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Origin Bancorp, Inc. (OBNK) Q1 2019 Earnings Call Transcript

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Origin Bancorp, Inc.  (NASDAQ: OBNK)
Q1 2019 Earnings Call
April 25, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Origin Bancorp, Inc. First Quarter 2019 Earnings Conference Call. At this time, I'd like to turn the call over to Drake Mills, Chairman, President and Chief Executive Officer of Origin Bancorp. Please go ahead, sir.

Drake Mills -- Chairman, President and Chief Executive Officer

Okay, this is Drake Mills and I just want to take a short break from our normal course of reporting this morning to acknowledge that our hometown community of Ruston, Louisiana was struck by a significant tornado last night. To the best of our knowledge, all our people are accounted for and none of our facilities were damaged, but our community suffered some severe damage in certain places and we simply want to say that our thoughts and prayers go out to our -- those friends and families who are affected and the Origin Bank family will be looking for opportunities to help prepare and restore our hometown to normal just as soon as we can. And I apologize for maybe the sound quality, because we've had to move facilities to a temporary facility for this call.

So I'll turn it back over to the operator for the normal call. Thank you.

Operator

At this time, all participants will be in listen only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded.

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

Chris Reigelman -- Investor Relations Contact

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 our management's views of future performance, business and growth strategy, projected plans and objectives and various other matters that constitute forward-looking statements under Federal Securities Laws. Subject to (ph) various risks and uncertainties, actual results may differ materially from historical results or any results implied by forward-looking statements. For a discussion of these risks and uncertainties, please refer to the forward-looking statements section of our earnings release and the risk factors included in our prospectus filed with the SEC on May 9, 2018, pursuant to Section 424(b) of the Securities Act as well as 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 statements.

If you are logged on to our webcast, please also refer to slide two of the presentation, which includes our forward-looking statements Safe Harbor statement. For 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 Safe Harbor Statements 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 slide presentation, which is also 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 supplemented and should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are 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 might have.

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

Drake Mills -- Chairman, President and Chief Executive Officer

Thanks, Chris and thanks for being on the call today. We marked a strong start to 2019, I believe we have the right team of bankers in place to continue to execute on our strategy for this year and beyond to drive loan deposit growth, developing deep and trusted relationships and leverage operational efficiencies. While we along with many in our industry are experiencing pricing pressures, I'm proud of our results this quarter and feel we can continue to achieve strong growth in earnings throughout the remainder of the year.

In the first quarter, we reported record net income of $14.2 million and diluted earnings per share of $0.60, an increase of $0.05 from the previous quarter. We ended the quarter with over $3.8 billion in loans held for investment, an improvement over our position at the beginning of the year. We also showed deposit growth during the quarter of $115 million, ending the quarter with approximately $3.9 billion in total deposits.

Now, I'll let Steve discuss more details around financial results for the quarter.

Stephen Brolly -- Chief Financial Officerz

Thanks, Drake. I'll start with slide four. While we had a modest growth in earning assets for the quarter, our net interest income was relatively flat, at $42 million. Net interest margin for the quarter was 3.80% on a fully tax equivalent basis, which was two basis points down from the fourth quarter of 2018. Our interest income on loans held for investment increased by $1.4 million due to volume and $1.1 million due to rate. However, this was offset by rate paid on deposits by $1.2 million and $820,000 net due to two fewer days in the quarter. On a daily basis, our average net interest income increased by 2.1% in quarter one compared to Q4 of 2018. Compared to that first quarter of 2018, our net interest income increased 21%.

Our provision for credit losses was approximately $1 million, which was a decline from the linked quarter and is a result of stabilized credit quality metrics, which you will see later in the presentation. Non-interest income improved by nearly 10% from the linked quarter, driven primarily by $1 million increase from our insurance division, which reflect the added activity of our insurance agency that we've acquired last year. The overall increase in non-interest income outpaced the slight growth in non-interest expense for the quarter, which helped to improve our efficiency ratio to 65.97%.

Lance will now give an overview of our loans, deposits and credit quality.

M. Lance Hall -- Chief Operating Officer and Louisiana State President

Thanks, Steve. we continue to be rewarded for our strong growth driven by the execution of our lift-out strategies. Over the past four quarters, we have captured 18.2% loan growth, 8.9% deposit growth and 55 basis point increase in loan yields, 12 basis points in margin expansion and an 18.4% improvement in non-interest income. For the quarter, we experienced some seasonality in our deposit mix, that contributed to our slight margin compression, as tax dollars and public fund dollars in our core markets rolled out and we -- expect to return later in the year.

