Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the allegiance Bancshares Inc. third quarter 2019 earnings Conference call.
At this time all participant lines are in listen only mode.
After the speakers presentation, there will be a question and answer session.
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I'd now like to hand, the conference over to your Speaker today, It's Courtney Terrio Executive Vice President and Chief Accounting Officer. Please go ahead.
Thank you operator, and thank you also joined our call today.
This morning, I, just thought where he led by George Martina Chairman and CEO steep ramp up President Rayva, Chile, Executive Vice President and President of allegiance Bank.
<unk> executive Vice President and CFO .
That's all executive Vice President and General Counsel.
Before we begin I need to remind everyone that some of the remarks made today may constitute forward looking statements as defined in the private Securities Litigation Reform Act at nights 95 as amended.
We intend to all such statements to be covered by the safe Harbor provision for forward looking statements.
Also note that if we give guidance about future. So that guidance is only reflection of management's belief the final statement as me.
Management's beliefs really predictions are subject to change and we do not publicly I say side.
Please see the last page of the text in this morning's earnings release for additional information about the risk factors associated with forward looking statements.
If needed a copy of the earnings release is available on our website at Allegion state dot com or by calling Heather Robert Actuate, One 5007, 642, and she will email you a coffee.
We also have provided an investor presentation on our website, although it is not being used as a guide to these common.
Is available for review at this time.
The completion of my remarks, well open the line and allow time for questions I now turn the call every <unk> CEO George Martinez.
Thank you coordinate and we welcome all of you to our third quarter earnings call.
Third quarter of 29 chain, what's your productive order for us in which our team of dedicated employees worked to achieve share wrote.
TJ objectives.
We were particularly pleased to see order growth in noninterest bearing deposits over 18 or half percent annualized.
The third quarter.
After the second quarter.
Broader success on the deposit fraud that allowed us to let nearly $100 million and broker deposits roll off the balance sheet during the quarter.
New loan production were strong at just over $315 million.
Approximately in line with expectations, although net loan growth came in below expectations due to higher than anticipated loan pay offs.
We continue to exercise discipline on pricing and terms.
At the every quarter, we successfully completed a $60 million subordinated debt offering, which enhances our capital position and also positions us well for future growth.
Our investment in our culture across allegiance just repeat grade rewards as we are seeing successes from our recruiting efforts over the years and our ability to increase market share.
We added two new lenders during the third quarter to support our future growth and made the strategic higher but chief information officer to enhance our utilization of technology in all aspects of our business at the same time.
Bankers have left the bank and as a result, the productivity gains many will not need to be replaced thereby improving our cost structure on a go forward basis.
We continue to focus our average aren't grading in new and deepening existing customer relationships.
Right Pro riding the same steadfast commitment to delivering personalized service for which we are known within our community.
It is this commitment that has helped us grow to better serve I employees, our customers shareholders that sets us apart as a premier community bank in the Houston region.
We are encouraged about our position of strength.
And our outlook for the remainder of the year as we work to leverage our talent and capital to produce research.
For our shareholders.
This morning, we also announced a timeline for transitioning to Steve.
CEO oblivious bancshares.
I will remain as chairman of the board.
Steve as a new CEO will be leading the earnings calls going forward.
As I prepare to step away from CEO duties at the end of the year.
Hi, I'm extremely pleased with the accomplishments of the entire allegiance family and building uses largest community bank and I know the best is yet to come.
Next Steve will describe our results in more detail followed by Paul who will explain some of the numbers behind.
These narrative.
Then we will open the call for questions.
Thanks, George I also welcome everyone to our third quarter conference call.
Recently completed our Twelveth year since our startup in 2007 and are currently ranked 11 and deposit share within the Houston MSA, we accomplished just by way of a near even split between organic growth in acquisitions.
The brand value behind the elitist name in the differentiation that accompanies our Super community Bank strategy continues to grow and be recognized.
