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Edited Transcript of OBNK.OQ earnings conference call or presentation 25-Jul-19 1:00pm GMT

Q2 2019 Origin Bancorp Inc Earnings Call

RUSTON Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Origin Bancorp Inc earnings conference call or presentation Thursday, July 25, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chris Reigelman

Origin Bancorp, Inc. - IR

* Drake D. Mills

Origin Bancorp, Inc. - Chairman, President & CEO

* Martin Lance Hall

Origin Bank - President

* Stephen H. Brolly

Origin Bancorp, Inc. - CFO

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Conference Call Participants

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* Matthew Covington Olney

Stephens Inc., Research Division - MD

* William Jefferson Wallace

Raymond James & Associates, Inc., Research Division - Research Analyst

* Wood Neblett Lay

Keefe, Bruyette, & Woods, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good morning and welcome to the Origin Bancorp, Inc. Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Chris Reigelman, Investor Relations. Please go ahead.

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Chris Reigelman, Origin Bancorp, Inc. - IR [2]

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Good morning, and thank you for being with us. 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 today's call.

Before we begin, I'd like to remind you that this presentation may include information about our management's views of our future performance, business and growth strategy, projected plans and objectives and various other matters that constitute forward-looking statements under federal securities laws. Due to various risks and uncertainties, actual results may differ materially from historical results or any results implied or indicated by any forward-looking statements. For a discussion of these risks and uncertainties, please refer to the forward-looking statement section of our earnings release and the risk factors included in our most recent annual report on Form 10-K filed with the SEC as well as any update set forth in other documents we periodically file with the SEC. Forward-looking statements speak as of the date they are made, and Origin undertakes no obligation to publicly update or revise any forward-looking statement.

If you're logged into our webcast, please also refer to Slide 2 of the slide presentation, which includes our forward-looking statement, safe harbor statement. Those joining by phone, please note the slide presentation is available on our website at www.origin.bank. All comments made during today's call are subject to the forward-looking statement, safe harbors in our slide presentation and earnings release. Finally, in this presentation, we may discuss certain financial measures that are not calculated in accordance with U.S. GAAP. Please refer to the reconciliations of these non-GAAP financial measures to their closest comparable GAAP metrics in our earnings release and slide presentation, which are available on our website at www.origin.bank. We believe that certain non-GAAP financial measures can provide meaningful information to investors. However, these non-GAAP financial measures are supplemental and should not be viewed as a substitute for operating results determined in accordance with GAAP, nor they necessarily comparable to non-GAAP financial measures that may be presented by other companies. I'm joined this morning by Origin Bancorp's Chairman, President and CEO, Drake Mills; our Chief Financial Officer, Steve Brolly; and Lance Hall, President of Origin Bank. After the presentation, we'll be happy to address any questions you may have.

At this time, I'll turn the call over to Drake.

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [3]

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Thanks, Chris, and thanks for being on the call today. As we move into the second half of 2019, Origin Bancorp has much to be proud of. Second quarter growth in our loan portfolio was strong as well as overall growth in core deposits, particularly noninterest-bearing deposits. We also saw net interest income reach a historical quarterly high. We remain committed to creating long-term value in our franchise by opening 2 full-service branches in Dallas, Texas and Jackson, Mississippi. These new locations were a proactive step to better serve our communities and drive opportunity for new core deposit relationships.

To support our asset growth, our bankers have continued to focus on building strong core relationships and growing core deposits. Given the competitive landscape in many of our markets, maintaining our historically low-cost of deposits has been challenging. During the second quarter, while our yield on loans held for investment remains stable, our rate on interest-bearing deposits increased 13 basis points. We continue to evaluate our deposit product offerings and balance sheet funding mix alternatives to minimize our cost of funds while supporting our asset growth.

Deposit growth was a main priority for us during the first half of the year, and we will work with our bankers to effectively manage cost associated with building long-term relationships within the markets we serve. Higher deposit costs in 2019 reflect competition in our geographic markets of Texas, Louisiana and Mississippi and our need to fund loan growth. Despite our rate challenges within the second quarter, we believe that the remainder of 2019 provides opportunity to stabilize our funding cost, while being mindful of adding the right customer relationships as we move forward.