The primary driver of deposit growth in Q1 was in our Texas markets. The pricing in these markets is higher than in Louisiana, Mississippi, but is a direct function of delivering deposits associated with our net banking team's relationships. We continue to be hyper focused on core deposit growth and pricing discipline. We have updated our retail and commercial bankers' incentive plans to more strongly promote core deposit growth and to maintain NIB growth as our primary focus. To continue to strategically support core deposit growth, we have opened a new full service branch in Dallas, expanded our Frisco, Texas location and rolled out two new exciting deposit products. Our loan pipeline and credit quality remains strong. Q1 was a slower than expected start to loan growth, with a seasonal $40 million reduction in our mortgage warehouse lines and a delay in the closing time of a few loan pipeline projects.

That being said, we are confident in our pipelines and still expect to deliver double digit loan growth in 2019. Our credit quality indicators and metrics for Q1 stabilized and returned to historical levels. Credit quality has been and will continue to be a strategic focus of our company, as we develop relationships and make loans in 2019.

Now, I'll turn it back over to Drake.

Drake Mills -- Chairman, President and Chief Executive Officer

Thanks, Lance. As we move into the first quarter of the new year, one of our goals was for deposit growth to outpace loan growth. We previously mentioned on our last call that deposit growth was a top priority in a thought (ph) for loan growth and we were able to grow deposits in the first quarter in a meaningful way. We believe our success in growing deposits will continue throughout 2019, but are mindful of the discipline needed in pricing and our banker's understanding of the importance of customer relationships in the current environment.

During the first quarter, we hosted our Annual Cultural Celebration and Kickoff events in each of our markets. This is our time to come together as a company and celebrate our success as well as roll out our agenda for strategy for the year. The focus and excitement that I see from our teams gives me great optimism. As Lance mentioned, we present a new deposit products and initiatives that fit our strategy of growing relationships and driving value for our company.

I am very pleased with where we are as a company. The first quarter saw a record profit for Origin, deposits increased, credit quality remains strong, our infrastructure and team of bankers are in place to capitalize on growth opportunities within our markets and we are following our strategy to increase franchise value for our stakeholders. We will continue to stay focused on our plan.

Thank you. We'll now open up the line for questions.

Operator

We will now begin the question and answer session. (Operator Instructions) The first question comes from Matt Olney with Stephens. Please go ahead.

Matthew Olney -- Stephens Inc. -- Analyst

Hi, thanks, guys. Good morning.

Drake Mills -- Chairman, President and Chief Executive Officer

Good morning, Matt.

Stephen Brolly -- Chief Financial Officerz

Morning Matt.

Matthew Olney -- Stephens Inc. -- Analyst

I've got a few questions for you guys, but first thanks for the update on the tornado. Sounds like it was a direct hit on Ruston. Our thoughts and prayers are with you guys.

Drake Mills -- Chairman, President and Chief Executive Officer

Thanks. Thank you.

Matthew Olney -- Stephens Inc. -- Analyst

I'll start on the deposit side. It looks like you had some outflows on the non-interest bearing. You made great progress there last year, but obviously, a little slippage in 1Q. Can you try to quantify how much of that slippage is seasonal in nature and how much you expect to rebound and what are your expectations for that more on a full year basis in 2019?

Drake Mills -- Chairman, President and Chief Executive Officer

Yes, Matt, this is our first quarter to report -- our first Q1 to report as a public company and you know, we do have tremendous amount of seasonality, especially in the core as public funds flow out. We actually each year have a decline in balances, so the majority of our deposit growth came from Texas and as you well know, the pricing on those Texas deposits are significant -- when I say significant, they're higher than they are in our core markets. We expect as we have seen -- as we've seen historical trends that in the next three quarters, we'll rebound with non-interest bearing deposit growth as we historically do and also stronger growth in the core. So, again, first time we reported Q1 and this is a seasonality that we've experienced in the past.

Stephen Brolly -- Chief Financial Officerz

Matt, this is Steve. Just to add to that, for -- at March 31st, our non-interest bearing were larger than they were at beginning of March and beginning of January. So although the average is a little bit lower, we're trending up so far at the end of the quarter.