Thank you to his bank is core to our identity and as we continued to gain market share that relationship deepens everyday not only through the banking services, we provide but also from the many hours a volunteer service our staff contributes to the local community Lejus Bank was recently recognized for many efforts with the 2019 community builder.
Award by the West Houston assistance Ministry.
I commit meant a beaumont, but also reflected through participation by Lejus bankers about Houston and Beaumont in their world habitat day event.
For these and many other community activity. We appreciate the ongoing generosity and dedication from all of our employee.
First I'll review, our loan production metrics for the third quarter.
Total core loans, which excludes mortgage warehouse lines ended the third quarter at 3.85 billion.
An increase of 37.6 million during the quarter or an annualized growth rate of 4%.
This compares to the organic growth rate of 4.5% in the second quarter.
Year to date core loan growth has been 189 million or 6.9%.
During the third quarter, our staff and linking once again book, a very strong 315 million of new loans that funded to a level of 210 billion by September Thirtyth. This compares to the second quarter, when 327 million of new loans regenerate, which funded to a level of 222 million by the end of the second quarter.
Paid off loans continued to be high at 188 million in the third quarter compared to 175 million in the second quarter and 159 million in the first.
The average size of the new organic core loans generated during the third quarter was 407000 committed and 270000 funded which once again reflects our continued focus on building a diverse and granular loan portfolio and as the average size of our funded loans ended the quarter at 337000.
Regarding interest rates on loans based on total loan amount the weighted average interest rate charge on our new third quarter core loans was 5.5%, which is below the second quarter weighted average rate of 5.74%.
The 180 million a paid off core loans during the quarter had a weighted average rate of 5.74%.
Carried core loans experience advances at 109 million had a weighted rate of 5.67% and pay downs of 103 million, which were at a weighted rate of 5.54% all in the overall period end weighted average rate charge on our funded core loans, excluding fees and acquisition accounting decrease.
Eight basis points during the quarter ending the quarter at 5.4, or 5%, which is close to where the year began at 5.47% as of December 30, Onest 2018.
Paul will discuss the resulting portfolio yields in margins in his report.
The mix of new loan production based on third quarter funded levels was represented by the following for commercial categories owner occupied commercial real estate, 22.2% non owner occupied commercial real estate, 15.6% commercial term loans, 13.1% commercial working capital Eightpointthree.
These four commercial category represented 59.2% of the new funded production compared to 48% for the second quarter and 59.8% for the first quarter of 2019, indicating our ongoing commercial concentration.
Loan secured by one four family residential real estate contributed 21.8% the new funded core loans construction and development, including land loans contributed 11.7% and multifamily contributed 2.6% of the new funded core loans during the quarter.
The overall loan mix was little changed on a linked quarter basis. The slide deck posted on our website provides added color regarding our overall mix loans.
Asset quality the quarter end remained in a manageable position the level of net charge offs experienced during the quarter was once again very modest at 729000 or an annualized rate of seven basis points. So far 2019 year to date net charge offs have been at a rate of five basis points as compared to six basis points, where all of 2000.
Keith.
Nonperforming assets, including both nonaccrual loans and Oh, sorry ended the quarter up from the second quarter, increasing from 77, the 88 basis points of total asset.
Non accrual loans increased a net of 3.3 million during the quarter from 31.3 million to 34.5 million, resulting from both increases and decreased.
The decreases were from payoffs of approximately 3.4 million payments applied to principal of just under 1 billion.
Closures of three properties from two relationships of 2 million winter now are easy and charge offs of 729000.
Increases totaling 10 point Threemillion, we're downgrades, primarily from two relationships one that 9 million any smaller loan of approximately 600000. The additional 700000 of downgrades was from six smaller relationship.
Regarding the two larger relationships the smaller one which is at 600000 is fully reserved.
