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spk01: Good day, and thank you for standing by. Welcome to the Allegiance Bank Shares third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I will now hand the conference over to your speaker today, Courtney Theriault, Executive Vice President and Chief Accounting Officer. Please go ahead.
spk02: Thank you, Operator, and thank you to all who have joined our call today. This morning's earnings call will be led by Steve Retzlaff, CEO of the company, Ray Vitulli, President of the company and CEO of Allegiance Bank, Paul Egge, Executive Vice President and CFO, Ocon Aiken, Executive Vice President and Chief Risk Officer of the company and President of Allegiance Bank, and Shanna Cuzzle, Executive Vice President and General Counsel. Before we begin, I need to remind everyone that some of the remarks made today constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend 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 management's beliefs at the time the statement is made, and such beliefs are subject to change. We disclaim any obligation to publicly update any forward-looking statements except as may be required by law. Please see the last page of the text in this morning's earnings release, which is available on our website at allegiancebank.com, for additional information about the risk factors associated with forward-looking statements. We also have provided an investor presentation on our website. Although it is not being used as a guide for today's 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 now turn the call over to our CEO, Steve Retzlaff.
spk08: Thank you, Courtney. Welcome, everyone, to our conference call, and we appreciate your attendance. As seen on our press release this morning, Allegiance has continued to provide very strong results in the third quarter. That income of $19.1 million, or 93 cents per diluted share, reflected continuation of the PPP loan forgiveness cycle and increased investments income as we prudently grew our securities portfolio due to an expanding liquidity position. Funded core loans grew slightly during the third quarter, which is the net effect of the funded portion of a very strong new loan production offset by continued higher-than-historic paid-off loans. Ray will provide additional color on the numbers, but I commend the efforts of our entire team for the front-end results, and I believe it reflects our growing brand and market position as the region's premier local community bank of significant scale. Our asset quality metrics reflect improvement with minimal charge-offs and an improved coverage ratio of reserves to non-performing assets. That said, the Houston MSA continues to steadily improve with modest job gains in recent months. Actually, excluding energy and related sectors, the broader local economy has rebounded from the pandemic at a pace more representative of national averages. Other strong initiatives, such as efforts towards energy transition leadership, the Port of Houston Improvement Projects, the Texas Medical Center, and others, remain shining stars for Houston's continued economic diversification and growth. Upon announcing their recent headquarters relocation to Houston, the CEO of Hewlett Packard stated, Houston is an attractive market for us to recruit and retain talent and a great place to do business. I could not agree with him more. Finally, our capital position is strong and combined with our liquidity provides us with a great position from which to grow core loans. Both in the field and centrally, we are working to improve productivity to grow and expand our capacity to handle even more growth. With that, I'll turn it over to Ray for a more detailed review of our operational results, followed by Paul, who will cover our financial results.
spk07: Thanks, Steve. Our lending staff set another record in the third quarter by originating $454 million in new core loans, surpassing the previous record that was set in the second quarter. 2021 has seen healthy loan pipelines as our bankers continue to both expand relationships and attract new business. And we are very pleased with the closure rate we experienced with our pipeline over the past few quarters and are entering the fourth quarter with good momentum. Another area to highlight is our lender hires so far in 2021. Through September 30, we've hired three lenders from outside the bank, but also saw five promotions from our lender development program. Many of our top producers are homegrown, so it is nice to see this healthy mix of both internal and external lender additions. Moving now to our quarterly operating results. Total core loans, which excludes PPP loans, ended the second quarter at $4 billion, an increase of $37.9 million during the quarter. Our staff and lending team booked the previously mentioned $454 million of new core loans that funded to a level of $293 million by September 30, compared to the second quarter when $379 million of new core loans were generated, which funded to a level of $251 million by June 30. The weighted average interest rate charged on the new third quarter core loans was 4.57%, compared to the weighted average rate charged on new second quarter core loans of 4.54%, and 4.63% in the first quarter of 2021. Paid off core loans were 290 million in the third quarter compared to 238 million in the