Q3 2020 Allegiance Bancshares Inc Earnings Call
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Ladies and gentlemen, you standing by welcome to the third.
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At this time, all I got a listen only mode.
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Thank you operator, and thank you to all have joined our call. Today. This morning earnings will be led by Steve Fritz Our CEO of the company raised to Lee President of the company and CEO and Allegion, saying Oh.
He executive Vice President and CFO.
On akin executive Vice President and Chief Risk Officer of the company and President I believe in Spain, and Shanok adult 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 of 1995 as amended.
We intend to all such statements to be covered by the safe Harbor provisions for forward looking statements contained in the act.
Also note that if we give guidance about future results that guidance is only a reflection of managements beliefs at the time the statement is made.
Management's beliefs relating to predictions are subject to change and we do not publicly update guidance.
Please see the last page of the text in this mornings 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 same dot com.
I call you had to Robert Actuate 15176 fortune to issue would email you a copy.
We also have provided an investor presentation on our website, although it is not being used as a guide for todays comments. It is available for review at this time.
At the conclusion of our remarks, we will open the line and allow time for questions I.
I now turn the call over to our CEO, Steve Russell.
Thanks Gordon.
Welcome everyone to our third quarter conference call and thank you for your attendance. This is our third conference call since the pandemic and associated economic impact interrupted the nation's extended recovery from the great recession.
The most everyone originally anticipated that the virus at least as it relates to business interruption. It would have been in the rearview mirror by now you're all receiving forecast that a full recovery will likely extend well into 2021 with some segments even further delay.
Religious bank has played a role to the fullest extent possible as a community bank as we not only supported our preexisting customers, but extended a helping hand to over 3200 small businesses in our region through the PPP program, who are not prior customers. In fact, though we have an approximate 1.5% deposit market share in the Houston MSC.
We completed over 7% of the region's TPP loan advances we continue to work closely with all of these customers through that forgiveness phase, where our customer facing portal was open during the third quarter with some forgiveness applications already being submitted by September Thirtyth.
In addition, our customers are hearing from our bankers as we reached out to virtually all of them in late Q3.
This extensive out reach was not only constructive for our ongoing loan grading process, but further exemplifies our value added one customer at a time approach to building relationships.
We are left with an optimistic outlook for the recovery of our customer base, while remaining cautious and prepare for stress scenarios.
Though we have an active central marketing and PR Department. It is every employee every lender who in fact deliver our greatest PR impact we are proud of our bankers and like our customers are so very appreciative of their selfless efforts.
To this point, we have not only received recognition as a top places to work, but have recently been named been a top 10 finalists for the National Association of corporate Directors NXT Award for our commitment to diversity equity and inclusion.
We believe our culture and Super community Bank strategy, our key driving contributors to our past and future growth. We are committed to continuing our strong performance with an unending focus toward continuous improvement of customer and employee experiences that will build excellent long term value for our shareholders.
Our record third quarter results reflect our ongoing progress and disciplined strategies as we ended the quarter with record earnings per share very low net charge offs stronger positive growth and stronger than ever capital allowance and liquidity positions. These earning power improvement is due to meaningfully growing our earning assets while.
Hang the strength of our net interest margin and holding the line on non interest expenses, we believe that our performance and balance sheet well position us as we remain cautiously optimistic given the ongoing uncertainties.
I will close my remarks, emphasizing that leaves US bank is clearly more nimble than ever related to business continuity, we are accelerating our shift to more paperless and efficient processes and service delivery center better positioned than ever to achieve our objective of organically driven market share growth.
Next Ray will describe our loan to deposit production results as well as an outlook on credit followed by Paul who will cover our financial results. We will then open the call up for questions.
Thanks, Steve.
During the third quarter, our bankers continue to outreach effort to our borrowing customers to get updates on financial condition perspectives on how the pandemic is affecting their industries and to continue the relationship development of our new customers as a result of our outsized PPP effort.
The scope of this outreach resulted in contact with customers representing 3.6 billion in loans are 79% of our funded loan portfolio.
In addition to the outreach put forth by our bankers during the quarter.
We saw a nice rebound and levels of new loan originations continue.
Continued growth and new Treasury customers as a result of the PPP.
Solid core deposit growth the reopening of our lobbies for most of our bank offices and launch of a first class PPP loan forgiveness platform with subject matter experts available to guide our customers through the process.
All while being prepared for to name storms that we're headed our direction.
Our bankers have exhibited an extraordinary commitment to get things done and serve our customers with many also navigating through the challenges of the pandemic at home, including uncertainty with school Reopenings child care needs and taking care of their families.
The execution of our business continuity plan has now become a seamless process with minimal disruption to how we conduct business.