Now Steve will discuss more details around the financial results of the quarter.

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Stephen H. Brolly, Origin Bancorp, Inc. - CFO [4]

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Thanks, Drake. I'll start with Slide 4. We ended the quarter with just over $5.1 billion in total assets, up 5.1% from the linked quarter. This growth was primarily attributed to loans held for investments, which Lance will talk -- touch on later. Total deposits ended the quarter at $3.9 billion, down 1.1% from the linked quarter. During the quarter, we made a strategic decision to replace approximately $187 million of broker deposits with short-term advances from the Federal

Home Loan Bank. We expect this change in funding cost to increase net interest income by approximately $450,000 annually.

Net income for the quarter was $12.3 million and diluted EPS was $0.52 per share. These results were lower than the prior quarter and the same prior year quarter. The primary drivers were increased provision expense associated with our loan growth during the second quarter and increased noninterest expense during the quarter. The increased noninterest expense was a primary contributor to our increased efficiency ratio during the quarter, which was 68.51% compared to 65.97% in the linked quarter.

Net interest income for the quarter was $43 million, up over $900,000 from the linked quarter, primarily due to loan growth. As Drake mentioned earlier, our deposit cost increased during the quarter, contributing to a

10 basis point decline in net interest margin for the linked quarter.

During the second quarter, we also increased our short-term liquid asset position to support current loan growth and our near-term loan pipeline, which had a downward effect of 3 basis points on our margin during the quarter. Net interest income continues to be our primary source of net revenue accounting for 79% of net revenue during the quarter.

Lance will now go into further detail about our loan growth, deposit trends and credit quality.

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Martin Lance Hall, Origin Bank - President [5]

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Thanks, Steve. In the first 6 months of 2019, loans held for investment have grown $196 million or just over 5%, with $146 million in growth during the second quarter alone. Of the year-to-date growth, over $95 million is attributed to construction and development and $69.1 million to commercial and industrial loans. We expect to see continued strong growth in our Texas markets with ongoing benefit from our lift-out teams. As we continue to experience strong loan growth, we are maintaining sound credit quality in our loan portfolio.

During the quarter, our percentage of nonperforming loans to total loans improved 2 basis points from the prior quarter. Our annualized net charge-off rate was 7 basis points, and our past due percentage decreased from 99 basis points to 80 basis points from the linked quarter. Not only have we been successful in growing loans and maintaining a strong credit profile, we've also seen success on the deposit side. Steve mentioned earlier about our strategic decision to replace certain broker deposits with short-term advances to lower our cost of funding.

While our total deposits decreased $43 million during the quarter, when adjusted for the broker deposits we replaced, our total deposits would have increased approximately $143.8 million or 3.7% for the quarter. We've been successfully increasing noninterest-bearing deposits this year by $52 million or 5.5%, which is a testament to the relationships our bankers continue to build.

Now I'll turn it back over to Drake.

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [6]

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Thanks, Lance. As we have discussed over the past year, we believe it's in the best interest of all our stakeholders to have a mortgage business that is fully integrated into our bank in a community-based retail mortgage banking model. We have taken a number of steps to achieve this goal, including our decision in the second quarter to outsource our mortgage servicing function to one of the nation's largest independent mortgage services.

The transfer of servicing should be complete in the fourth quarter of 2019, and we believe that it will result in additional ongoing efficiencies for Origin Bank as well as a positive experience for our mortgage customers. We have always been committed to the long-term vision of Origin Bancorp. As we continue to strive to increase our capital levels over time, we are committed to deploying capital through quality asset growth. We also believe in having other strategic tools to manage our capital levels for the benefit of our shareholders.

Over the past several quarters, through periods of record earnings, our management team and Board have discussed those strategic tools. And through those discussions, we have decided to increase our quarterly cash dividend as well as put in place a share buyback program. These actions will not change the fact that we are focused on growing organically, and we'll continue working to do so by deploying entirely generated capital.

However, we believe these tools show our commitment to our shareholders. While we acknowledge the challenges we faced in the second quarter in relation to deposit pricing, margin pressures in the ever-evolving competitive landscape within our markets, we are committed to continue to develop high-quality, multifaceted relationships. I remain optimistic about our ability to execute our strategic plan and look forward to what we will accomplish in the future. Thank you.