second quarter. The 290 million of paid off core loans during the quarter had a weighted average rate of 5.04%. Carried core loans experienced advances of 141 million at a weighted average rate of 4.55% and pay downs of 113 million which were at a weighted average rate of 4.98%. All in, the overall period end weighted average rate charge on our funded core loans decreased eight basis points, ending the quarter at 4.87%, compared to 4.95% as of June 30, 2021. Turning asset quality, non-performing assets, including both non-accrual loans and ORE, ended the third quarter down from 58 basis points in the second quarter, to 44 basis points of total assets. Non-accrual loans decreased a net of $8.3 million during the quarter from $36.6 million to $28.4 million, primarily due to $9.1 million in payoffs, $1.1 million in payments, $526,000 in charge-offs, and $1.7 million in upgrades placed back on accrual, partially offset by $4.1 million in additions. ORE of $1.4 million at September 30 is comprised of two residential properties. And charge-offs for the quarter were minimal at an annualized rate of four basis points. In terms of our broader watch list, our classified loans as a percentage of total loans decreased to 3.83% of total loans as of September 30, compared to 4.18% as of June 30. Criticized loans decreased to 5.37% at September 30, from 6.05% at June 30. Specific reserves for individually evaluated loans ended the quarter at 17.5% of total reserves, compared to 17.2% at June 30. We continue to keep a close eye on various loan categories that may have heightened risk due to the pandemic, including our hotel portfolio, where we feel it will take more time for financial performance to see a return to pre-COVID levels. At September 30, Our hotel portfolio totaled $135 million, or 3.38% of our funded loans, with the weighted average LTV of 60.5% on the $120 million that's categorized as CRE. A 30% stress test on the LTV plus 6% in marketing expenses would result in a $4 million shortfall on the portfolio. In aggregate, our asset quality at quarter end remained in a manageable position. On the deposit front, we saw an increase in total deposits in the third quarter by $234 million from the second quarter and up $750 million over the year-ago quarter. We continue to see solid growth in non-interest-bearing deposits that contributed to the quarter-to-date increase, primarily the result of new accounts associated with PPP customers, as well as higher balances in our carried accounts. With that, our non-interest-bearing deposits to total deposit ratio was 36.7% 36.7% for September 30, compared to 36.3% for June 30, and 36% for the year-ago quarter. While we are pleased to see oil prices in the 80s, the Houston region continues to diversify as evidenced by a top 10 U.S. finish in the 2021 Global Innovation Index recently published by the World Intellectual Property Organization, with results primarily driven by patent filings and scientific research publications. With a U.S. ranking of 7 and global ranking of 16, Houston was the highest ranked city in Texas. And the Houston Purchasing Managers Index of 59.5 in September marked the 14th straight month of the PMI in excess of 50, which is the threshold to signal economic expansion in the goods producing sectors. As the largest Houston-based community bank that is focused on the Houston region, these trends provide opportunity for us to serve more and more businesses, their owners, and their employees. I now turn it over to our CFO, Paul.
spk06: Thanks, Ray. We are pleased to report another solid quarter of earnings with net income of $19.1 million, or 93 cents per diluted share, as compared to $22.9 million, or $1.12 per diluted share, in the second quarter, and $16.2 million, or 79 cents per diluted share, in the third quarter of 2020. These results were driven in part by lower funding costs PPP-related revenue, as well as provisioning for credit loss in the third quarter. Our pre-tax, pre-provision income for the third quarter represented another record at $25.9 million as compared to $25.3 million in the second quarter and $21.2 million for the year-ago quarter. Recall that in the year-ago quarter, we recorded $1.9 million in write-downs on other real estate out. Net interest income, once again was a key driver to our pre-tax, pre-provision earnings power during the quarter, where we saw an increase of $1.6 million, or 2.8%, to $58.2 million during the third quarter from $56.6 million in the second quarter, primarily due to higher PPP revenue recognized on PPP loans and lower interest expense in the quarter. Total net fee revenue related to PPP loans recognized into interest income during the third quarter with $7.4 million. A $963,000 increase from $6.4 million in the second quarter. Interest expense decreased by $509,000 during the third quarter compared to the prior quarter. Before moving on, I should note that as of quarter end, we had approximately $10.8 million of net deferred fees remaining related to PPP loans after recognizing the $7.3 million net PPP fee income into yield during the third quarter in a total of $20.7 million year-to-date. Yield on loans in the third quarter was 5.32% as compared to 5.09% for the second quarter and 4.89% for the year-ago quarter. Excluding PPP loans and related revenue, yield on loans would have been 5% for the third quarter, 