The larger is a commercial construction project, where although a recent appraisal reflects adequate loan to value coverage project delays and increased construction costs led to the downgrades that we're working to optimize the outcome of these relationships to that end I'm pleased to report that since the ended the quarter two other non accrual loans during.
Maximally 1.8 million have paid off.
The specific reserves represent approximately 18% of the outset outstanding balance of the nonaccrual loans approximately 75% of the outstanding balances are collateralized by real estate and the overall estimated loan to value of the unreserved exposure of the non accrual loans is 80%.
Our already consists of five properties totaling 8.3 million. The largest is a 5.8 million industrial commercial real estate property, which has a recent appraised value of 6.5 million and is being marketed.
The second largest at 1.2 million is a lot located in the well established upscale Roche subdivision.
The third largest as a 575000 home and a popular gated community the remainder our three smaller properties located west of Houston.
Overall, we believe our nonperforming assets are well collateralized and manageable.
In terms of our broader watch list are classified loans as a percentage of total loans increased slightly ending at 2.18% of total loans as of September thirtyth compared to 2.02% at June Thirtyth.
Criticize loans decreased slightly to 2.87% at September 30, compared to 2.91% at June 30.
The specific reserves for the impaired loans ended the quarter at 18.2% from 20.4% at June Thirtyth.
On the deposit front, we're pleased by the changes in our deposit mix in the quarter total deposits increased in the third quarter by 36.8 million, representing a 3.8% annualized growth rate in the quarter and 8.5% year to date, while as George mentioned noninterest bearing deposits increased 54 million or an annualized growth rate.
18.5%.
With that noninterest bearing deposits improved to 31.5% of total deposits.
Timber thirtyth compared to 30.4% at June Thirtyth and to 31.2% at March 30, Onest 2090.
Finally deposit mix further improved during the quarter as we were able to let just under 100 million a broker deposits roll off the balance sheet.
Obviously, we are pleased with the recent mix change and continue to focus the entirely just team on our core deposit growth initiatives from both borrowing and non borrowing customers.
So the Houston economy, let's first look at the data.
The West, Texas Intermediate oil price began 2019 had its low at 40 650 has traded as high 60 630 and is more recently in the mid to low Fiftys range Houston them as they has added 81000 jobs over the past 12 months led by professional scientific and technical services some manufacturing.
Other services distribution and healthcare.
Just an unemployment rate was at 3.9% and August compared to 4.4% a year ago.
Home sales are on the page, where a record setting year at 58128 homes sold through the first eight months.
2019, the local area purchasing managers index registered in the expansion.
51.6 in August .
But no new vehicle sales are down 2.4% year to date, showing more slowing in recent months than earlier in the year.
But the port of Houston is reporting increased tonnage up 4.7% year over year.
Finally, a hotel occupancy is down slightly and average room rates are down a bit with all of that they're both signs of strength in some softening. We do however note the benefits of Houston is growing population as well as increased economic diversification and globalization.
We continue to be disciplined with regard to underwriting standards and monitoring of our relationships in pursuit of consistent strong long term asset quality performance.
As I conclude I would note that so far in 2019, we've added 13, new lenders one of which is a promising promotion from within construction continues to make progress for our new new leased branch office in the east side of downtime Here's the leadership team for that New office, and the east and community anxiously await opening of the brand.
In early 2020.
Finally, as George mentioned I have humbly accepted the request an election by the board of directors to serve as CEO of the company as George Martinis leaves that responsibility, but continues to serve close by as our chairman.
I'm excited to serve in this capacity alongside Rayva truly who will ably serve as president of the company and CEO of allegiance Bank.
With Paul Eggy, our talented CFO and Okada Lake and soon to serve as the banks President.
I mentioned these three today, but my thoughts of appreciation contain many others.
And in contrast to most new CEO as mine is not a new found excitement rather my journey began 12 years ago, when George and I co founded the bank has since you bought into tremendous confidence in our ability to represent excellent for all of our stakeholders as we both way and pursue our future my great confidence comes from my familiar.