And we'll now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Matt Olney with Stephens.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [2]

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I want to start on operating expenses. It seemed pretty heavy this quarter versus at least expectations. Can you just walk us through some of these lines and help us appreciate where these lines are headed as we move into 3Q? I'm just trying to get a run rate to know how to forecast operating expenses?

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [3]

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Yes, Matt, this is Drake. As we look at -- as I mentioned earlier about continuing to build what we think is a franchise that will promote strong core deposit growth, we had -- and I'll go through this. I think the biggest addition to, or the biggest expense item was really a swing in income.

If you look at our LP investment income that typically would have been $400,000, we had an impairment on LP income. So really that swing represented about $0.03 of an increase in, let's say, expense item or lack of income. We also, as we talked about in earlier quarters, we created a performance checking product that we promoted heavily, which represents, I would say, $0.01 of additional cost that we have -- that we will cut after basically going into this quarter. But what that created for us was about $60 million of additional deposits that we think the weighted average rate on that is somewhere around the 180 to 190 range. So we believe that investment or that expense item has been very good for us in the creation of not only the $60 million in deposits, but the acquisition of customer relationships that we've been able to cross-sell and create other fee income opportunities.

We also had about $0.01 increase in data processing, and it has to do with a conversion of communication loans. One of the vendors involved in that -- in that conversion overcharged us, and it was something that we caught down the road. That overcharge in -- which will be refunded, represents about $0.01. So if you look at those increases that represents $0.05 basically of the increase that we saw in the quarter. We think that the quarter, for us, is a high quarter from an expense standpoint, probably the highest quarter we'll see. Certainly working to -- because of the mortgage process we're going through, the rift we're going through, we think we can continue to be somewhere, let's say, what we -- similar to what we were maybe the first quarter with a little increase from the first quarter.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [4]

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Drake, that's great color. And I want to drill down on the mortgage piece system more. I mean, I guess, the mortgage revenue was around $3.2 million in 2Q. How much of that was production versus servicing? And then once we move to the MSR outsourcing in the fourth quarter, can you walk through kind of what the impact, or where we're going to see that in the financials?

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [5]

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Okay. Let me -- Matt, if I could, just for a second, walk -- let me do a year-over-year comparison, because as I've talked a lot at each quarter, we've worked hard to get mortgage integrated into the community bank model. For instance, in Q2 '18, $2.3 million of revenue; Q2 '19, $3.3 million, basically. And that was all -- that was origination. And as of that origination, 70% was new origination, 30% was refinance. So we're not seeing -- even though we are getting a bump in refinance, it's not driving the increase in production. It is -- we've done an excellent job of cutting mortgage loan offices that weren't producing and adding back. So we actually are working with fewer mortgage loan offices than we did, but getting better production. Noninterest expense from the mortgage side, Q2 '18, $4.2 million. This quarter was $3.5 million, a 14% decrease. So contribution income, and this is what we've been working on, to get this thing to breakeven, and we see some profitability coming. We had mortgage contribution income of, a loss of $1.7 million. Last -- this quarter, we're basically breakeven. So we made a lot of progress there.

MSR value through that, we're seeing significant change in our hedging a year ago. We lost $300,000 this quarter. We had a positive $207,000 impact. So we continue to seek -- for improvement, but we've reduced the amount of our servicing from our MSR asset value from $26 million to $21 million during that process. So to take that into the next couple of quarters, we think once we get the conversion, which will be in October, November, to our mortgage servicer, we will see about a $1 million reduction in expense -- an annual reduction in expense because of that program. That does not include the reduction in the people, the rift that we'll have in October once we let those people go. They will have a slight spike because we will pay severance, but we see a $1.5 million total reduction in expense just to move it from the servicing side.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [6]

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Okay. Got it. That's helpful, Drake. And then, I guess, my last question is going to be on capital. I noted the dividend increase, the share buyback authorization. You've talked around M&A now for a while. I'm just kind of curious as far as the update. Does this signal anything as far as M&A? Just any more color on the buyback authorization?