Whether the pandemic or storm threat, we have the ability technology and expertise to run the bank as if we were working entirely on premise.
While we have served customers VR drive throughs and by appointment since Cobot was declared a pandemic.
We have reopened 21 of our 28 bank offices to full lobby service and continue to do so when appropriate following state and county guidelines.
Last quarter, we announced the opening of our 20 Eightth Bank office located in the historic East end of Easton. This.
This bank office serves a growing and vibrant community and even with the pandemic Theres energy and excitement with what we believe to be a flagship location.
We continue to look for opportunities to both further expand our franchise and make sure our existing footprint is optimal for the communities we serve.
As a result earlier this month, we announced the permanent closing of our Antwan office located in northwest Houston an.
An area, where we have other allegiance offices nearby to serve our customers.
In terms of PPP, we're very pleased with our loan results and the impact of our efforts on the eastern region.
As of September Thirtyth, we funded 6334 loans totaling $710.2 million affecting more than 60000 jobs.
Our approach to provide PPP loans to both existing customers and new customers has further strengthened our market presence.
We are now executing on the forgiveness process of PPP and working with our customers to complete the appropriate forgiveness application for further submission to the FDA.
While we were pleased with the recent announcement of the simple for getting this application for loans up to 50000.
We are hopeful additional legislation will provide for an increase threshold to 150000.
Of all PPP loans, we originated 61%, our 50000 or less and 83% our 150000 or less in terms of number of loans.
To date, we have received forgiveness applications for 384 loans totaling $160 million.
Of those 221 have been submitted to the FDA with two having been approved and funds received.
Speaking of the SBA, we are extremely pleased with where we stand in several categories of the recently published September Thirtyth SP, a fiscal year end report.
And the Houston District allegiance Bank ranked third in terms of SB $8 funded and fifth in terms of number of SB eight loans originated.
These results include both PPP and seven eight loans and reflect our continued market share gains and prominence as a leader in providing SBH solutions to business owners in the eastern region.
In addition to helping our customers through the PPP process. We also provided assistance to eligible borrowers with payment deferrals on outstanding loan balances of 1.15 billion or 30% of core loans through September thirtyth.
Of this amount approximately $240 million or about 6% of core loans remain on deferral at the end of the third quarter.
I will now go over our quarterly results.
Total core loans, which excludes PPP loans and mortgage warehouse lines ended the third quarter at 3.8 billion, a slight decrease of 5.8 million during the quarter.
During the third quarter, our staff and lending team, but $280 million of Nucor loans that funded to a level of $181 million by September 30.
Compared to the second quarter, when $234 million of new loans were generated which funded to a level of 148 million by June 30.
Paid off core loans were $181 million in the third quarter compared to $171 million in the second quarter and $204 million in the first quarter of 2020.
The average size of the new organic core loans generated during the third quarter was 370000 with an average funded balance of 240000, which once again reflects our continued focus on building a diverse and granular loan portfolio.
The average size of all funded loans ended the quarter at 343000.
Regarding interest rates on loans based on total loan amount the weighted average interest rate charge on our new third quarter core loans was 4.63%.
Which is below the second quarter 2020 weighted average rate of 4.84% and the first quarter 2020, and weighted average rate of 5.11%.
The $181 million of paid off core loans during the quarter had a weighted average rate of 5.33%.
Carried core loans experienced advances of $96 million at a weighted average rate of 5.19% and paydowns of $104 million, which were at a weighted average rate of 5.03%.
All in the overall period end weighted average rate charged on our funded core loans decreased eight basis points ending the quarter at 5.16% compared to 5.24% as of June 32020.
The mix of new loan production based on third quarter funded levels, which represented by the following four commercial categories.
Owner occupied CRT non owner occupied CRT commercial term loans and commercial working capital loans. These.
These four commercial categories represented 73% of the new funded production for the third quarter compared to 56% for the second quarter 2020, indicating our ongoing commercial concentration.
In terms of our overall loan portfolio the loan type mix was little changed on a linked quarter basis. The slide deck posted on our website provides added color regarding our overall mix of loans.
I would now like to provide some additional information on three loan categories that could have heightened risk due to energy prices and or the co. The pandemic.
Those being our oil and gas portfolio, our hotel portfolio, and our restaurant and bar portfolio.
Despite being a Houston region bank, our overall exposure to oil and gas is largely indirect as we do not have any reserve base loans.
So we have defined the category to be any borrower that operates in our directly supports the upstream midstream or downstream segments of the industry.
As of September 30. This category is approximately 1.6% of our funded loans for 74 million.
Of which $27.6 million was commercial real estate and $44.4 million was cnine.
Of the $27.6 million in CRT, the weighted average LTV for the portfolio was 55.1%.