And with the leadership talent and culture that exist at all levels and our organization.
I am so grateful to be able to serve the individuals very much to serve all of the credit for our past accomplishments and from who are high expectations are derived with that I will now turn it over to our CFO Paul.
Thanks, Steve.
Third quarter net income were $12 million.57 per diluted share as compared to second quarter earnings a $14.2 million or 66 cents per diluted share.
Third quarter performance was impacted by certain onetime item.
Most notably $1.4 million severance costs, partially offset by $676000 small bank assessment credit from the FDIC netting to additional expense of about $755000 in the quarter.
Also recall that second quarter performance benefited from significant nonrecurring revenue items, partially offset by acquisition expenses, netting to an approximately $1.5 million benefit.
Adjusting for these onetime items net income would have been $12.6 million.59 per diluted share for the third quarter versus an adjusted $13.1 million for 61 cents per diluted share in the second quarter.
Third quarter net interest income was $44.8 million down from $45.6 million in the second quarter, primarily due to lower acquisition accounting accretion versus the second quarter.
As higher interest, earning assets was essentially offset by lower net interest margin before acquisition.
The third quarter acquisition accounting accretion increased net interest income by $2 million compared to $2.8 million during the second quarter.
Within the third quarter acquisition accounting accretion increased loan income by $1.9 million and reduced CD expense by $154000 for total positive effect on net interest income of $2 million.
This quarter's accretion lead $7.2 million in the landmark and $694000.
Yield on loans in the third quarter was 5.72% versus 5.88% for the second quarter and 5.49% for the year ago quarter.
Adjusting to the acquisition accretion recorded during the third quarter yield on loans would have been 5.43% versus 5.62% in the second quarter.
The total yield on net interest, earning assets, 5.43% for the third quarter, 5.58% for the second quarter and 5.12% for the year ago quarter.
Adjusting for the acquisition accretion total yield on earning assets would have been 5.26% compared to an adjusted total yield on earning assets at 5.34% for the second quarter.
The total cost of interest bearing liabilities of 188 basis points for the third quarter compared to 186 basis points to the second quarter 153 basis points for the year ago quarter.
Overall cost of funds for the third quarter was 133 basis points versus 132 basis points for the second quarter, and 109 basis points of year quarter.
Excluding acquisition accounting adjustments in the third quarter. The total cost of interest bearing liabilities would've been hundred 90 basis points. Overall total cost of funds would have been 135 basis point.
During the quarter, we did see inflection in our cost of funds on a monthly basis, and we feel well positioned to show incremental improvement in our cost of funds that we work to reprice our deposits in the current lower interest rate environment.
Tax equivalent net interest margin for the third quarter with 4.16% compared to 4.33% in the second quarter.
Adjusting for the acquisition accounting accretion the net interest margin would have been 3.97% for the third quarter compared to 4.07% second quarter.
Noninterest income decreased to $2.9 million for the third quarter $3.8 million for the second quarter, primarily due to the second quarter being bolstered by certain nonrecurring revenue items, including $846000.
On the gain on sale securities.
$214000 as lumpy FDIC.
Total non interest expense in the third quarter was $30 million compared to $30.1 million in the second quarter.
Note that during the third quarter, we incurred $1.4 million a separate expenses, partially offset by the $676000 small bank assessment credit from yet.
The efficiency ratio for the third quarter was 62.88% from 61.93% that we posted in the second quarter and 63.95% for the prior year quarter.
Excluding the onetime expenses during the quarter efficiency ratio for the third quarter 2019 would have been 61.3%.
The provision for loan losses was $2.6 million for the third quarter and the ending allowance at $29.8 million 77 basis points a total loan.
Q2 include to $7.2 million Malone, Mark remaining on acquired loans, the ending allowance plus loan Mark to total loan is 95 basis point.
Bottom line, our third quarter 2019 produced a return on average assets 0.98%.