M. Lance Hall -- Chief Operating Officer and Louisiana State President

And this is Lance. I might also would add, if you look back from Q1 '18 to Q1 '19, non-interest bearings are up $92 million, which is about 10% growth. I think we're projected to be able to do the same thing in the next twelve months.

Matthew Olney -- Stephens Inc. -- Analyst

Okay, that's great color. And then it sounds like you continue to expect some good strong loan growth this year. I think you mentioned double digits. Can you just talk about the challenges of trying to maintain that core margin? I think around 3.80% (ph) at this point. Can you hold this margin throughout the year, if you do get that loan growth or could there be some softness there?

Drake Mills -- Chairman, President and Chief Executive Officer

Well, at this point, Matt, we -- with the loan growth in the first quarter, we still have significant pipelines and there are some timing issues there. For instance, we had -- if you look at our Dallas market, we had a 13% annualized growth rate in the first quarter, Fort Worth 9%, Houston 26% annualized. So the core market, Mississippi was a little bit soft, we'll just see some return. We expect that margin to see some increase in the second quarter and we are being extremely diligent. From a pricing fraction (ph) pricing prospect, we're passing on some loans that, that historically might would have put on the books that are cheaply priced. So we're kind of picking our poison as we see what goes up with -- as we see deposit growth come through the issues (ph). So we still feel at this point, we're going to see somewhere in the range of 10% annualized loan growth for 2019. And we think that we can continue to manage and battle the pricing strategies that we have in place on the lending side to hopefully allow us to come in and understand where our margin is going to look -- what it's going to look like for instance. And if you look at the decline in LIBOR, we have $1.3 billion of loans tied to LIBOR that move -- that's moved from 2.79% to 2.59%. So we're feeling a little bit of pressure on that. So we're being creative in our pricing strategies and how we tie those indexes as we move forward.

So a lot of things are going on and we are battling the margin side, but still think that we're going to see the loan growth and deposit growth as we saw and at this point, when I look into the third quarter and fourth quarter, maybe I see some flatness in the margin at this point, but we're still determining what that will look like as we get aggressive with our pricing strategies.

Matthew Olney -- Stephens Inc. -- Analyst

Okay. Thanks for that Drake and I guess I also when I hear Lance's view, I think Lance you've talked about being disciplined on the loan pricing side and you've got some new programs and tools that you been implementing over last year, so can you just kind of talk more about how much progress you've made so far on that and how much more upside there is to -- on -- especially on the loan renewal side?

M. Lance Hall -- Chief Operating Officer and Louisiana State President

Yeah, I think that is the daily battle, Matt, and we've talked about in the past, we did, we implemented precision lender, which really kind of got going in the fourth quarter of last year. And so, we're still kind of working through some of the hurdle rates and assumptions inside of it. So I wouldn't say that it is -- it's not fully functional for us, but we're getting it there quickly and I think that's going to be nothing but a lift for us on the pricing side as we analyze the ROA and ROE's of total relationships.

We're actually having a President's meeting today, met with them all day yesterday, getting them hyper focused on right discipline, fighting for that extra 10 basis points on the loan side and the deposit side. So, you know, I would say for us, priority one is core deposit growth and NIB growth and option and the second most highly emphasized is our loan yields right now. So it is very much top of mind.

Matthew Olney -- Stephens Inc. -- Analyst

And I guess on that same topic, Steve, I don't know if you have any numbers in front of you that you can share as far as some of the new and renewed loan yields that you saw more recently in the first quarter compared to the overall loan book.

Stephen Brolly -- Chief Financial Officerz

We look at that on a weekly basis actually and our new loans are probably going on an average of about 5.40% (ph) right now. And so, we think loans will continue to go up about the same as they have in the past couple of quarters, maybe not as much, but then, the pressure will be on the deposits also. So we don't -- we still think there's some overall improvement in loan yields going forward.

Matthew Olney -- Stephens Inc. -- Analyst

Okay, guys. That's helpful. I'll hop back in the queue.

Drake Mills -- Chairman, President and Chief Executive Officer

Thank you, Matt.

Operator

The next question comes from William Wallace with Raymond James. Please go ahead.

William Wallace -- Raymond James & Associates, Inc -- Analyst

Thanks. Good morning, guys.

Drake Mills -- Chairman, President and Chief Executive Officer

Hi Will Wally, how are you doing this morning?

