STEL (2020 - Q4)

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2020 Allegiance Bancshares, Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Courtney Theriot. Please go ahead, ma'am. Courtney

Thank you, operator, and thank you to all who have joined our call today. This morning's earnings call will be led by Steve Retzloff, CEO of the company; Ray Vitulli, President of the company and CEO of Allegiance Bank; Paul Egge, Executive Vice President and CFO; Okan Akin, Executive Vice President and Chief Risk Officer of the company and President of Allegiance Bank; and Shanna Kuzdzal, 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 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. 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 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 allegiancebank.com or by calling Heather Robert at (281) 517-6422 and she will e-mail you a copy. 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 Retzloff.

Thank you, Courtney. Welcome, everyone, to our conference call, and thank you for your attendance. As we report on our results for the fourth quarter and for the 2020 year, we are buoyed by the heroic effort put forth by our bank team. I differentiate the actions of our staff this past year between that of mere duty and that of genuine dedication. Our purpose of opening doors to success and helping small to medium-sized businesses in our region and understanding the importance of our special role within our community is what drove our team through the late nights and weekends that it took for not only our vastly outside PPP response, but also as we remained in close contact with our customers throughout 2020. In addition to strong operating results during a COVID-impacted 2020, we completed and initiated numerous projects, including opening a new branch in the exciting east side of downtown Houston, while we announced the closure of a branch slated to occur in January of this year. We also furthered the implementation of a new loan origination system, adopted CECL, enhanced our cybersecurity, expanded our electronic banking services, including online account opening, improved numerous electronic workflows, implemented additional card controls, introduced factoring as an in-house product, incorporated letters of credit production into our International services group, executed share repurchases, began paying dividends, and this quarter will increase that dividend by 20%. Most importantly, we continue to support the community through local organizations such as the Houston Food Bank and many others. And we were recently awarded for the 11th year in a row the distinction of being a best place to work in the region. All of this and more was accomplished with a large number of our staff working from home and/or dealing with family challenges resulting from the worldwide pandemic. To say that we are proud of our team and the culture in which we operate is an understatement. During the fourth quarter, $140 million of PPP loans were processed through the forgiveness phase, while core loans increased approximately $40 million, notwithstanding approximately $16 million of loan sales, which Ray will describe in his report. While core loans only slightly increased during 2020, our customers, and consequently, the community and the bank, benefited from the $700 million of first round PPP loans that were booked. Our team is well underway as we readied ourselves for the opening bell of PPP 2021, and we're transmitting loans to the SBA on day 1 of the new program. I am pleased with our asset quality position as we were able to reduce nonaccrual loans in the fourth quarter, resulting in an improved coverage ratio. We continue to work with customers with payment relief where possible and consider that our reduction in the volume of this activity is an encouraging sign of optimism, broadly speaking. The past two quarters reflected high watermarks for Allegiance in terms of earnings per share, which was driven by both the accelerated PPP fee recognition and our ability to onboard new lending relationships at an impressive pace. The Houston and Upper Gulf Coast region of Texas continues to be resilient in this cycle, and our bankers are prepared to take it from here. Next, Ray will describe our loan and 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 for questions. Ray?