A 20% stress testing of the most recent appraise value plus 6% marketing expenses resulted in an overall collateral deficiency of approximately 397000.
Increasing to $1.2 million at a 30% stress test.
Regarding our hotel portfolio at September 30, we had 134 million of hotel loans of which $124.6 million was commercial real estate.
1.8 million with Sandy and $2.9 million Wasnt Cnine.
Of the $124.6 million in CRT, the weighted average LTV for the portfolio was 59.4%.
At 20% stress testing of the most recent appraised value plus 6% and marketing resulted in an overall collateral deficiency of approximately $1 million increasing to $5.4 million at a 30% stress test.
And regarding our restaurant and bar portfolio at September 30, we had $117 million of restaurant and bar loans of which $82 million was commercial real estate $3.5 million with CND and $31.5 million was cnine.
For the $82 million in CRT, the weighted average LTV for the portfolio was 59.9%.
A 20% stress testing of the most recent appraised value plus 6% marketing resulted in an overall collateral deficiency of approximately $1.5 million increasing to $5.6 million at a 30% stress test.
Asset quality at quarter end remained in a manageable position the level of net charge offs experienced during the quarter was 220 to 291000.
Or an annualized rate of three basis points.
Nonperforming assets, including both nonaccrual loans and Lori ended the third quarter similar to the second quarter, increasing slightly from 77 to 78 basis points of total assets.
Non accrual loans increased a net of $4.7 million during the quarter from $33.2 million to 37.9 million, primarily due to $7.1 million and new nonaccrual loans, including a $3 million or land loan that has matured and this pending financing from a different bank.
The additional 4.1 million increase in non accruals was from 16 relationships.
Three of which totaled $2.7 million and the remaining 1.4 million was from 13 smaller relationships. These.
These downgrades were partially offset by $1.9 million in payoffs and payments and 421000 and charge offs.
Oh, sorry decreased 8.9 million during the quarter compared to $11.8 million for the second quarter, primarily due to write downs of $1.9 million.
The $8.9 million and already consists of four properties with the largest a $4.4 million commercial real estate property. The second largest is a $3.7 million industrial commercial real estate property and the third largest it's $576000 residential property.
The remaining property is in Belmont.
These properties are actively marketing with the two largest properties and contract negotiations for potential sale.
Generally we believe our nonperforming assets are well collateralized.
In terms of our broader watch list our classified loans as a percentage of total loans increased to 2.4% of total loans as of September 30, compared to 2.06% as of June 30.
Criticized loans increased to 5.16% at September 30 from 3.2% at June 30.
Specific reserves for impaired loans ended the quarter at 15.7% compared to 12.1% at June 30.
On the deposit front, we saw an increase in total deposits in the third quarter by $216.7 million from the second quarter and up $1.02 billion over the year ago quarter.
The increase during the third quarter was primarily in money market and savings accounts.
The increase over the prior year was primarily in the non interest bearing deposit category as a result of new new accounts associated with PPP customers as well as higher balances in our carried accounts.
Non interest bearing deposits increased $18.6 million during the third quarter.
And were up 544.9 million over the year ago quarter.
With that our non interest bearing deposits to total deposit ratio was 36% for September 32020, compared to 37.3% for June 32020, and 31.5% for the year ago quarter.
We seek to continue our track record of keeping this ratio at or above 30%.
With regards to the pandemic and cobot statistics for the Houston area as of October 26, Harris County reported 158758 total confirmed cases and 2190 total deaths.
Contrary to the trends in the broader US Harris County is experiencing both percent of positive tests and IC you bet is occupied by Coke Govan patients at levels well below the peak highs in July.
While our trends are headed in the right direction, we remain highly focused on health and safety.
During the quarter Governor Abbott increase the capacity limit for most retail businesses from 50% to 75%.
We remain cautiously optimistic of progress towards economic recovery in the eastern region, while staying focused on our borrower profile of small to medium sized businesses and the resulting granular portfolio with diversification across industries.
I'll now turn it over to our CFO Paul.
Thanks, Greg we're very pleased to report record Q3, net income of $16.2 million or 79 cents per diluted share.
Up from $9.9 million of 48 cents per diluted share in the second quarter and up relative to the $12 million or 57 cents per diluted share posted in the third quarter of 2019.
Adjusting for that $1.9 million in Oreo write downs net income would have been $17.6 million or 86 cents per diluted share in the quarter.
Pretax pre provision income for the third quarter with $21.2 million compared to $22.6 million in the second quarter and $17.7 million for the year ago quarter.
Adjusting for that $1.9 million in Oreo write downs pretax pre provision income would have been a record $23 million for the third quarter.