William Wallace -- Raymond James & Associates, Inc -- Analyst

I'm very good, thank you. Maybe to kind of push on the NIM topic. Drake, you sounded like you said you're expecting margin expansion in the second quarter. Correct me if I'm wrong, but -- I can understand seeing the loan pricing improved when you've got a fed hike in September and December. How are you guys going to continue to raise loan pricing with a Fed pausing?

Drake Mills -- Chairman, President and Chief Executive Officer

Well, we have a percentage of our portfolio that is renewing on fixed rate, two and three year fixed rates that we're going to be able to continue to price up. We also on the deposit side, with some of the public funds and some of the indexes that we were using, with no further moves, those betas will cease. And then, I believe that we're going to continue. We've run through these markets on their pricing strategies. We have a pretty good feel of what it's going to look like in the second quarter.

It gets foggy going into the third quarter and that's what we're working to get a better feel for it. But you know, again, with the increase in some of the positive rates we're seeing, it's been because of the 100% beta type situation that we have with (inaudible). But pricing disciplines Wally, we are, like I said, we've passed on a couple of deals here just this past couple of weeks that significantly fixed rate low for instance, seven year 4.99% (ph) fixed rate type stuff that we're just looking at. We've got -- our pipelines are strong enough to where we can still hit our 10% growth, pick those that make more sense from a pricing standpoint can help us fight off this compression.

William Wallace -- Raymond James & Associates, Inc -- Analyst

Okay. And then you mentioned the $1.3 billion in loans tied to LIBOR and you hinted at some changing of pricing strategy around those. Are you changing -- are you going to -- I know there are some questions in the industry as to what's going to be the new benchmark rate, are you guys going to switch to whatever the new benchmark rate is or are you going to go to prime? Can you talk a little bit about what some of the strategies are around those loans?

Drake Mills -- Chairman, President and Chief Executive Officer

Yeah, unfortunately that's a factor of that relationship and the way that they -- the client drives that to a degree, but we are definitely going to look at the benchmark rate to start pushing what we feel is going to be best for us from a pricing standpoint.

William Wallace -- Raymond James & Associates, Inc -- Analyst

Okay. And then on the deposit pricing, you mentioned that the Texas markets are driving the deposit growth and those are higher costs markets. Are you seeing with the fed pausing, are you seeing any change in the competitive environment around how other banks are pricing deposits and do you anticipate that the pricing pressures will ease?

Drake Mills -- Chairman, President and Chief Executive Officer

You know, Wally, I'm anticipating that they should ease. We're not seeing that at this point. We're continuing to see some unreasonable pricing in our markets from some competitors, but overall, I believe that we're going to be able to kind of hold that bay to where it sits today with maybe some slight pressure upward, but we're looking -- we've launched and Lance is going to probably talk a little bit about this, but we've launched and worked diligently on launching new account types and focusing on niche plays that we think are going to be significant impactors to our overall cost of funds.

William Wallace -- Raymond James & Associates, Inc -- Analyst

Got it. And one last question before I hop out, just on the operating expense base, can you tell us what the new branch in Dallas will add and kind of your thoughts on the run rate expenses for the rest of the year?

Drake Mills -- Chairman, President and Chief Executive Officer

Well, you're touching on a subject that is top of mind internally, we are taking a complete different focus on expense management as we look, as we try to understand what margin, I mean, you think about how quick this margin compression came at us from the standpoint of the rates environment. So we are looking at every single -- for instance, we have 45 open positions, I've asked him to hold those open positions. When you have 800 some odd employees, you've got a percentage of those positions always open. We're looking -- we -- the Dallas office and we have a new Jackson office, which both our CRA offices that we have opened that are going to be productive on the deposit side. I believe that we're going to be able to offset that with some of the cost efforts or expense management efforts that we have in place that will impact us through the next three quarters. So I am looking and pushing this organization hard to see extreme expense management through the next three quarters.

Brady Gailey -- Keefe, Bruyette, & Woods, Inc. -- Analyst

So am I hearing that you are trying to hold the line from the first quarter, trying to keep it flat this year?

Drake Mills -- Chairman, President and Chief Executive Officer

We're not going to be able to keep it flat, but it's not going to be as we had projected and we're still trying to get a hand on that. We think we can knuckle this thing under to lower to middle single digit increase in expenses and those expenses increases are going to be around these two new offices that we have coming online.

William Wallace -- Raymond James & Associates, Inc -- Analyst

Okay. Great. I'll hop out. Thanks.