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [7]

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It doesn't signal anything on M&A. We still are active and certainly have some opportunities that are in tow that we're working on that, that I think, can be good for us. What -- I do think that -- and Matt, I'll go back to our third quarter '18 conference call when I think you asked a question, and I said that the Board and management was working on the buyback program just to have the tool available. At that point, we felt it was too quick off of the IPO to really have that program in place. But certainly, what was something that we thought we had, well, as the rate environments change a number of different things, we want to have the opportunity to take advantage. And as we see potential private equity continue to exit, we just want to be in place to take advantage of it, if indeed, it's there.

But from a capital impact standpoint, we are running models for both the $40 million buyback. And of course, that's a 3-year program. So we want to have that data in place. And the dividend, we feel at this point, that, that's something. We've had retail shareholders that's been with us for a number of years, that dividend at three and quarter cents has been in place and that for probably the last 20 years. When we ran our capital model, we saw that we could increase that to nine and half cents, not have any impact to any degree. Really the levered, the ratio we are considered or concerned most about, and that's our total risk-based capital ratio because we can pay that -- increase that dividend and with earnings, continue to see an increase in total risk-based capital.

So we don't think, at this point, this has any -- this is signaling that we're not in the M&A business or anything else. That's job one for me, and it's a priority, and I think that's probably one of the best steps we can take to solve some of the funding -- the increase in funding cost and also give us a position to continue that process of M&A.

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Operator [8]

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The next question comes from Woody Lay with KBW.

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Wood Neblett Lay, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [9]

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So looking at loan growth, it was strong this quarter at 14% linked quarter annualized, and this was -- this came after a quarter you all lowered guidance down to 10%. Going forward, does that 10% guidance still feel right to you all?

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [10]

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Yes -- no, the 10% guidance at this point, the pipeline supports that, Woody. What we are concentrating on, then we'll talk a little bit about this I'm sure during the call, is asset yield. We were fortunate. If you look at our asset yield for the quarter, that asset yield, not including mortgages held for sale, increased 1 basis point. So we are very, very focused on asset yields and the pricing.

So we believe that if we continue to focus on quality, asset yield and increasing asset yield lease, holding that stable, that we could see a slight decrease in growth in loans, let's say, to 8% is, so we're modeling both ways. Our pipelines are full. And it certainly supports at 10%, but we're going to be aggressive with the pricing. And in our last forecast meeting, we felt that, that could bump that down to 8%. But with deposit growth still remaining strong and core deposit growth really getting a good ratchet up right now, we think that, that could be 8% to 10%, but we're going to be aggressive with this pricing.

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Wood Neblett Lay, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [11]

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Okay. That makes sense. And then looking on the other side of that, it's clear that one of your all biggest focus is, is on maintaining the deposit cost. Do you believe that going forward, we could reach an inflection point where deposit cost could actually compress from here? Or do you think it'll sort of still see some deposit pricing competition, which will all increases to it?

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Martin Lance Hall, Origin Bank - President [12]

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Yes. Hey Woody, this is Lance, thanks. That's obviously been the primary focus for us inside the bank. I spent a lot of time in the past couple of weeks with our President on creating a plan, because you're right. I mean driving our investment in our core deposit franchise is our number one factor. And you look at that both from a margin perspective and from an expense perspective. And we have hired 3 deposit-gathering professionals in Dallas-Fort Worth. We had a new treasury management professional in

Mississippi.

Obviously, the branches, it's all about driving this core deposit franchise. That being said, we really sort of dissected and tiered our interest-bearing portfolio. Met with all the presidents, I've met with bankers. We feel we have a real opportunity to smartly drive down some deposit cost in those areas. While at the same time, been able to drive double-digit deposit growth. So yes, we feel like, obviously, our incremental costs are still high. I feel like our deposit pricing has peaked. And we feel like we have a really smart plan and I'll be able to manage that effectively.

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Wood Neblett Lay, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [13]

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Okay. And then last from me. It sounds like loans and deposits would grow pretty evenly, but looking at the loan-to-deposit ratio, excluding the warehouse, it was up to around 98% for the quarter. Is there sort of a ceiling level, you all feel comfortable growing that up to?