Net interest income with a key driver to our pretax pre provision earnings power in the quarter.
Where we saw net interest income increased $1.1 million or 2.1% to $51.9 million from $50.8 million in the second quarter, primarily due to lower interest expense and the impact of additional income from our larger securities portfolio in the quarter.
Total interest expense decreased by $703000, while total interest income increased by $359000 during third quarter.
The impact of acquisition accounting accretion continued to decrease in the third quarter accretion increased loan income by $516000.
Okay, and reduce CD expense by $82000 for a total positive effect on net interest income of $598000 during the third quarter versus the total positive impact of $666000 in the second quarter and $2 million in year ago quarter.
This quarters accretion leased $3 million in the loan Mark and $281000 in CD Mark.
Yield on loans in the third quarter was 4.89% impacted by both the full quarter impact of average PBP loan balances in our average, earning assets and lower purchase accounting accretion as compared this compares with 5.13% for the second quarter and 5.72% the year ago core.
Okay.
Adjusting for acquisition accretion yield on loans would have been 4.84% for the third quarter, 5.8% in the second quarter compare.
Compared to 5.53% near the year ago quarter.
Excluding PPP loan yield on loans would have been 5.25% in the third quarter versus 5.44% in the second quarter.
The total yield on interest, earning assets was 4.58% for the third quarter down from 4.83% for the second quarter and 5.43% for the year ago quarter.
Reflecting the aforementioned effect of PPP balances and lower accretion income as well as higher average securities balances in the earning asset mix.
Excluding PPP loans total yield on earning assets would have been 4.85% for the third quarter versus 5.07% in the second quarter.
Our cost of interest bearing liabilities continue to decrease in the third quarter to 105 basis points from 119 basis points for the second quarter, and 188 basis points to the year ago quarter.
The overall cost of funds for the third quarter was 69 basis points versus the 79 basis points posted in the second quarter we.
We are pleased to deliver lower cost of funds and we expect continued to improve our funding costs in the current interest rate environment.
Now withstanding such significant average balance mix shift towards lower yielding PPP loans and securities. We are really proud to have maintained a solid taxable equivalent net interest margin of 3.95% third quarter as compared to 4.10% in the second quarter and 4.16% in the year ago quarter.
Excluding PPP loans and related revenue net interest margin would have been 4.12% for the third quarter.
Going forward, we feel well positioned to maintain a strong net interest margin as we seek to further optimize our funding mix and maintain discipline on loan pricing.
Noninterest income increased $1.9 million for the third quarter from one point increased to $1.9 million for the third quarter from $1.6 million for the second quarter. This was largely due to differences in gains and losses on sales of securities in Oreo between the quarters, otherwise non interest income was stable quarter over quarter.
Total non interest expense for the third quarter was $32.6 million compared to $29.7 million in the second quarter.
The difference is largely attributable to the $1.9 million of write downs on other real estate owned in Q3, but we should also note that Q2 feature deferred costs related to PDP loans recorded in the second quarter that lowered the salary and benefits line by $1.6 million.
While on the topic of PPP loans, an income statement impact we should note that we expect to recognize approximately $21 million in aggregate origination fee income and approximately $1.4 million in remaining aggregate deferred origination cost into the yield.
Over the life of the individual PPP lab.
As we experienced at the forgiveness or early payoff on individual loans, we look forward to accelerating the recognition of the remaining origination fee income and costs.
The efficiency ratio for the third quarter was 60.3% compared to the 56.92% we posted for the second quarter and 62.8% for the prior year quarter.
Note that in Q2, if you were to adjust the third quarters efficiency ratio for the Oreo write down it would have been 57.13%.
The provision for loan losses was $1.3 million for the third quarter compared to the provision we took in the second quarter of $10.7 million, our year to date provisions totaling $23 million brings our allowance for loan losses to $48.7 million, representing 106 basis points on total.
Well.
If you were to include the $3 million in loan Mark remaining on acquired loans and exclude the PPP loan balances the ending allowance plus loan mark to core loans would be 133 basis points.
As we mentioned in the first quarter call, we elected to take the relief that came with the cares Act and we deferred the implementation Cecil So the group reported allowance is under the current incurred standard.
Bottom line, our third quarter ARLP, a in our LTC metrics came to 1.09% and 12.72% respectively.
And thats with the Oreo write downs in the quarter.
Quarter end tangible book value per share of $24 to 97 cents.
Which makes for an increase of approximately 10.4% since year end 2019, which we're pretty proud of notwithstanding have turbine 2020, and so far.
While cobot brings about significant economic uncertainties, we are buoyed by our strong margin recurring earnings power and capital position as well as our prospect for Axcelis accelerated revenue recognition from PPP forgiveness in the next couple of quarters.