Thanks, Steve. As in the previous quarters of 2020, our bankers continue to outreach effort to our borrowing customers in the fourth quarter 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. Each quarter, I look back on all the accomplishments and truly appreciate all of our bankers who have found ways to get all the work done. Given all the challenges that came our way during the year, it is very nice to look back at 2020 and see solid performance by various measures as will be described later by Paul, and some other key results that are reflective of how we have come to be Houston's largest community bank. From total loan originations of $1.8 billion, inclusive of $1.1 billion in core loans and $700 million in PPP to record levels of onboarding of new treasury management customers to a smooth PPP forgiveness process, we continue to deliver to meet the expectations of the communities we serve. In terms of PPP, we are very pleased with our loan results and the impact of our efforts on the Houston region. Our approach to provide PPP loans to both existing customers and new customers has further strengthened our market presence. We continue to execute on the forgiveness process from round 1 of PPP and welcome the recent announcement of the simple forgiveness application for loans up to $150,000. Of all 6,000-plus round 1 PPP loans we originated, 83% or $150,000 or less in terms of number of loans. To date, we have received forgiveness applications for 2,785 loans totaling $368 million. Of those, 1,511 have been submitted to the SBA with 1,274 having been approved and funds received. We are positioned again to be a leader in the delivery of the next round of PPP funds to our existing and new customers. Our application portal has been opened since January 11. And to date, we have responded to more than 3,700 new PPP first or second draw inquiries with more than 1,500 completed applications having been received. 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. Of this amount, approximately $161 million of core loans remain on deferral at the end of the fourth quarter and $126 million as of January 25. I will now go over our quarterly results. Total core loans, which excludes PPP loans and mortgage warehouse lines ended the fourth quarter at $3.92 billion, an increase of $39.7 million during the quarter. During the fourth quarter, our staff and lending team booked $310 million of new core loans that funded to a level of $220 million by December 31 compared to the third quarter, when $280 million of new loans were generated which funded to a level of $182 million by September 30. Paid-off core loans were $195 million in the fourth quarter compared to $181 million in the third quarter and $171 million in the second quarter of 2020. The average size of the new organic core loans generated during the fourth quarter was $382,000, with an average funded balance of $270,000, which once again reflects our continued focus on building a diverse and granular loan portfolio. The average size of all core funded loans ended the quarter at $343,000. Regarding interest rates on loans, based on total loan amount, the weighted average interest rate charged on our new fourth quarter core loans was 4.64%, which is comparable to the third quarter 2020 weighted average rate of 4.63% and below the second quarter 2020 weighted average rate of 4.84%. The $195 million of paid off core loans during the quarter had a weighted average rate of 5.25%. Carried core loans experienced advances of $65 million at a weighted average rate of 4.88% and paydowns of $63 million, which were at a weighted average rate of 5.02%. All in, the overall period end weighted average rate charge on our funded core loans decreased 8 basis points, ending the quarter at 5.08% compared to 5.16% as of September 30, 2020. In terms of our overall loan portfolio, the loan type mix was a 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 3 loan categories that could have heightened risk due to energy prices and/or the COVID 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 did not have any reserve-based loans. But we have defined this category to be any borrower that operates in or directly supports the upstream, midstream or downstream segments of the industry. At December 31, this category is approximately 1.7% of our funded loans, or $75 million, of which $28.4 million was commercial real estate and $46.2 million was C&I. Of the $28.4 million in CRE, the weighted average LTV for the portfolio was 52.3%. A 20% stress testing of the most recent appraised value plus 6% marketing expenses resulted in an overall