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [14]

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Yes, we did it start. We're at that level and really feel like that's going to continue. That's actually going to head back the other direction because there's a couple of factors involved in that, and we'll let Lance talk about deposit growth in markets, and we are still waiting to see the Louisiana deposits kick in, and what lands the bids] with that, but we have -- we run a daily liquidity model. We feel very comfortable with the liquidity where it is and continue to feel that with the efforts that Lance mentioned about deposit gathers and the process and the progress we're making there, that we'll see that loan deposit ratio continue to -- or start headed back direction. Lance, you will talk real quickly about what we're doing in Louisiana and what we feel the impact will be?

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Martin Lance Hall, Origin Bank - President [15]

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Yes. So if -- and Steve will talk about the strategic decision to replace the Raymond James money market with Federal Home Loan Bank borrowings. But if you normalize the Raymond James deposit reduction, Woody, basically, we're on track to do about 16% deposit growth for the year and 10% a month. You got to see where our focus is driving deposits at a faster rate than loans, so that we build a little cushion in that loan-to-deposit ratio.

As Drake said, the -- all of the growth in our deposits in the first 6 months has really been in Texas and Mississippi. Not a normal run for us. Louisiana is always our most stable deposit driver. I have no concerns but that's not going to kick in and continue to be the same. We still project 5% deposit growth in Louisiana, like we traditionally do. And obviously, we do it in Louisiana in a cheaper way. So one of the effects on NIM from this quarter is that in Mississippi, you've had 14% deposit growth year-to-date; Dallas-Fort Worth, 16%; Houston, 16%. Those are coming in at a higher cost blended in our projected because of the lack of Louisiana. We had about $65 million in public fund runoff in our Louisiana that obviously will swing back in. It's a little higher number than we're used to.

And then we've had about $50 million in reductions in some of our commercial portfolios and talking to the bankers. Absolutely not customer loss, just some timing around some of those commercial accounts. So I still project Louisiana to be 5% or 6% deposit growth, as we budgeted. And then, obviously, that will significantly drive down sort of the blended expense for the group and we figure, at the end of the year that's going to be normalized and healthy for us.

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Operator [16]

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(Operator Instructions) The next question comes from William Wallace with Raymond James.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [17]

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Drake, if I could back up to some of the commentary you had around expense. First, you mentioned the LPL impairment. That's in the -- that's booked in fee income, right?

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [18]

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Correct.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [19]

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So how much was that impairment?

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [20]

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It was basically $0.01.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [21]

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Okay. So about...

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Martin Lance Hall, Origin Bank - President [22]

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I mean, excuse me, excuse me, excuse me. About $0.03. I'm sorry, Wally.

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Stephen H. Brolly, Origin Bancorp, Inc. - CFO [23]

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Hey Wally, this is Steve. The swing quarter-to-quarter was $819,000 of pretax.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [24]

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Okay. All right. And then, Drake, you said that your targeting expense run rate, you think will be closer to the first quarter, slightly higher than the first quarter, I believe, is what you said. Does that include the $1.5 million of annual savings once the servicing agreement is transferred to the third party? Or is that...

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [25]

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No, that was -- that's Wally, that's net. That's not going to kick into the first quarter really of 2020. So that was -- and I want to back up on that, because I'm sitting here kind of running a little bit. I do think it's going to be higher than the first quarter. I'm trying to look at -- there is not a doubt that the second quarter is going to be -- and even in our internal budgets, it was -- the second quarter was the highest quarter because of the branches that we made decision. I want to highlight the fact that we made those decisions on those branches, which I still think, from a long-term perspective is the right decision. During a period of time, we were -- 2 quarters ago, 3 quarters ago, we're looking at increasing interest rates. But for our expansion and what we're doing there, I believe that the second quarter, is, it's certainly a high quarter with probably a reduction around...

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Stephen H. Brolly, Origin Bancorp, Inc. - CFO [26]

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Hey Wally, this is Steve. I know there's a lot of numbers going back and forth. So if you look at total, we had $35 million in the first quarter, and we had $37 million in second quarter. $37 million is going to be a high point for us. But if you look at both of them, I would say, it's lower than the second, but not as low as the first. If I was going to model conservatively, I would say, $37 million straight across next 2 quarters and just slightly lower for some of those items that we talked about.

We don't plan any expansions. We don't plan any other large one-time items. We don't have any large items in the budget whatsoever. If anything happens, that comes out of that. That would be something that we don't have expectations for today.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [27]

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Okay. But $37 million is basically where you were in the second quarter.