All in all we feel well positioned as we navigate the current economic environment, we feel confident about our ability to maintain a strong capital position and our dividend.
To that end our board of directors declared a 10 cents dividend on October 22nd.
I will now turn call back over to Steve.
Yes, Thanks Paul.
Really great numbers with that I will now turn the call over to the operator to open the line for questions.
Thank you well.
Ladies and gentlemen, if you have a question Apple pie profit SAR, followed by the number one on your telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound team.
And our first question comes from Brad Milsaps from Piper Sandler Your line is open.
Hey, good morning, guys no more breadth.
Appreciate all the color and detail as always.
Wanted to maybe start with the net interest margin.
Ray It sounds like you are starting to see a little bit more pressure on loan yields I understand you still got some tailwinds on deposit side of things, but I just kind of taken altogether.
Would you guys you know to the extent you continue to grow loans you expect.
Probably not on.
Balance, which you saw in this in the third quarter, but just incremental pressure from here as you kind of move into 2021.
Yes, Brad I think there there we make it a little more pressure and we're getting to a point where.
Where we are hopeful that we start getting to what maybe might be a floor, but I think there is theres still competitive pressure out there and I know we dropped.
Quarter to quarter 21 basis points in new loans in the new and the.
The rate on new loans booked and.
That delta did close a little bit from previous quarters. So so hopefully with the pressure it may not be as as much but we are still seeing competitive deals and.
We may have a little bit a little bit more pressure, but dumb but.
But we were very pleased with the level of of new loan originations for the quarter. It was a nice rebound.
And I'd add a lot of the delta in Nam from the second quarter to the third quarter was really structural in nature.
It's largely a function of kind of that the.
New norm, I guess, you'd say with the earning asset mix.
We did see signs of stabilization during the quarter, but area potential for stress.
The the levers that will drive kind of the forward NIM.
NIM profile is going to be the extent to which core loan growth.
Can accelerate accounting.
Change and try to get us back to similar earning asset mix or closer to.
Kind of the prior normal from the new normal but adds as we're feeling in the rest of the industry is feeling I.
I guess, we're going to get the test of whether that can be too too much of a good thing as it relates to excess liquidity on our balance sheet and we really saw that.
Stair step move here in this quarter, but we hope we are doing everything we can to protect.
Our margin notwithstanding.
I should point out there.
That said the Stevie that.
Weighted average rate in the third quarter of 463 is pretty rare air from a lot of numbers, we're hearing others in terms and we did $280 million of that so.
Wherever we're able to our due to our granularity and focus we were still able to get relatively speaking very good rates.
Yeah, just curious does sort of my follow up is raised or Steve's there sort of a line in sand that you draw me. What you guys do is pretty unique obviously you want to get paid for the for the risk you're taking with some of the smaller credits.
Drew a level that you guys sort of won't go below or.
At this point, you just kind of taking kind of what's out there in the market.
Again, we're pretty disciplined with our pricing model on our on the rates we offer.
We're seeing some.
Some three handle even some to handle type rates out there. We're we're probably not going to play in that game, especially for when some of these are beyond five year fixed rate terms, so kind of the blocking and tackling type lending that we do I think it should still be in this general range and if it's up it's coming in.
With one of these.
280, fives or something that probably not going to have a lot of discussion about it.
It's a risk return.
Decisioning as well and so we always look at risk when repricing our loans.
Got it and just continue with the margin Paul just kind of a housekeeping item I try to back into it but with the fees that you recognized with PBP. This quarter right at just under 3 million is that the right number and if I understand correctly, you still have 21 million yet to come.
It's probably closer to $4 million and.
21 million you got to net out I think we'll have around when I won and change million of deferred costs. So what what's left net of deferred cost is just under $20 million to recognize over the remaining life of those loans.
And left for yet reason to accelerate.
The 4 million will be inclusive of the 1% coupon right.
Yes, yes.
Okay and then.
Just just finally on on credit.
Just you guys do a lot of SPD Wendy I'm curious if you guys have kind of what percentage of the portfolio is maybe.
Maybe coming off of that six month period, where the FDA.
I was paying.
Making payments on behalf of those customers and sort of you know kind of how that relates to maybe some of your deferral numbers and how you think about provisioning. If there is any impact at all kind of going forward.
So thank you Brad SOCOM, Yes, you did the bulk of our SD eight portfolio is actually coming off of the payments that are being received so far.
And in the end of September October is where we are seeing that so.
We will.
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We've been in touch with our with our customers in the portfolio and we're seeing some deferment requests that are coming in.
In that portfolio.
But overall.
Between the the support that we receive from these payments.
The money's idle on in his was deferment availability to the bank.