Drake Mills -- Chairman, President and Chief Executive Officer

So it's not going to be significant, is what I'm saying.

William Wallace -- Raymond James & Associates, Inc -- Analyst

Okay. Thanks. Thanks, Drake. Appreciate it. I'll hope out.

Operator

The next question comes from Brad Millsaps with Sandler O'Neill. Please go ahead.

Bradley Milsaps -- Sandler O'Neill -- Analyst

Hey, good morning guys.

Drake Mills -- Chairman, President and Chief Executive Officer

Hello, Brad.

Bradley Milsaps -- Sandler O'Neill -- Analyst

May be wanted to touch on fee, we haven't hit that topic yet. I think last quarter, you mentioned you thought you could kind of grow fee income sort of in line with what you did in 2018, which was sort of low double digits. The insurance was seasonally strong this quarter, obviously that will maybe backup a little bit in the second quarter, but you probably have a better mortgage quarter. So just curious, it seems like your fees are maybe tracking better than you originally thought. Just any update around insurance and mortgage would be greatly appreciated.

Drake Mills -- Chairman, President and Chief Executive Officer

Yes, I'm going to let Lance visit a little bit about this, because he is -- we're doing a tremendous amount around, for instance our mortgage is getting very close. We talked in the past about break even. We had a really good first quarter, what you would expect that to be, somewhat down because of the seasonality. But we have done some extensive work around expenses and manage in that mortgage process to where we had, I think that a net contribution loss of $96,000 for the quarter, I'm assuming for the month, which if you compare that to a year ago, was over $600,000. So that's been a strong move for us.

Our treasury management fees are really driving a big percentage, they're up 27% and that is continued as you can imagine on loan experience (ph) side and the clients that we're bringing in. We're not bringing in larger relationships from the loan side unless we have some significant treasury management opportunities with those. So the swap fees are up. Insurance, we really have some strong momentum on the insurance side and I think the efforts we see internally and the way we're incenting fees, I believe that we can end up with stronger fee production for the year. Lance, do you want to comment on anything else?

M. Lance Hall -- Chief Operating Officer and Louisiana State President

No, you've covered it good, I think that's right. We are focused as a strategy on doing more back to back swaps with our customers than we have in the past and I think that really benefited us in the first quarter. I think we had almost $0.25 million in swap fees in this flat yield curve environment, it's a strategy that we're looking at hard.

Drake Mills -- Chairman, President and Chief Executive Officer

And you know, Brad, I would also point out that in the swaps and what we're trying to do from a hedge standpoint, is as potentially, we start to position ourselves more neutral from an asset sensitivity position. We're getting very aggressive with our customers on hedging the larger relationships to where we can -- and put ourselves what we think into a better position if potentially in '20, we see rates move down.

Bradley Milsaps -- Sandler O'Neill -- Analyst

That's helpful. So with bottom line though, it sounds like you've got enough positives going on where you feel like you can do better than that low double-digit growth rate that you kind of talked about last quarter?

Drake Mills -- Chairman, President and Chief Executive Officer

I do, and again, we're just -- we're waiting, we expect the core markets to take out the first quarter seasonality and see some continued growth in those markets, which will be of much lower cost.

Bradley Milsaps -- Sandler O'Neill -- Analyst

That's helpful. And then, wanted just to follow-up on deposits. My timing might be slightly off, but I think I noticed you guys unveiled a 4% checking product up to like $40,000. You've got to jump through a number of hurdles I think with debit card transactions et cetera to get the 4%, but just curious, how much success you have with that product and what sort of the all-in cost if everybody -- if you do in fact hit the -- everything you've got to do in terms of point of sale, debits et cetera, what does that bring the cost of that money down to?

M. Lance Hall -- Chief Operating Officer and Louisiana State President

Yes, hi, this is Lance. So yes, we lost that mid-March, spent a lot of time through the last quarter of last year, really analyzing how much cannibalization we think we're going to have in that product and what we think the total weighted average rate is going to be. We had a similar product previously called TrustPlus (ph) . We fine tuned it with a service charge with paying zero, if the debit card swipes and the ACH performance isn't there. All in, our projection is, it's going to be about 35 basis to 40 basis points of the stated rate. I'm sorry --

Drake Mills -- Chairman, President and Chief Executive Officer

35%, 40%.