And to return on average tangible equity of 10.33%.
On a pretax pre provision basis, our ROI during the quarter with 4.4 or 5%.
Excluding the onetime items previously discussed.
Then 1.51%.
Last we'd like to highlight that we were active repurchasing shares under our new we purchase authorization buying just over 430000 shares at a weighted average price of $32 45.
Per share during the quarter.
We feel comfortable with our capital position and our flexibility consider future share repurchases under the existing authorization.
I'll now turn the call back over to George.
Thank you Paul operator, we would now like to open the lines for questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Please standby, what we compile the Q and a roster.
Our first question comes from that only with Stephens. Your line is now open.
Hi, Thanks, Good morning, guys.
Matt Ryan.
I'll start on the deposit side I think Paul I believe you mentioned that this was an inflection point on the deposit cost side.
In the third quarter, we still see higher deposit costs first twoq. So I'm curious what month did this inflect in Threeq. You then can you give us some color about how much improvement of deposit cost we should expect over the next few quarters.
Certainly, it's a little bit slower on the way down than it was on the way up interestingly enough.
The deposit costs or cost of funds.
Really peaked in June July and.
Showed showed.
Positive.
Decreased slightly in in August and September respectively. So progress is being made but the.
Yes sure did.
Ramp up a lot faster then it's coming down really because we want to be as thoughtful thoughtful as we approach those repricing discussions with our deposit or particularly since.
We see.
Still have growth ambitions as it relates to.
Sharing it that spot at the bank.
Okay, Great and then on the loan side I think it sounds like a the payoffs remain elevated I guess a theme that we're hearing from others as well anything you can point to specifically that the you've seen recently, it's a bank competition non bank competition are these.
How are these borrowers so one of businesses just any more color I appreciate it.
Hey, Matt the.
We have looked at that really on just the entire year because the downsize payoffs have really been that way for them all three quarters and if you look at all three quarters in aggregate.
Look at those pay downs were seeing in about 20% to 21% of the pay downs are related to better terms better pricing. We're just we just remain disciplined on those loans as far as how we price and then about 80% is in the category of sale business There was company.
Cash and bank too I.
And just paid off alone had nothing to do with competition or anything like that so.
That's where we stand year to date and.
And we are looking at that but again, we're going to remain disciplined pricing and I think.
We may see some of that in the comp.
What's happening in the competitive market on the loans.
And raising your sense that there is those headwinds in those challenges intensified in the third quarter or how does remain consistent throughout 2019.
I think on the.
I looked at it on a year to date basis, there may have been a little uptick in the third quarter in the better terms.
Leaving for terms and conditions, but it looks to be pretty consistent overall three quarters.
Okay.
And then as far as the producer headcount I think as Steve said, it's been 13 year to date additions.
But on the other hand, it sounds like you've lost a handful of employees would those revenue producers or non revenue.
And how many employees have you lost and I guess, just give us the overall headcount at the total produce.
On the producer side the in the quarter to too that were added in the quarter.
Hi kept our producer level. The same so we had we entered the we ended the quarter with.
15, and we finished the quarter 2000, fifteens there was an attitude in a lawsuit.
Got it.
Okay. Thank you guys.
Yes, Matt.
Our next question comes from Brady Gailey with KBW. Your line is now open.
Thank you good morning, guys.
Good morning, but I wanted to start with the bought with the sub debt raise of 60 million.
At a pretty attractive costs, how do you think that plays into continuing the buyback you repurchased about 6% of the company.
Year to date do you anticipate utilizing the full 60 million of sub debt to continue to repurchase stock here.
Well, our first kind of step on bringing that sub debt Edwards with to pay down our holding company line of credit, which we did in early October .
And then the remainder.
And what we had drawn to finance some repurchases.
Ahead of that sub debt raise.
So some of that.
Repurchase activity that we stated on the prepared comments.
Had been financed by the holding company like credit.