DSP of portfolio is holding up fairly well.
Okay, great. Thanks.
Thank you.
And our next question comes from Matt Olney from Stephens. Your line is open.
As to the level of operating expenses and the run rate from here.
Thanks.
Okay.
Certainly.
Yes reasonable guidance would be to take that Q3 number and adjusted as Oreo expenses.
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And then there's some seasonality and some modest growth we expected from that.
So we're working to hold line, it's as much as we can on Ics on expensive really just cognizant of the challenged revenue environment.
Yes that was my follow up question was just kind of bigger picture on expenses and the opportunities you see there.
To cut back on expenses I think you mentioned the branch closing did note there were more opportunities. There and then are you still committed to.
The new hires that you've been doing that for a number of years. Thanks.
I'll touch on the branch in the Hirings mass the.
Probably near term.
As far as the.
Further consolidation I don't see much near term, but we look we constantly have to make sure our footprints optimal.
Both on as far as consolidation and or maybe even in long term other markets, where we don't where we do not have a presence and on the hiring we are.
It did slow down a little bit in 2020, but we still through September we had six six producers plus two from internal promotions were off sort of a lender development program and and we're having meetings every day with the not every day, but meetings throughout regular meetings with potential talent.
That that were considering so it definitely slowed down it's not not so much of a this is what we're going to target. It's just when that when we have strategic opportunities for talent, we will make that investment if we want to emphasize too that we have some kind.
Kind of embedded capacity with our lending staff is.
Present time as well to help drive further grow so some of the younger ones. Some of the newer entries into the into the company still have rendered certainly build their portfolios. So there's definitely capacity there.
Okay, and probably has some comments about productivity I think we can we also have some operational efficiency and productivity gains initiatives that are ongoing.
Since the beginning of the year, we deployed our electronic.
The positive origination solution in my own originations solution that during the funding of the PPD.
PPP, we saw great adoption from our employees and our customers with those solutions in deals they will be actually fully deployed in the first quarter of 2021, where we expect significant profit improvements in these functions.
We're also building under our CIO as often as a team is solutions team that's going to be focusing all through 2021 on additional operational efficiency and productivity gains.
He is and so there is some additional expense control that we anticipate from those initiatives.
Right.
And then I guess switching gears setting Steven rate, both mentioned that the success.
PDP program for the bank.
And a big chunk of the of your originations went too.
New customers.
How should we think about converting those new customers into loan growth outside of PDP in the future.
Well I want to say as fast and as thoroughly as possible [laughter] Satish and thinking about we are we're all over it we're evaluating those customers.
In terms of our outreach to each one of them our Treasury management group is getting in touch with them through the lenders and.
Greg can give you some additional detail, but we are we're definitely seeing that for ourselves as a great opportunity and it's really one of our strongest opportunities to grow.
Grow organically and to kind.
Kind of move that are kind of loan to deposit ratio core loan to deposit ratio back up to the levels that we like to see.
Yeah, Matt I would just say the word where it starts on the conversion is going to be on the deposit side and then that'll manifest to the loan the loan growth fee. So we're working to convert those customers to full business customers, starting with treasury and when it when we look at our numbers of Onboarding.
We've got every quarter has been a since the pandemic in the PPP and we've had a really solid.
Percentage of Onboarding this new the new PTP customer so.
Our bankers are in front of those PPP, and though they'll be loans coming from that the kind of the the first step is getting the on the deposit side and even the testimonials from those guys.
Our value as they say you know they werent able to get the response there were looking for until they turn to allegiance and those testimonials are actually good referral sources for us.
Okay, Great. That's all for me thanks, guys.
Matt.
Thank you. Our next question comes from David Simpson from Raymond James Your line is open.
Hi, Good morning, everybody Hey, Dave.
Hi, good deposit growth has been tremendous I'm just curious how much of this has been from the PDP dollars and how much do you estimate estimated yield might be in there and how much might be just from the treasury management team our clients holding caching, what's the early read on the fourth.
Quarter end, how sticky deposits are going to be as we go through 2021.
So David on me.
I just gave you something you can it may be extrapolated that on the.
When we look at the deposits that were brand new related a PPP because those are we certainly track those which is a little bit different than PPP that was an existing customer.
There is something like 20, 20% of those balances might still be here and the and and Thats about half of what the PPP.
Volume was was to new customer so.
Most of our deposit growth has been.
What I would say, replacing and then in excess of some of the Pvp funds that have come out of the bank.
If that helps you.
Okay.
That's helpful.
And then I guess, how do you think about the reserve going forward you grew another two basis points ECP I guess.
Do you think we're there in terms of reserve builds or maybe in the fourth quarter should we expect kind of a true up as you implement Cecil or does your model pretty much already contemplate that through the Q factors.