5.07% in the second quarter, and 5.25% in the year-ago quarter. Total yield on interest-earning assets was 4.23% for the third quarter, down from 4.41% in the second quarter and 4.58% for the year-ago quarter. This trend is primarily reflective of changes in the mix of our growing earning asset base towards a higher proportion of lower-yielding cash and securities. With respect to interest expense, Our cost of interest-bearing liabilities continued to track downwards in the third quarter to 61 basis points, from 67 basis points in the second quarter and 105 basis points for the year-over quarter, driven principally by CD repricing. The overall cost of funds for the third quarter was 39 basis points versus 44 basis points in the second quarter. We expect to see continued improvement in our funding costs going forward, driven by CD repricing and continued optimization. So, with the help of increased PPP net fee income recognition and lower interest expense in the third quarter offsetting a significant shift in the composition of earning assets, our taxable equivalent net interest margin was 3.9% for the quarter, as compared to 4.02% in the second quarter and 3.95% in the year-ago quarter. Excluding PPP loan balances and related revenue, net interest margin would have been 3.57% for the third quarter from 3.88% in the second quarter. Notwithstanding structural decreases in our go-forward NIM profile due to our average earning asset mix, we are pleased to see net interest income growing nonetheless, thanks to the larger balance sheet. Non-interest income was slightly down quarter-by-quarter, decreasing to $2.1 million for the third quarter from $2.3 million for the second quarter due to a mix of factors. We are pleased to see significant year-over-year increases in our interchange income, though. Total managed expense increased in the third quarter to $34.3 million compared to $33.6 million in the second quarter, largely due to professional fees tied to strategic initiatives to improve operating leverage during the quarter, among other things. Aside from the uptick in professional fees, which we consider to be one-offs, we are pleased to be holding the line on expense. Accordingly, our efficiency ratio for the third quarter decreased slightly to 56.91% compared to the 57.07% from the second quarter and 60.58% for the prior year quarter. Moving on to credit, we recorded a provision for credit losses of $2.3 million during the quarter. Just under $1 million of the provision related to unfunded commitments. The rest of the provision for loan losses was driven by an increase in loan balances an increase in reserve related to individually evaluated loans, and net charge-offs during the quarter, among other things. I should note that due to uncertainty related to the significant spike in COVID cases during the quarter, we elected not to loosen qualitative factors in our allowance model at quarter end. So our allowance for credit losses on loans ended the quarter at $50.5 million, representing 118 basis points of total loans, and 126 basis points on core or non-PPP levels. Bottom line, our third quarter ROAA and ROATCE metrics came to 1.14% and 13.49% respectively, both representing solid results. Quarter end tangible book value per share was $27.67, making for an increase of approximately 10.8% since the year-ago quarter. notwithstanding dividends and some share repurchases over the last year. So as we prepare to close out 2021, we are at over $6.7 billion in assets with profitability, capital, and liquidity levels at or near all-time highs. We look forward to building on our momentum as we close out 2021 and move into 2022. I will now turn the call back over to Steve.
spk08: Thank you, Paul. With that, I will now turn the call over to the operators to open the line for questions.
spk01: Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from David Feaster with Raymond James. Your line is open.
spk03: Hey, good morning, everybody. Hey, David. Um, I just wanted to follow up on the, uh, the origination. It's great to hear that you guys are continuing to set new records. Um, I just wanted to get some, some insights from your perspective into what do you think is driving this? I mean, how much is just from the general improvement in the economic backdrop versus the new hires and PPP client acquisition. And just wanted to touch on whether you expect this trend of improving production to continue.
spk07: Hey, David, uh, The last part, yes, I expect it to continue. I think what's driving it is the economic conditions in Houston are still extremely strong. Customers have good sentiment about the future. And we do have all of our entire lending staff out there working on their pipeline and getting that pipeline closed. So we're extremely excited about the $454 million that we originated and continue to set records and And when we look at that pipeline going into the fourth quarter, it looks similar to what we've seen in the first two quarters that produced these results.
spk08: And, you know, during 2020, we turned our sights to helping customers through PPP, even in a little bit early this year. And we knew that was taking a little toll, but we also knew that it would start upticking after we weren't distracted by that. And we've seen that happen. These guys are out there really making it work. So we're really encouraged by it.