And then what remains of the that proceeds in the bank.
Would be sufficient to cover any additional share repurchases under our.
Just in plant.
Okay.
All right and.
And any color on the seasonal impact to your reserve that's coming up next quarter.
I can provide some.
However, our reserve will be higher.
Directionally I note that.
The probably the.
One of the larger points of comparison is the fact that discount that we have on purchase loans will manifest itself more directly in and reserve.
Seasonal adjustment on January one.
And then the adjustment will go from there.
And and.
We're comfortable with the levels.
And in particular, we would feel like we've been able to be pretty agnostic as it relates to the outcome of Cecil because of that tier two capital treatment.
From the overall reserves and if not fall into the income statement.
Yes.
All right and then you had roughly 2 million of Accretable yield this quarter I know Cecil can impact that number just as that.
7.2 million or discount moves into the reserve do you expect a notable drop off in yield accretion in 2020.
Yes, I'm actually stands to reason.
As you've seen the.
Accretion we've had since the closing the transaction.
Which you witnessed in the first three quarters was.
Transaction.
First quarter.
Pardon me the fourth quarter of 18, and the first two quarters of 19 relatively higher levels of accretion it dropped off.
Rather significantly here in the third quarter it will step it's scheduled to.
Set down.
To buy as large margin here in the fourth quarter.
I'd say.
At least.
A 25% if you don't have any impact from.
From early pay downs and things along those lines, there's a lot of stuff that can affect the schedule of our accretion.
And then what's left.
Really accrete into the earning stream at a less rapid pace. So 2019, 2020 accretion will be significantly lower than 2019, Krish Krishnan level.
Alright Thats helpful. Then finally for me the benefit you saw from the FDIC assessment credit.
Is there any of that left that will be a benefit in future quarters.
Yes, there is.
Hey.
I'm left for the fourth quarter.
I don't believe it will be as large as the third quarter. We were fortunate in that we get the benefit.
Based on timing, we got the benefit of both.
Our small bank assessment credit and that a poster.
So we will have some remaining benefit going into the fourth quarter and ER.
We're hopeful that that feature a settlement credits come through from the FDIC, but but we'll see.
Alright, great. Thanks for the color guys and George Good luck in retirement wish you all the best.
Yes, Thank you Brady.
Our next question comes from Brad Milsaps with Sandler O'neill. Your line is now open.
Hey, Good morning is actually Peter reason for Brad.
One of the theater.
Just wanted to maybe follow up on the margin appreciate all the color you guys kind of gave but just thinking about.
Previously kind of indicated that you thought the NIM could maybe hold steady here even on on future rate reductions, but just wanted to get your since on on you know what what that looks like going into 2020, if we do get this get another cut here and that next week and just what you guys are thinking.
From here.
Certainly.
We're working hard to execute such that we can maintain stable NIM.
That's structural indications sub debt deal, we'll have some effect on our NIM positioning and.
As as we see in the longer term, we like our overall NIM NIM story by virtue of.
The nature of our lending being a little higher higher rate you just really have to go back to the prior interest rate cycle two to three years could see where our.
Yield uninspiring assets.
Laid out we tend to be we do have a.
Rate sensitive liability based so we think that as we hit floors. There's the potential for there to be some wind at the back of our NIM, but not.
Up to this point, we've been feeling pressure and it's it's hard.
Right now given some changes in the funding markets and the lending markets are competitive markets too.
Ted to give too bullish signals on NIM, notwithstanding the fact that kind of broadly speaking we like the NIM.
Implications of where we operate our business.
Okay, maybe following up on on Matts question just.
In terms of the deposit costs.
You mentioned you reached an inflection point.
Total deposit costs were essentially flat.
Linked quarter so.
Can you kind of give a sense of where spot rate kind of deposit costs or for some of the products.
Maybe the month of September versus where they were in July .
There's certainly lower I mean, we got if you follow where the.