Good question David.
I'd say kind of reflecting on C.. So we will we will we've got a pretty significant reserve build thus far this year.
Totaling around $20 million to $20 million, but when you go point to point, we will be operating under seasonal in the fourth quarter and that will also be taking into account our day one adjustment.
At 112020, I. If you guys recall, we gave guidance at the end to around what that was relative to our 12 31 number I was about a third or so so really.
When you take the totality of where we are.
Don't see huge potential for kind of a.
True up or catch up so to speak.
But and it's hard to kind of predict what our 12 31.
Models going to stay here at.
The 29 to Thirtyth of.
Silver so ultimately.
I I.
I don't see there being a huge true up.
But we're going to go based on our model methodology as of 12 31, and it will be kind of our first.
First Ron I guess second official run with diesel so.
We don't have so many reps to tell you to really be in a position to predict that right now, but our expectation is now for the future.
Okay got it and then maybe just more of a high level question, just as I step back I mean, it seems to me like is this environment really reinforces kind of your structuring your business model I guess I'm just curious how do you think about some caution here maybe what lessons have you learned that didn't help you position, even better going forward and maybe what you're most excited about.
Powder what initiatives you.
I think are really going to allow you to outperform your peers going forward.
Well, let me I'll, let probably everybody chime in here, David but on the what we're extremely excited about is this market share opportunity that we have through Pvp I mean, we've got we are well position with both our our lending staff those new customers that we have that we're converting over from PPP our branded.
Fairness in the market. It's I mean, it's growing every day I mean, we talked about us being third and and number of PPP loans. I mean that is I mean, we're talking to Steve mentioned, we said 11 deposit market share and we're we're cranking on numbers on and and some metrics that are third in the MSC, which is mostly can.
Troll by.
Out of state banks large banks. So we think there is tremendous opportunity there and we're hitting it hard and we're extremely proud of where we sit and where we're positioned.
And I might add.
It's really hard for us right from where we sit now to really forecast how the loan growth story is going to play out.
But we really do feel as well positioned as anyone in our market to get more than our fair share of whatever longer theres going to be out there.
And that between the momentum we have and the embedded capacity that these referenced.
In our in our team.
Hey, I'm, a little bit more boring in epic group of guys in the in our office Simi that way as well but.
It's just you know we weren't 80% roughly core loans to deposits, we need to grow that a little bit that any incremental gains there over the next year are going to just.
Right to the bottom as we control our expenses.
We continue to grow the bank's footings.
And do the right things with regard to capital management as well I mean, it's it's a little here a little there are top tier tap there and we're going to improve our overall outperformance so.
That's a boring answer but that and like Ray said I think our brand has really taken off it's been 13 years now would you celebrate our 13th birthday and are the name allegiance bank is as getting better and better known everyday, particularly with response that we gave you the PPP and the small business customers.
We're pretty encouraged.
Okay. That's great. Thanks, guys.
Thank you and again, ladies and gentlemen to ask a question. Please press Star then one now and our next question comes from John Rogers from Janney Montgomery. Your line is open.
Good morning, guys. Thanks for all the good morning, John first time caller [laughter] interesting times for sure.
Just most of my questions were asked and answered but just one question on the Securities portfolio you guys continue to grow that during the quarter and Im sure. Its a function of what's going on in the loan portfolio and deposits, but how should we think about the size of that portfolio going forward.
We like the where the size of it as it currently stands we don't see we don't want.
Got to be growing it too much from here, but to the extent we are we do grow it's largely going to be a function of that.
With that large assets in.
In liquidity, so, we'd obviously, rather be putting our excess liquidity into loans.
We'd like to the overall size. We currently kind of think the overall size of our securities portfolio is optimal.
But.
If.
If we continue to have too much of a good thing as it relates to excess liquidity.
We will start to act.
We will continue to grow.
That portfolio, but it will be kind of kind of like holding I know, that's what we do in Canada, we would much rather.
Put it in loans, but when push comes to shove. The net result, as up to this point of the side kind of generational customer acquisition that opportunity that is PPG has actually been up.
You know more more deposit and.
Thats important were wearing the customer acquisition business first and foremost.
Right now it's manifesting itself in more deposits on two years ago is manifesting itself in and not in excess loan. So we'll we'll take the customers and will serve him well and will allow will relate to our balance sheet accordingly, but yet you might say that the pressure on.
Investment yield in that excess liquidity does embolden us to really be disciplined when it comes to deposit pricing. So.
Where it will our team is well aware of.
Those investments.
Yields and Thats a good point, we do have.
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We do have a ways to go as it relates to.
On kind of improving our cost of funds and we're being pretty assertive about that.