spk07: And I would just add, David, on the loan originations from PPP, that's still an opportunity for us. Those customers still are somewhat flush or dealing with whatever they were with why we needed a PPP in the first place. So I think that's just more opportunity. You don't see this record, but the record really doesn't have much meaningful originations from the PPP side yet.
spk03: That's great. That's extremely encouraging. And I think I heard it correctly, but it sounds like new loan yields have been pretty stable. I just wanted to get a pulse of the competitive landscape from your standpoint. You know, we hear a lot of competition on pricing, which makes stable new loan yields even more impressive. Just curious what you're seeing on the competitive landscape and whether you're starting to see more pressure on structure and standards, or is it mostly on pricing still?
spk07: There's still significant competition out there. We were extremely pleased to see a three basis point uptick in this quarter's loan originations versus last quarter at 457. I mean, it's very strong. That's just a tribute to the work in the field and the kind of value proposition we provide for the customers. Another way to look at it is we saw a little bit, although payoffs were high, we saw a little bit of the mix of the payoffs that's related to refinance tick down just a tad. So that's a little bit of a – it's just one quarter, but that might be another sign that maybe we're seeing a little bit of relief there, but it's still – that being said, it's still competitive on the right side. Yeah.
spk03: Yeah, that makes sense. And then, you know, cognizant that the margin is an output, not an input, I did just want to touch on some of the puts and takes as we go forward just as we get more PPP forgiveness and deposit growth and, and probably see some more securities purchases, do you think we should see some additional compression or just, you know, could this be the trough as the earning asset mix is set to improve and, you know, new, new loan yields have at least stabilized? Um, I guess just how do you think about some of the puts and takes with the margin as we look forward?
spk06: David, I'll take that. Uh, really the, the largest dynamic that's going to drive, uh, the margin story is funded core loan growth. And funded core loan growth, we're really doing a darn good job as it relates to what we're originating and the rates that we're putting on the books on. Four, what we haven't had as much control and agency over is the payback story. And it's an industry-wide phenomenon, but we've been feeling it as much as anyone. All of our great work this quarter showed a little less by way of funded core loan growth than we would have hoped as a byproduct of pay down. So you're right. NIM is an output, not an input. And core loan growth and the extent to which core loans represent a larger part of our balance sheet is going to be the largest driver of our NIM story. We're down to about 59% of total assets being core loans. And if we're able to get anywhere close, any forward progress towards our pre-COVID levels of 80% of our assets being core loans, that's when from a NIM and from a core profitability standpoint, we'll really be cooking with gas. So in the absence of meaningful core loan growth, you're going to see that liquidity build and ultimately cash sitting at the Fed at 15 basis points or alternatively our securities at incremental levels of yield without taking meaningful levels of interest rate risk are going to be poultry returns by comparison to that core loan profile.
spk03: Okay. That's helpful. Thanks, everybody.
spk08: All right. Thanks, David.
spk01: Our next question comes from Brad Saps with Piper Sandler. Your line is open.
spk04: Hey, good morning, guys. Hey, I appreciate the commentary around the uptick in production. You know, when I think about allegiance, bigger picture, I think, you know, high single digit, you know, low double digit type loan growth. Obviously, I think we can throw 2020 out the window for, you know, for reasons everyone knows. But if I look back, you guys really haven't achieved that level of growth since maybe the first quarter of 19. Ray or Steve, I mean, do you feel like you've got, you know, the, you know, the pieces in place to accelerate, you know, growth, you know, off the levels you're seeing. It just seems things have been, you know, sort of stalled out for a bit, you know, even, you know, COVID notwithstanding.
spk07: Yeah. So when we talk about this, how we get to the loan growth, it starts with the, I mean, it starts with the origination. So where for quarters and quarters, we had talked about a, you know, real happy with 300 million of core loan originations. I mean, we know as an organization, as a lending team, that that just has to be a higher number in order to generate core loan growth after you take out pay downs and then the amortization of the portfolio, and if we can get some little uptick in our advances and our unfunded. So I think that it still comes back to loan originations, and I think we're positioned to get that mid to high-digit single growth. based on just this quarter, it may take more originations to get there. And that's what we're focused on. And we have the team to do it. We have the embedded capacity to do it. And it's probably going to be a combination of possibly even having higher originations as well as seeing some of that unfunded fund, which just goes straight to the bottom line when our unfunded funds up. And we have about a billion dollars in unfunded right now.