Wholesale curve was.
In.
September versus July .
We try to keep our pricing.
Add.
Consistent spreads from that and that's what's enabled us to have a little bit more.
Uh huh.
Empowerment, when we go to.
Re pricing discussions with some of our more price sensitive deposit, but we tend to kind of base, our pricing deposit pricing methodology based on the competitive markets brand.
Using where the wholesale FHLB and brokered curves are the baseline and pursuing a certain spreads within there and then letting that guide a little bit of our.
How we think about exceptions.
So I think that point point comparison would probably be.
The right thing to look at.
Probably with a little bit of a lag a particularly as it relates to.
How how we.
Approach the deposit repricing discussion there is there is some lag.
Particularly on the Cds since it's a function of that of whats coming due and renewing but other than that.
We we try to we do operate on.
Somewhat of a lag so.
The benefits.
Aren't going to be as stair step as they would.
In some cases, although we do have certain portions of our deposit base that are 100 beta links to fed funds. It's just that's not.
The provider.
Okay, great. Thank you.
As a reminder, ladies and gentlemen, if you'd like to ask a question at this time that Star then one.
Our next question comes from the lineup David Feaster with Raymond James Your line is now open.
Good morning, guys.
Sure David I'd, just like to Ah to follow up on that the common it's all about.
The floors on your loan portfolio could you give us some more details into that how much. Your book has forced how close to are we to hitting those and ultimately given your history and your client base, how effective how floors, Dan and how effective you expect them to be a at protecting loan yields.
Well the about third of the portfolio is variable and almost I would say other than SBH pieces in there those loans generally have floors. So the I think the question as you know where we're just before.
What is the level of floor. So we've seen floors that are some floors that we've had never we never busted blew the flow through the floor, even in the rising rate environment. Some of those on just on the books. So I mean, the floors in a range somewhere between you know.
For something to.
Five.
On the fives, so we feel really good about that on our variable book and that's again thats about third of the portfolio.
Okay.
That's helpful. And then I guess, so you know look into the core NIM you know you've got the sub debt.
Coming off it sounds like loan yields there was some some noise there that are.
Caused loan yields declined more than you are what we would have expected I mean, how do you think about a core NIM.
Next year as we with the prospect you've got the September cut coming through and prospects of another one I mean do you think we're going to have a core NIM here in the mid three eightys or is there opportunity to to get it closer to the 390.
What are what will protect our core NIM is the where we operate in where we land and our ability to have a little bit more pricing power then.
Then.
Anecdotal discussions.
Known competition out there about kind of 10 year nonrecourse funding at 385, we don't operate in that type of a mark in general we're not.
We do see.
That competition, but generally speaking, it's not targeted towards our client base and we're we've historically been able to.
Benefit from some pricing power as a byproduct.
And we were going to seek to do just that in this and this rate environment.
Overall kind of.
Maintain a floor on the overall yield story on our assets and.
Put us in a position to appreciate the lag benefits of repricing the deposit so.
We see that as being a medium to long term stabilizer in our NIM, but in the short term.
As you've seen the set in the third quarter, we felt to squeeze and.
How that plays out in the near term, it's probably what's what's a little more.
Uncertain for us as we know and are pretty confident and kind of the overall strength of.
Our long medium and longer term NIM competition in the down rate environment.
Okay. Okay, we're just going to remain very disciplined on.
Pricing and underwriting in terms of so forth and given the kind of a smaller loan.
Customer you know as Paul says, we're we're underwriting.
That particular, a client base at rates that are.
Commensurate to the type of risk they pose and the underwriting.
Lets say is not changing in terms of credit quality.
Okay. That's helpful. What kind of along the same winds I mean with with you stick into your guns in terms of underwriting and pricing and then.
As ray talked about increasing competition and elevated pay downs I mean, how do you think about loan growth going forward I mean.