collateral deficiency of approximately $142,000 increasing to $440,000 at a 30% stress test. Regarding our hotel portfolio, at December 31, we had $127 million of hotel loans, of which $117.7 million was commercial real estate, $6.8 million was C&D and $2.5 million was in C&I. Of the $117.7 million in CRE, the weighted average LTV for the portfolio was 59%. At a 20% stress testing of the most recent appraised value, plus 6% in marketing, resulted in an overall collateral deficiency of approximately $994,000, increasing to $3.1 million at a 30% stress test. And regarding our restaurant and bar portfolio, at December 31, we had $117 million of restaurant and bar loans, of which $83.4 million was commercial real estate, $2.9 million was C&D and $30.4 million was C&I. For the $83 million in CRE, the weighted average LTV for the portfolio was 58.1%. A 20% stress testing of the most recent appraised value plus 6% marketing resulted in an overall collateral deficiency of approximately $613,000, increasing to $1.9 million at a 30% stress test. Asset quality at quarter end remained in a manageable position. Nonperforming assets, including both nonaccrual loans and ORE ended the fourth quarter down from 78 to 63 basis points of total assets, primarily due to the sale of $8.2 million of nonaccrual loans during the quarter, which was part of $16 million in total loan sales during the quarter. Nonaccrual loans decreased a net of $9 million during the quarter from $37.9 to $28.9 million, primarily due to the $8.2 million in nonaccrual loans sold during the quarter, $3.8 million in charge-offs, of which $2.1 million is associated with the loan sale, $1.4 million in payments and payoffs and $321,000 that was moved to ORE. We added $4.1 million in new nonaccrual loans during the quarter, the largest being a $1.7 million real estate loan that paid off in full earlier this month. The additional $2.4 million increase in nonaccruals was from 5 relationships, 2 of which totaled $2.2 million and the remaining $194,000 was from 3 smaller relationships. ORE increased to $9.2 million during the quarter compared to $8.9 million for the third quarter, primarily due to a single-family residence that was moved to ORE in the amount of $321,000 and subsequently sold in January of 2021. The $9.2 million in ORE consist of 5 properties with the largest $4.4 million commercial real estate property. The second largest is a $3.7 million industrial real estate property. And the third largest, a $576,000 residential property. The remaining property is in Beaumont. These properties are being actively marketed with the 2 largest properties in contract negotiations for potential sale. The level of net charge-offs was elevated during the quarter at $4.3 million or an annualized rate of 37 basis points, inclusive of $2.4 million related to the above -- to the aforementioned loan sale. In terms of our broader watch list, our classified loans as a percentage of total loans increased to 3.61% of total loans as of December 31 compared to 2.40% as of September 30. Criticized loans increased to 5.95% at December 31 from 5.16% at September 30. Specific reserves for individually evaluated loans ended the quarter at 12% compared to 15.7% at September 30. On the deposit front, we saw an increase in total deposits in the fourth quarter by $71.1 million from the third quarter and up $920.3 million over the year-ago quarter. The increase during the fourth quarter was primarily in CDs and other time deposits. The increase over the prior year was primarily in the noninterest-bearing deposit category as a result of new accounts associated with PPP customers as well as higher balances in our carried accounts. Noninterest-bearing deposits decreased $68 million during the fourth quarter and were up $452 million over the year-ago quarter. With that, our noninterest-bearing deposits to total deposit ratio was 34.2% for December 31, 2020 compared to 36% for September 30, 2020, and 30.8% for the year-ago quarter. With regards to the pandemic and COVID statistics for the Houston area, while not at all-time peak levels, Harris County is experiencing elevated levels of both percent of positive tests and ICU beds occupied by COVID patients. We continue to monitor these trends and remain highly focused on health and safety. We are cautiously optimistic of the progress towards the economic recovery in the Houston region, aided by our ability to again deliver relief to our customers with the next round of PPP, while providing banking solutions to meet the needs of our customers in 2021 and beyond. I now turn it over to our CFO, Paul.