spk08: A couple of quarters ago, we mentioned that we would be entertaining maybe slightly larger loan relationships, and kind of just exploring that territory. Ray, what was the number in terms of percentage growth from this year alone?
spk07: Yeah, we're at relationships over – our larger relationships are now up about 50% of what we – this year. So that's helping us. on both the origination side?
spk08: It is coming off of a pretty small base, so there's a lot of room and a lot of potential for us to move a little bit larger in relationship size or even loan size for that much. We're working pretty hard on all fronts, and it's showing up. Unfortunately, like the rest of the country, we're seeing paydowns at this particular point in time.
spk04: No, great. That's helpful. So, I mean, you guys still would, over the longer term, still think about that kind of high single-digit type growth. It just may take a little bit to build back up to it.
spk08: Yeah, I believe that's a true statement.
spk04: Okay. And, Paul, you alluded to this a little bit, but your average cash, I think, average liquidity doubled, almost doubled link quarter. And then the period in cash was, you know, almost $300 million higher than the average cash. Obviously, that represents a lot of loan growth potentially down the road. But in the interim, are you thinking that you are going to hold more of that just at the Fed? Or do you think you did add in the bond portfolio fairly significantly this quarter? Does that continue? Just kind of curious how you're thinking about the cash, knowing that a lot of that's out of your control with how much deposits are coming into the bank.
spk06: Absolutely. We had just phenomenal deposit growth. And in addition, we had a lot of PPP forgiveness activity, and that really did fill up our cash levels to really all-time highs. And we have been pretty measured about what we put into the securities portfolio. We don't want to necessarily invest it all at once, and we want to be mindful of the overall interest rate risk dynamics that come as a byproduct of putting securities in putting cash into securities. In particular, we can't go too long with too much volume in securities. Otherwise, we put ourselves in an interest rate risk position that we're not idealizing. So ultimately, it's dynamic. We will continue to leg into the securities market. We're valuing having excess liquidity to fund up our potential billion dollars in unfunded commitments and to support the origination. So Right now, we may be testing the adage of whether you can have too much of a good thing by way of liquidity, but it definitely beats the alternative, and we feel like we're pretty well positioned from both the liquidity and capital standpoint to support growth, as well as plenty of financial flexibility. Okay.
spk04: Can you talk about the yields of some of the bonds that you're buying or that you bought in the third quarter?
spk06: You know, the yield story is not super exciting, particularly as it relates to the front end of the curve, and that's why you're seeing dilution in the overall securities yield. I mean, it's incremental on a weighted average basis, and granted, it's thankfully going up now because we're seeing some steepness in the yield curve. But on a weighted average basis, we take into account kind of the barbelling that we're doing. We're not really putting securities on the books for more than, call it, 60 basis points. That's weighted average what's on the front end and what's on the back end. Granted, now that we have a, and that's because we're not putting more duration on our books. We don't want If we went and invested $500 million in securities that yielded, call it, 170 basis points, that would have a meaningful impact on our IRR profile. So right now, up to this point, we've been staying relatively short in those purchases. That's why you're not necessarily seeing some of that probability move the proverbial needle as much.
spk04: Okay, great. And then maybe final one for me. I saw professional fees are also doubled in quarter, Paul. Anything there that you should be aware of that might reverse out? Just kind of wanted to get a sense of kind of what, you know, kind of where you thought the core sort of expense rate might be.
spk06: Definitely expect that to be one-off. So it was the run rate would pivot back to your second quarter run rate.
spk04: Great. Thanks, guys. I appreciate the color.
spk01: Our next question comes from Brady Lee with KVW. Your line is open.
spk09: Hey, good morning, guys. Good morning, Brady. Just to follow up on that expense question. So, I mean, if it reverts back to 2Q levels and professional fees, that'll put you a little under $34 million on a quarterly expense run rate. That feels like the right number for you guys?
spk06: Yes, absent that uptick in professional fees, we're actually pretty pleased to be holding the proverbial line on expenses, and that's the intent as we go forward.
spk09: Okay. And the $11 million of PPP fees remaining, do you think you can realize the majority of those in the fourth quarter, or does that happen more over the next two to three quarters?