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Stephen H. Brolly, Origin Bancorp, Inc. - CFO [28]

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Yes. So it's going to be slightly less than that, but not as low as $35 million.

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [29]

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And I guess what, Wally, I'm looking at is loan growth where we are from a provision standpoint and from a credit quality perspective, what potentially could be there. So I'm going to back up from what I said a little bit. That's what I was looking at right at this point and say that we're probably going to have a run rate that's slightly less than that. And I would say, $0.01 to $0.02 lower.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [30]

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Okay. And what -- when the servicing agreement, would that go into a third party, what kind of revenue comes out once that's completed?

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Stephen H. Brolly, Origin Bancorp, Inc. - CFO [31]

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No revenue comes out whatsoever. Matter of fact, we may have a little bit more revenue because we hope that the third party does a better job on delinquencies and foreclosures and recovery. But there's no -- we will give them a little bit of revenue, but we think net-net it's going to be about the same. The real saving is going to be -- the real savings is going to be on the cost to service a loan. It's also going to be great for the customer because they're going to have a better platform, they're going to have better communications. So if you're looking at, purely on a cost basis, it's going to be the cost, that the service loan is going to be much lower.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [32]

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Okay. Sounds great. Okay. And then if I could maybe just ask a direct question on net interest margin. You've made some changes on the deposit side by replacing some brokered deposits, et cetera. If the Fed cuts next week, with the changes that you've made, what is the impact to net interest margin, if it cuts 25 basis points, in your opinion?

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [33]

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Wally, yes. At this point, we see 4 to 6 basis points reduction in asset yield. We have -- we know exactly what we have to do to reduce -- the amount we have to reduce noninterest-bearing deposits to offset that. Those plans are in place and ready to pull the trigger. And we feel that we have a very good opportunity to neutralize that 4 to 6 basis point reduction in asset yield.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [34]

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4 to 6 basis point in asset yield. Are you saying the decline in asset yields would drive NIM down 4 to 6 basis points, and you've got a direct plan to offset that pressure on the funding side? Or are you saying the yields go down 4 to 6 of the net interest margin would go down accordingly?

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [35]

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Yes. And we know -- like I said, I know exactly what we -- what the cost reduction is we have to have. And that's what we've been working on the last few days with our presidents to put that in place in the markets. And it's actually very achievable without fear of running off deposit cost, primarily coming from the money market side and some of the variable costs we have in our interest-bearing deposits. So we -- those plans are in place, ready to be, ready for the trigger pull if they do make the core reduction. We think we can offset that 4 to 6 basis points.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [36]

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Okay. So you think that you can flip a switch on the deposit side.

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [37]

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Yes.

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Stephen H. Brolly, Origin Bancorp, Inc. - CFO [38]

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We have a plan in place already. Everything from the back-office operations. We have all the, as Drake -- sorry, as Lance had mentioned before, all the Presidents went through the various deposit programs. And on August 31, if the rates drop then August -- I mean, July 31, when the rates drop August 1, we will put that plan in place, and we're all ready to go.

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [39]

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Now Wally, I want to make sure that we're saying the same thing. You said what would the impact of a quarter decrease have effect of us, right?

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [40]

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On NIM?

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [41]

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On NIM, right, because I'm not representing to you that at this point NIM's going to be flat. I'm just going to say, we think we can offset the impact of the reduction in asset yield on a 0.25 point decrease. I want to make sure we're talking the same.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [42]

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So yes, I'm confused now. So -- I'm sorry, but you can offset it, but you're not saying NIM will be flat. If you can offset, I mean, NIM would be flat, right?

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [43]

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If I offset the quarter decrease, the impact of a quarter decrease, I can neutralize the impact of that quarter decrease, we still feel that we'll have some NIM pressure. We do feel that we have a topping out of our deposit cost. But the plan that we have in place is to really offset the decrease in a quarter point of interest rate decrease.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [44]

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Okay. I see what you're saying. So what is the -- what is the continued pressure that you anticipate in the third quarter, just from what you saw in the second quarter?