Originations are obviously holding up pretty well, but I mean, given elevated pay downs and potentially higher competition is more of a mid single digit rate of growth more appropriate or do you think you can stay somewhere in that high single digit level or north of that.
Well Im and we were originating in other than the pay downs are a big piece, but I mean, we're originating enough to grow and what you're describing.
We do have with the with the lenders we brought on board.
We do have capacity market share growth that that we're going to rely on to get to to get the growth that we were looking for so.
You know, it's like we've seen this year, it's a function of the pay downs and we will just continue to originate and we liked that leading indicator, which is the levels of originations. We've had we're happy with that.
Okay.
All right. Thanks, guys.
Our next question comes from that only with Stephens. Your line is now open.
Yes, just a follow up on the overall strategy here I mean, we're talking about the revenue headwinds.
With respect to the margin and slower loan growth from some of these paydowns I'm just curious on the operating expenses and if you're going to slow down the rate of expense growth and specifically I'm looking for some help on.
Operating expense growth in 2020 thanks.
You know we're we've been.
Unabashedly investing in the future for many years and then there's there comes times when you can take advantage of some of that previous spend and.
Leverage off of that into the future, we feel like Theres probably.
Reasonable amount of opportunity for that on the margin going forward. So we're looking for improvements.
The spend rate is.
Probably tapered a little bit just in some of the changes in the third quarter and year to date, such that I think we can take advantage of that little bit in Q4 and early in 20. So.
It again, we've got a capacity in a lot of the lenders already we are opening an office in January we're proud of that has mentioned a those lenders that are in there already working for the bank. So that's a.
Net increase so we're I think we can.
Proved that operating leverage a bit going forward and.
Loan growth will certainly be a part of that equation.
And so wouldn't NIM and George his prepared remarks, he acknowledged really leveraging productivity gains and where we have a retirement or certain levels of turnover being in a position to to not replaced and.
I think that can have structural benefits and and helping our cost structure notwithstanding the fact that.
We want to maintain a growth posture and continue to invest in the business.
And I respect that you guys are probably in your your budget planning sessions for next year, but Paul are there any numbers you can help put behind that as far as thinking about the expenses in 2020.
Right.
Payment that we don't have a practice, we've given guidance, yet Oh, oh tougher on that but we are planning to be mindful of some of the potential realities of the current environment as we plan in 2020.
Okay.
And then also want to ask about that credit quality I think you mention into paired remarks. The the addition of a 9 million dollar I think there was a non accrual loan if I heard correctly commercial construction loan with some delays anymore color on that what type of project is this any specific reserve and with the loan to the.
You on this project.
Yeah, the loan to values.
And that kind of 80, 85% range.
And now I'll give too much color on the loan.
But it looks like a viable project with good demand that just experienced some delays and if you cost overruns some.
Good morning.
Caused by their mother nature, but.
The yeah, we feel good about.
What we're doing to work with that particular borrower in that case, but then that was a big part of the number when you look at the non accruals or the nonperforming assets at the big jump was that one loan but again.
Real estate collateral is something that doesn't run away at the end of the day and you still have it took to work with so.
We feel good about that one.
Lease in terms of the basin the type of nature of it.
And there was a higher provision expense for loan losses. This quarter was there something specific on that loan or a separate line that drove that.
Nothing specific on that one but.
There were some impairment activity on smaller loans, I think Steve actually acknowledged and little bit of that what what you did see it by virtue of the.
You know.
To date accretion on the acquired loans.
Our methodology called for a topping off.
Our allowance for loan losses relating to the relative size of.
The discount on the acquired loans, so that that end up being.
A relatively.
Meaningful piece of the overall provisioning story.
Got it okay. Thank you guys.
I'm showing no further questions in queue at this time I'd like to turn the call back to Mr. Martinez for closing remarks.
Once again, we really appreciate your time and interest in allegiance.
Our team looks forward to speaking to you again in the future. Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating may now disconnect.