spk06: If the fourth quarter is like the third quarter, The majority will happen in the fourth quarter, but it is not quite the same. Ultimately, this is a customer-initiated workflow, so we don't have control over that. There's so much outside of our control as it relates to the timing of our receipt of that forgiveness. I will say, so far, it has slowed down directionally. Granted, the third quarter was really a record So we expect a considerable amount of recognition in the fourth quarter, but definitely less unless things were to change materially than our record third quarter. And that would leave some, of course, to go into 2022 as well. Yeah.
spk04: All right.
spk09: And then on the M&A front, I mean, it's been, you know, what, three years or so since you announced and closed the post-oak deal. Anything new on that front? Are you still actively, you know, looking for possible targets?
spk08: I would say we're still very interested in that prospect. And, you know, as we kind of move into 22, it's definitely something that's on, you know, front of mind. Nothing actionable at this point that, you know, there is to report today, but, you know, it's a – From an acquisition perspective, there's candidates out there, and we will look at all of them that come our way.
spk09: I know you guys have a while until you really need to worry about it because you're under $7 billion, but $10 billion is there. How do you all think about the impact for Durbin for Allegiance? Is that going to be a notable headwind or more in line with peers?
spk06: For us, it's not as big a deal as it is for more retail-oriented banks. Now, we're working hard on increasing our interchange income, and we're actually pleased to see our interchange income increase a lot here in the last 12 months. But still, relative to most banks, it's the 40% or so kind of haircut that we would take on interchange income is less than is a lower impact for us than it would be for some banks with different business things. But we feel pretty well positioned from an infrastructure and otherwise standpoint as we kind of look forward towards thresholds like the $10 billion threshold and beyond.
spk09: And where are you guys running on interchange fees on an annual basis roughly right now?
spk06: Our most recent quarter is $771,000. That interchange is effectively that line on our press release for debit card and ATM card income. We actually only started to break out that line last quarter, and we're pretty pleased. On a year-to-date basis, last year we were at $1.6 million, and year-to-date this year we're close to $2.2 million. It's growing from a small base, but initiatives up to this point have been pretty successful to drive meaningful growth on that line item. Okay.
spk09: All right, great. Thanks for the color.
spk08: All right, thanks.
spk01: Thank you. As a reminder, to ask a question of time, please press star then 1 on your touch-tone telephone. Our next question comes from Matt Olney with Stevens. Your line is open.
spk05: Thanks. Good morning, guys. Paul, you mentioned $1 billion in unfunded commitments. I'm trying to appreciate how big of a move this is. Do you have a comparable number a year ago so we can just appreciate that more?
spk06: You're going to have to make me dig around, but it is significantly higher than in the past.
spk08: Well, even a big portion of our reserves were driven by that.
spk06: Yeah, actually, you all haven't asked the question on reserves, but we kind of outlined it in the discussion. Nearly $1 million of our reserves was driven by an increase in unfunded commitments. So of that $2.3 million, $900 and change was driven by the increase in unfunded commitments.
spk07: Yeah, and just to clarify, Matt, I think about things as $1 billion unfunded. It was $1 billion at the end of the year. It's $1.6 billion today.
spk05: Okay. So I'm sorry. It's $1.6 billion today, and it was $1 billion at 1231 last year. Is that right?
spk07: That's right. Yeah.
spk05: Got it. Okay. And then you also mentioned the provision expense. The $1 million of that was from the unfunded commitments. I guess the question is, if originations stay at this elevated level, and it sounds like they could given some of the progress you're making and some of the new hires, is it fair to assume that this provision expense is going to maintain around these third quarter levels around $2 million for a while?
spk06: You know, the provision is very dynamic. There's so many forces at play here. The unfunded is meaningful, but as that funds, there's less of a need for unfunded, and then, of course, a need for funded. What's very interesting here is of that level of provisioning that we put forth this quarter, only about, I'd say, $400,000 or so of it is attributable to net funded loan growth. That $900,000 is in the unfunded. So really, so much goes into it, but that gets you down to, call it, $1.3 million in provisioning. Now, the X factor in our provisioning and in the provisioning of all banks is ultimately what level of qualitative reserves to layer on our CECL model. And up to this point, or at least in the third quarter, we elected... due to delta variant and things along those lines really to not uh loosen some of those q factors so um there is potential as it relates to uh where the economy goes and where sentiment goes uh for a lot of things to ultimately drive our reserve levels and you know the cecil uh has a way of we're getting used to cecil with up to this point has a way of uh um introducing a little bit more uncertainty but the The real effect it's going to have on our provisioning levels is going to be a function of pay down. That's the X factor as it relates to funded loan growth. And if that slows down, we'll probably have greater need to reserve because funded loans will presumably be increasing.