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Stephen H. Brolly, Origin Bancorp, Inc. - CFO [45]

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Wally, the range would probably be somewhere, 3 to 6 basis points. And that's depending on a lot of factors.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [46]

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Okay. Understood. I understood that part. Yes.

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [47]

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Yes, we're super, super progressive, Wally, trying to minimize this, but what we've focused on this past week is a plan to neutralize the decrease in interest rates. And I will say that when we -- Wally, when I think about where we are with everything, I mean, obviously, we're focused on running this business the best way. And I look at it, it's kind of near-term headwind for a company to build long-term value. But the reality of it is, we know that the deposit cost battle is going to be an influence on us being able to be successful for the balance of the year. So like I said, every aspect of this organization is focused on that.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [48]

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Okay. Understood. Appreciate that. And I'm really sorry to monopolize time, but I've actually gotten several e-mails while we were talking to go back to expenses. I feel -- it seems like there's just some confusion around whether or not the run rate is going to be flattish to where it was in the second quarter or going down in front, near to where it was in the first quarter. So I'm sorry to back up here, but could you just...

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [49]

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Okay. Let me make this point in, because I have the tendency to get aggressive with where I think expense rate's going to be. The CFO is sitting here saying, you all have run, take a $37 million run rate, certainly got to work to do better than that. So to break the confusion, I think it's going to be slightly less than what we saw in the first and the second quarter. And I don't mean to -- you, anyone because I am, again, where everyone's focused on deposit cost, I'm focused on expenses.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [50]

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Right. So I guess, where the confusion is coming from, as you highlighted, the vendor overcharging you and some other onetime-ish type costs in the second quarter that presumably were going away. Are those being replaced -- partially replaced with continued investment in the franchise? Is that what we're thinking?

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [51]

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No. We have some severance cost on our rift that we're going to be dealing with that's one-time. So what I think they're concerned about around the table is that, as we continue to do things to reduce the expense of the organization, we're going to have some onetime cost in the next quarter or 2.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [52]

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Okay. So let's talk about it from that perspective, because I think most investors and analysts will look at severance costs as one time. And we're trying to figure out what's a core go forward expense run rate basis that we should be thinking about in our models to think of as a baseline, absent of the noise that's coming from things like severance and whatever term -- lease terminations or whatever you might have. So should we approach it from a basis of what is -- what might this expense base look like once we get past all the noise associated with things around the servicing contracts going to a third-party, rifts, et cetera?

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Stephen H. Brolly, Origin Bancorp, Inc. - CFO [53]

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I'm going to give you a range of about very close to $36 million even, give or take things here. So it's not as high as a $37 million. It's not as low as the $35.3 million but I would be surprised if it's not very, very, very low $36 million.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [54]

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Okay. And this is after you've got the saves and everything around the servicing?

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Stephen H. Brolly, Origin Bancorp, Inc. - CFO [55]

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No. That is for the...

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [56]

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That's the 4...

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Stephen H. Brolly, Origin Bancorp, Inc. - CFO [57]

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That's 2 quarters.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [58]

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And then you get another 400 or so come in, in the first quarter of '20.

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Stephen H. Brolly, Origin Bancorp, Inc. - CFO [59]

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That would come in first quarter '20, however...

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [60]

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(inaudible) in the fourth quarter.

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Stephen H. Brolly, Origin Bancorp, Inc. - CFO [61]

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First quarter '20, if you just look at and say, a normal noninterest expense run rate would be 3% to 5%...

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [62]

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Yes, I got you. We'll have inflationary pressures, (inaudible) et cetera. Okay. That helps me. I think I have more clarity on that. And hopefully, the investors did too. And I've taken so much time, I'll step out and let's somebody else...

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [63]

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Well, Wally, I apologize for the confusion. Like I said, I'm focused on doing what we say we are. And this has been -- as when you look at the second quarter, there are a lot of things just held in between interest rate pressures and our open, in our offices and severance and a number of different things. So we'll get on track.

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Operator [64]

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The next question is a follow-up from Matt Olney with Stephens.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [65]

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Yes. Circling back to the question around the margin and the impact from the Fed. Can you just disclose to us within your loan book, what percent of those loans are variable? And then within that, what percent's going to be LIBOR versus another index, like prime?