Of course not being.
Being mindful not to upset the Apple cart, but not where we are in driving incremental improvements.
Sounds good thanks, guys and just one other question just on the topic of M&A just any thoughts there have you had many discussions.
What are you seeing in the market today.
We stay in touch with the.
Both local bankers.
Bankers in the other companies around here and on a regular basis.
A lot of good banks that they.
There you know there is everybody has been kind of in a wait and see mode. In this past during the pandemic just yeah did due to that kind of uncertainty. So I think it will probably be a market where you'll start to see some activity in 2021, and maybe some conversations eaten up a little off late maybe even early 21.
But.
No there's nothing to announce.
Initiatives point, it does take two to tango, yes.
It is a bit.
Yes, it will be a function of.
You know how that how how it works not only profit for folks like us who the potential.
Potential buyers.
But also on Steve on the other side and I'd, just say if theres any of our smaller brother in laws listening today, we love them [laughter].
Sounds good guys. Thank you.
Great.
Thanks, Phil.
Our next question comes from Matt Olney Stephens Your line is open.
Yes, guys just to follow up on the.
The Oreo write down that you guys had this quarter any color you can provide about.
Which property that was you see any color at all thanks.
Not a lot of color I mean, it it's just a process. It's a discipline on our part to Mark our already to have current market valuations and we do have on the two large pieces, which is the vast majority of all our we do have some negotiations underway right now, we're we're optimistic about being able to.
Reduce that already balance significantly, but it hasn't happened yet so but were the more with those properties and more aware of the proper valuation things change the world changes around this one had some covidien related pressure on it because of the nature of the property and the other.
He has been on the books for a while it down it had a little bit of an oil and gas a history to it so.
So we just we think we're at the right level right now on those properties and you know again experienced teachers you.
What those values should be.
Okay.
And then any update on the the hotel loan that's on a non accrual I think of the bounces around $7 million in Threeq I think with the similar amount last quarter as well.
No update Scott I'd like a lot of Houston as the occupancy the Revpar still challenged.
We feel like were properly reserved on that though so we're we're now we'll keep watching it and then and.
Oh God, hoping for the best for that particular property.
More broadly we are seeing a little bit of Revpar increase across the board, although as it continues to be.
Challenging in this market.
Kind of more broadly, though there are actually some of our profit into doing rather well say that had a little surge over the summer in Galveston or a couple of other locations, but generally speaking the experts tell us that it's it's just going to be a gradual improvement through 21, and even into 22 before the whole.
Telx will get better.
Okay.
And I don't know if you don't have your script in front of you from my prepared remarks, but the level of criticized loans I want to make sure I got that right I wrote down the level at September Thirtyth was 5.16% up from 3.20 did I get those numbers right.
Hi.
Greg is yet when I got it here.
Page 10.
So you say criticized Matt Chris idea, if Bob 16.
From Threeq warning.
Got it and as you look at that.
Linked quarter change any any any notable takeaways as far as the types of credits.
Mostly this.
Co bid hot spots, we've been talking about for you guys is than when oil and gas hotels and restaurants.
So this is o'connor.
In the third quarter, the largest migration we saw in our portfolio, even though it is using the hotel portfolio that impacted these numbers.
Significantly.
Having said that the overall portfolio when you look into hotels, we have 32 loans currently owns and disarmament out of 81 hotels. So.
In our.
Conservative underwriting with hotel loans.
He is putting in a city.
Average weighted LTV at.
59%.
So we're watching this portfolio closely EBIT, but thats where were seeing the most amount of impact on our excise boats.
Yes, the hotel industry the job loss was there an assortment with the restaurant. The hotel is recovering slowly, but it's more is very well collateralized. The restaurant industry had more is actually recovered. According to Houston data, 60% of the jobs lost in the restaurant and bar industry are actually recovered so well.
Well you have both some seeing high and some CRT in that you actually are having better performance because the governor's opened up those categories. So.
We feel relatively good about both at this point in time.
Okay.
And then Paul I think the tax rate was little bit higher in the third quarter with whats the outlook outlook on.
On the effective tax rate.
Hi, this is going to pick up a little bit with respect to.
Some of our tax preferential securities have ground, but.
I'd I'd think of something with a 19 handle.
As a as a more normalized number.
Okay.
Okay guys. Thanks for your help appreciate it.
All right. Thanks Mel.
Thank you and that does conclude our question and answer session for today's conference I'll now like to turn the call back over to Steve Rattle off a cliff any closing remarks.
Just want to continue to thank and appreciate everybody for your time and your interest in allegiance. We look forward to speaking to you next quarter. So thank you very much I appreciate it.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program you may all disconnect everyone have a wonderful day.
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