M. Lance Hall -- Chief Operating Officer and Louisiana State President

Percent of the stated rate. So we're projected about a 160 (ph) rate on that. Our goal is to build a raise over $100 million in that product. The real win for us though is the amount of households that it drives into the branches, especially in on our Mississippi and Louisiana markets has been huge than Dallas so far. And we've opened up over 250 accounts already just in the Dallas market in the last few weeks and as many dollars as that we're getting into this performance checking account, we're getting an equal amount of dollars into other accounts because when people come in and realize, well, that's not for me I'm not -- I don't swipe my debit card quite to that level. We're really right now have almost dollar for dollar in other accounts as well. So when you look at the weighted right, I think it's going to be very advantageous for us at the end of the year.

Bradley Milsaps -- Sandler O'Neill -- Analyst

Great. Thank you very much.

Operator

The next question comes from Brady Gailey with KBW. Please go ahead.

Brady Gailey -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Hey, good morning, guys.

Drake Mills -- Chairman, President and Chief Executive Officer

Hey Brady, how are you doing?

Brady Gailey -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Good. Hey, I didn't know about the tornado last night, I hate to hear that and hope everything ends up OK.

Stephen Brolly -- Chief Financial Officerz

Thank you, my friend.

Drake Mills -- Chairman, President and Chief Executive Officer

Thanks.

Brady Gailey -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Yes. I wanted to ask a little bit more about the mortgage side, I know last quarter you all were going through some rifts there and maybe looking at doing the servicing side a little differently. But you know, as we go forward, are there any major changes left on the cost side of your mortgage group?

M. Lance Hall -- Chief Operating Officer and Louisiana State President

Yeah. You know Brady, we are in the process of continuing to assess you know servicing and how we address that. And there are some decisions to be made, but I will tell you that we are going to continue to reduce the overall operating expense of mortgage. Our retail production now continues to strengthen, the number of our mortgage lenders continues, we had two big wins this past month on some great hires. So we are -- as I've been saying for the last two quarters, a little bit behind my schedule, I think you'll see break even in the next month or so. And you know from that point, I do think there's some opportunities for us to reduce our overhead. But I'd like to hold that until we make some decisions.

Brady Gailey -- Keefe, Bruyette, & Woods, Inc. -- Analyst

All right. Then you -- I know you all entered into the leverage transaction. I think it was third quarter of last year where you took on the $250 million (ph) of advances. Can you just give us an update on the -- I know the yield curve has changed pretty dramatically, but can you just give us an update on the profitability of that transaction and any updated thoughts there?

Stephen Brolly -- Chief Financial Officerz

Hey Brady, is Steve. Right now, looking at the Home Loan bank, if we were to replace that today, not -- if it's called later on, it's about a 10 basis points higher. When the similar structure, if we go out and borrow overnight, which is then something we would do for that, it's about 100 basis points higher. And so, it was 165 basis points, you could see that we've taken almost the entire amount and put it into loans and our loans are in the 5% area. So it's a very good profitability for us.

In the beginning, it took a little while to take that money and to use it. But we do have some securities that we're sitting on the side to be able to -- they will mature if we want to pay it down. And we have some cash flow from securities also. But we're looking at all of our options and we had a really good finance committee board meeting yesterday and there's a lot of give and take about what are some of the options, what should we do strategically what's the best for us. So it was very profitable. We just have to see where the market is and where our liquidity is as the first call date is in August.

Brady Gailey -- Keefe, Bruyette, & Woods, Inc. -- Analyst

All right. Thanks, Steve. And then lastly, for Drake, just an update on M&A. I know when we spoke 90 days ago, you were having, I don't know, three to four conversations, most of them were more on the funding side and I think in the state of Mississippi. Drake, just an update on kind of how you're feeling on M&A?

Drake Mills -- Chairman, President and Chief Executive Officer

Yes, I have -- what I would consider for opportunities in the pipeline, one that we're really laser focused on, we actually have walked away from two that heated up, that were not very good fit for us. And I would think you as an analyst and our investors if this first one, I don't shoot (ph) needs to make a tremendous amount of sense and it needs to be really a 100% based on funding opportunities and so, the one that's heating up pretty good is, hits all those marks and I am hoping that we can get something, I'm being very aggressive with this and hopefully -- because from our standpoint, you take $150 million, $200 million of low cost deployment, throw it in, our mix at this point and that's significantly accretive very quickly. So very active in it, and this is a priority of mind at this point.

Brady Gailey -- Keefe, Bruyette, & Woods, Inc. -- Analyst

All right. Great. Thanks guys.