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [66]

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Yes. 58% of our loans are variable, and about 52%, 53% of those are LIBOR-based. And Matt, we've been feeling that pressure now for quite some time.

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Stephen H. Brolly, Origin Bancorp, Inc. - CFO [67]

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Yes. So Matt, in dollars, I think, it's about $995 million that are prime-based, about $1.2 billion that are LIBOR-based.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [68]

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Okay. That's helpful. And then on the other side of the liability side, what -- can you give us an idea of what portion of your liabilities are going to be indexed to -- indexed to something that will also be a very high beta that could help offset some of the headwinds on the loan side?

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Stephen H. Brolly, Origin Bancorp, Inc. - CFO [69]

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Sure. The broker deposits that we have, they are tied to an index. And our public funds are tied to index. The public funds are about $300 million. And the brokered deposits are also somewhere around $130 million.

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [70]

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I think the last -- Matt, the last time I looked at that, it was about $500 million total.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [71]

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Okay. So $500 million on the liability side. On the earning asset side, we're closer to $2 billion when I add in the prime and the LIBOR loans. And what about on the CD side? I'm showing the average cost was, I guess, $213 million in the second quarter. Can you talk around, kind of what your newer rates are that you're posting right now? And how much more pressure we are seeing in that $213 million average time deposit cost?

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [72]

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And Matt, and before I turn it over to Lance, because Lance did a lot of work in this area, I will say, if there is any benefit to us as an asset-sensitive institution of rates going down, is to reset the customer mindset that rates are going down. So again, that's why we looked at exactly what it was going to take in the reduction of expense or cost on the interest-bearing side to offset that quarter. So Lance?

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Martin Lance Hall, Origin Bank - President [73]

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Yes. Yes, Matt, as I mentioned, I do think that the rates that we drove in the second quarter would peak out and start to reduce. I mean, obviously, we have a -- really, really focused on our money market accounts and how we're going to reduce that. At the same time that we've got a plan on CDs to start incrementally pulling those pricing back on new offerings. But at the same time, making sure that we're growing core deposit, so.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [74]

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Okay. So said another way, it sounds like you expect the deposit -- average deposit cost to move down in the third quarter, even if you do grow the dollar amount of deposits? Am I interpreting that correctly?

(technical difficulty)

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Operator [75]

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Pardon me, this is the conference operator. The speaker’s line has reconnected. Mr. Olney?

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Matthew Covington Olney, Stephens Inc., Research Division - MD [76]

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Guys, this is Matt. Can you hear me?

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Stephen H. Brolly, Origin Bancorp, Inc. - CFO [77]

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Yes.

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [78]

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Yes.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [79]

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Did you want me repeat the question or did you get all that?

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Stephen H. Brolly, Origin Bancorp, Inc. - CFO [80]

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Yes. No, yes. I got it. I think I will say Matt, I'm sorry, I'm not sure what happened there. Yes, we definitely feel like the deposit rates peak in the second quarter, and we'll begin to start pulling those back down, both from the money market perspective and from new time deposits. So then we feel confident in our ability to do that.

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [81]

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And Matt, to get a little more specific, I know you've asked for what does the rate forward look like. We're going to have to manage this from a standpoint of customer expectations and what length of time they -- this is going to change what they look from a maturity standpoint, and we'll be reducing those rates, I think, accordingly, based on what the Fed does.

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Operator [82]

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This concludes our question-and-answer session. I would like to turn the conference back over to Drake Mills for any closing remarks.

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Drake D. Mills, Origin Bancorp, Inc. - Chairman, President & CEO [83]

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Okay. Just appreciate everyone's attendance on this call. I do want to reinforce the fact that there are many positive things going on with this organization. Right now, we do feel comfortable that our growth projections will continue. The acquisition of these teams that we have in place have certainly allowed us to focus on deposit growth and deposit acquisition, but we will continue to build this organization with customer acquisitions that do create profitability across all lines of the bank. What I mean by that is we're not out doing loan transactions just for the sake of a loan. It's full relationships that we're working on. We're having a lot of success around there. But as I mentioned, this is near-term headwinds for a company that's built long-term value. I certainly appreciate the time, the confidence that you have in the company, and I look forward to seeing each of you as we continue to be on the road. So thank you very much for your opportunity.

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Operator [84]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.