spk05: Okay. Yeah, no, I get it. It's a nuanced topic, to say the least. So not easy to have much of an outlook there, but I appreciate the commentary. What about on the stock repurchase plan? I don't think I saw any activity in the third quarter. Just remind us what the authorization is and then what the appetite is to become active on that here in the more than near term.
spk06: Absolutely. We have a million-share authorization and – a meaningful appetite to get into the market. But that said, it's probably third on our hierarchy of what we want to be using capital for. First and foremost is growing core loans. And absent, once again, the wildcard that is payoffs, we feel good about our potential to drive funded core loan growth, which is our highest and best use of capital. Next is preserving flexibility in what we think is a real meaningful M&A market where scales of increasing importance. And then third, of course, is the financial engineering and the benefits that we get from kind of capital return strategies such as share repurchases. So it is very high on our minds and definitely an option that we're very thoughtful around.
spk05: Okay, thanks for that. And then I guess going back to the discussion around the core margin, and I'll put the liquidity aspect aside for a moment, given that's tough to predict. I think the core loan yields were down about six or seven basis points if I remove PPP and accretion. I think it's pretty similar to the decline that we saw on the interest-sparing deposit cost, about seven bps in the third quarter. and it sounds like you expect additional relief there and further benefits of lowering deposit costs. Can you talk about just the relation, the pressure on the core loan yields as it relates to lowering core deposits? Do you think those two will continue to be in lockstep the next few quarters, or do you think there could be, one would be greater than the other? Thanks.
spk06: You know, I think, They ought to be pretty close to lockstep, but there could be more pressure. With deposits, unfortunately, having a lower bound of zero, there's likely to be a little more pressure on the loan side, although we are just over the moon as it relates to the level of pricing that we're able to continue to get in tandem with this record origination, notwithstanding the fact that there are a lot of folks who are originating a lot of loans with a three-handle and whatnot. So we feel really good about our pricing power. We feel great about our originations. So we're just extremely focused on growing that NII line and recognizing NIM as an output, especially as this level of liquidity is really just exceeding all expectations. Yeah.
spk05: Okay. All right, guys, that's all from me.
spk08: Thanks for your help.
spk01: Thank you. Our next question is follow up from Brad Millsap with Piper Sandler. Your line is open.
spk04: Hey, thanks for taking a follow up. Paul, just kind of curious, if the Fed were to raise rates late next year, early 2023, just kind of curious if you could remind us how you think your loan portfolio and margin might react to, say, a 25 or 50 basis point increase in Fed funds.
spk06: We would be thrilled to see a 25 to 50 basis point increase in Fed funds. We try to stay neutral from an overall IRR position, but we are neutral with a lean towards asset sensitivity now, which is actually a little bit new for us. And to see such a meaningful level of what we have in variable rate securities as well as kind of the nature of our loan portfolio start to reprice, we feel like we're going to see meaningful improvements in our overall net interest income profile, I should say, immediately. So we, like the rest of the industry, quietly cheer on a measure of higher absolute value interest rates. Not sure about what comes with that, but we're From an interest rate perspective, we're positioned well for it and not as sensitive as most, but we look forward to the potential revenue benefits that would come.
spk04: Okay. And then just housekeeping, do you ever have the average balance of PPP loans in the quarter?
spk06: That I do not have.
spk08: Started at what and ended at what? Do you know that number?
spk06: They've got that in the first.
spk08: Oh, they've got that. Okay. So, yeah, the timing of that is hard to – Yeah.
spk06: You're consistent in that I had it last quarter, and I'm – apologies for not having it at my fingertips this quarter.
spk04: No problem. No problem. We can follow up. I appreciate it. Thank you.
spk06: Thank you. Thank you.
spk01: Thank you. And I'm currently showing no questions at this time. I'd like to turn the call back over to Steve Retzlaff for closing remarks.
spk08: Well, we just want to thank everybody for joining this meeting, and I appreciate your attendance and look forward to speaking to you next quarter. So thank you all very much.
spk01: This concludes today's conference call. Thank you for participating. You may now.
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