Drake Mills -- Chairman, President and Chief Executive Officer

Thank you.

Operator

(Operator Instructions) The next question is a follow up from Matthew Olney with Stephens. Please go ahead.

Matthew Olney -- Stephens Inc. -- Analyst

Hey guys, just a follow up. You've been pretty active hiring commercial lending teams within your footprint over last few years. Didn't know if there were any updates you wanted to share with this for this year and I guess related, it sounds like you're being pretty careful on the expense side at this point. So I'm curious if this initiative is going to slow down the team lift-out strategy this year.

Drake Mills -- Chairman, President and Chief Executive Officer

You know, we have -- our -- man, our focus on any type of lift out right now is going to be deposit driven and we have had a little success there. We have called some lower producers and we're going to be replacing them with what we think are high quality producers in the DFW market at this point. So those are going to be not adds, but I think significant increases in production, but we're looking at continuing to increase our production through making sure that we're taking out those that are producing and replace them with stronger producers. So we have, I think two to three in a DFW market that I think are going to be significant for us, but those are all replacements and I think there's going to be upsides for us. But on deposit side, we're going to continue. If we have opportunities for some lift out and some adds there that are deposit focused, we're going to make those moves.

Matthew Olney -- Stephens Inc. -- Analyst

Okay. Thanks for that Drake. And then just a general update on credit quality. I think last quarter, there were a few loans that were more problematic and went through an impairment process, and I think you're expecting some resolution at some point this year. Just update on those handful of loans and just some overall commentary on credit. Thanks.

Drake Mills -- Chairman, President and Chief Executive Officer

Yes, now, I really feel good about overall credit quality and the direction, we've had a slight decrease in NPLs in the first quarter. We have, I think if you look at -- our sub-standards are down 19% since Q1 of '18, we still see that trend moving in a favorable direction and we've looked at other areas that we've recently seen, some stress then like franchise restaurants. We have $66 million in exposure there, 1.7% of our loan portfolio and those are all really backed well and good brands assisted living which has been a problem, $96 million, 2.5% of loan portfolio is performing well.

Multi-family is continuing to perform well and overall offices, we feel pretty good. ADC, we're at 77 basis points and CRE is 266 basis points. So we still have some room in those areas, but overall, our credit metrics look really good at this point. And I think that there's nothing -- we just had yesterday with our risk committee and also audit, we went through a real deep dive in the portfolio. Jim Crotwell, our Chief Risk Officer has done an excellent job of staying on top of those metrics and at this point, there's not anything on the horizon that bothers me, but we're staying close as we continue to -- we potentially see some recessionary pressures.

Matthew Olney -- Stephens Inc. -- Analyst

And so, it sounds like the classified loans continue to come down especially year-over-year. Is your expectation Drake that there is additional healing, additional improvement you guys could see, especially with the energy portfolio or is this now kind of where classified loans could level off?

Drake Mills -- Chairman, President and Chief Executive Officer

No Matt, we will see some additional reduction in classified loans. We're not -- even though it's decent, it's not where we historically are and we want to continue to see some -- and we have some deals working on a couple of those credits that have been historical low performers for us that we should see some reduction in those, in the second and third quarter hopefully, because we're working diligently and just don't feel like that our numbers need to represent our overall credit quality. So you'll see some decline in those.

Matthew Olney -- Stephens Inc. -- Analyst

Okay great. Thank you, guys.

Drake Mills -- Chairman, President and Chief Executive Officer

Thank you, Matt.

Operator

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

Drake Mills -- Chairman, President and Chief Executive Officer

Well, we appreciate everyone's participation, and I would say this, historically we receive some calls to the office, we do not have power or phone at this point. For those that know me, I give my cellphone out generously and if there is any questions, if you could please try to call my cellphone, 318-243-2525. Appreciate the participation and we'll keep everybody at the data on the damage and what's going on from the tornado. But thank you very much.

Operator

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

Duration: 77 minutes

Call participants:

Drake Mills -- Chairman, President and Chief Executive Officer

Chris Reigelman -- Investor Relations Contact

Stephen Brolly -- Chief Financial Officerz

M. Lance Hall -- Chief Operating Officer and Louisiana State President

Matthew Olney -- Stephens Inc. -- Analyst

William Wallace -- Raymond James & Associates, Inc -- Analyst

Brady Gailey -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Bradley Milsaps -- Sandler O'Neill -- Analyst

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