Thanks, Ray. We are very pleased to report fourth quarter net income of $15.9 million or $0.77 per diluted share as compared to $16.2 million or $0.79 per diluted share in the third quarter and $14 million or $0.67 per diluted share posted in the fourth quarter of 2019. Pretax provision income for the fourth quarter reached a high-watermark at $24.2 million as compared to $21.2 million in the third quarter and $18.5 million for the year-ago quarter. I'll note that we had $1.9 million in OREO write-downs in the third quarter. So after adjusting for this pretax preprovision income would have been about $23 million for the third quarter. Net interest income was the key driver to our pretax pre-provision earnings power in the fourth quarter, where we saw an increase of $3 million or 5.8% to $54.9 million from $51.9 million in the third quarter, primarily due to revenue recognized on PPP loans and lower interest expense in the quarter, more than offsetting slightly lower core loan income. Total net fee revenue related to PPP loans recognized into interest income during the fourth quarter with $6 million, an increase from $3 million in the third quarter. Additionally, interest expense decreased by $757,000 during the fourth quarter compared to the third quarter. The impact of acquisition accounting accretion continued to decrease in the fourth quarter. Accretion increased loan income by $281,000 and reduced CD expense by $61,000 for a total positive effect on net interest income of $342,000 versus a total positive impact of $598,000 in the third quarter and $1.9 million in the year-ago quarter. Only $855,000 remain in a loan mark and $220,000 in the CD mark. Yield on loans in the fourth quarter was 5.09% as compared to 4.89% for the third quarter and 5.65% for the year-ago quarter. Adjusting for acquisition accretion, yield on loans would have been 5.07% in the fourth quarter, 4.84% in the third quarter and 5.47% in the year-ago quarter. Our loan yield story reflects a combination of factors, including decreased purchase accounting accretion, as previously discussed, decreasing core or non-PPP loan yields, which went from 5.25% in the third quarter to 5.11% in the fourth quarter and perhaps most impactful was the overall impact of PPP loans. In the third quarter, we saw PPP loans effectively dilute overall loan yields, which went from 5.13% in the second quarter to 4.89% as average PPP balances amounted to about 15% of our loan mix. This was a pretty significant mix shift towards lower-yielding PPP loans and without the benefit of any accelerated fee income recognition from forgiveness. This dynamic flipped in the fourth quarter, thanks to accelerated PPP net fee income recognition into yield, totaling approximately $3 million and thereby boosting loan yields to 5.09%. So total yield on interest-earning assets was 4.71% for the fourth quarter, up from the 4.58% we posted in the third quarter and down from 5.35% for the year-ago quarter, reflecting the aforementioned effects of PPP balances, net fee income recognition, lower accretion income and a changing asset mix. Excluding PPP loans and related revenue, total yield on earning assets would have been 4.67% for the fourth quarter versus 4.85% in the third quarter. Before I move on, I should note that as of year-end, we had approximately $14 million of net deferred fee income remaining relating to 2020's PPP loans, which we will recognize in the yield over the life of the remaining PPP loans and on an accelerated basis, when we experience SBA forgiveness. With respect to interest expense, our calls of interest-bearing liabilities continue to decrease in the fourth quarter to 93 basis points from 105 basis points in the third quarter and 185 basis points for the year-ago quarter. The overall cost of funds for the fourth quarter was 62 basis points versus 69 basis points in the third quarter. We expect to see continued improvement in our funding costs going forward. So with the help of PPP net fee income recognition and lower interest expense in Q4, offsetting a significant shift in the composition of our earning assets, we are really proud to post a taxable equivalent net interest margin of 4.14% for the quarter as compared to 3.95% in the third quarter and 4.11% in the year-ago quarter. Now if you were to exclude PPP loans and the related revenue, net interest margin would have been 4.02% for the fourth quarter. Going forward, we continue to feel well positioned to maintain a relatively strong net interest margin as we seek to further optimize our funding mix and maintain discipline on loan pricing. Noninterest income ticked up slightly quarter-over-quarter, increasing to $2 million for the fourth quarter from $1.9 million in the third quarter. On the expense side, total noninterest expense also remained relatively stable quarter-over-quarter as fourth quarter expense was $32.7 million compared to $32.6 million in the third quarter. The difference is primarily due to increases in the salary and benefits line and the other expenses line, mostly offset by decreased other real estate expenses. The efficiency ratio for the fourth quarter decreased to 57.53% compared to the 60.58% posted in the third quarter and the 62.2% for the prior-year quarter. As mentioned in prior quarters, we had elected to take the relief that came with the CARES Act to defer the implementation of CECL until this quarter. At which point, we adopted CECL retrospectively to January 1, 2020. Consequently, the reported allowance for the fourth quarter was calculated under the CECL standard. The provision for loan losses was $4.4 million for the fourth quarter compared to the loss to the provision we took in the third quarter of $1.3 million, bringing our total provisioning for the year to $27.4 million. Our allowance for loan losses ended the year at $53.2 million, representing 118 basis points of total loans and 139 basis points on core or non-PPP loss. So bottom line, our fourth quarter ROAA and ROATCE metrics for the quarter came to 1.05% and 13% -- 12.32%, respectively. Year-end tangible book value per share was $25.59, which makes for an increase of approximately 13.1% since year-end of 2019, which is something we feel great about notwithstanding such turbulent 2020, which included CECL implementation and a year-over-year reserve build of over 80%, $0.40 of dividends and the repurchase of over 500,000 shares of stock during the year. On the topic of share repurchases, I should note that in the fourth quarter, we did restart share repurchases under our existing 1 million share repurchase authorization, buying back nearly 275,000 shares. While COVID still brings about significant economic uncertainties, Allegiance closes out 2020, bigger and better than ever at over $6 billion in assets with capital, reserves and liquidity levels stronger than ever. We feel very well positioned as we navigate the current economic environment, and we feel confident about our ability to maintain a strong capital position. To that end, the company declared a dividend of $0.12 per share of common stock, up 20% from the $0.10 per share dividend prior. I will now turn the call back over to Steve.

Thank you, Paul. With that, I will now turn the call over to the operator to open the line for questions.

[Operator Instructions] Our first question comes from Brad Milsaps with Piper Sandler.

Ray, I was writing quickly during some of your commentary. And I think I may have missed the number, but I think I heard production of $310 million during the quarter. What did that fund up to in terms of outstandings? And kind of -- it sounds like that was higher linked-quarter? And kind of based on that, how do you kind of feel about loan growth in 2021 kind of based on your finish to the year?

Sure. Thanks, Brad. Yes. So the $310 million was the originations for the quarter and that funded up to $220 million and -- which was nice compared to the third quarter. What was really nice is that $310 million is our first quarter in excess of $300 million since third quarter of '19. So that kind of momentum going into '21, we're really excited about that. And still, the fourth quarter was a quarter where we continued customer outreach, all the other things that we need to do as bankers. But to get that kind of core origination was really nice to see the return to those levels that we've kind of expected in the past, which we've talked about before, that 300 -- that benchmark kind of $300 million.

Do you think -- obviously, 1 quarter may not make a trend, but does that push you maybe higher than sort of a mid-single type run rate in loan -- growth rate loans in '21? Or is it higher than that?

Yes. No, I think that's -- I still think that's good. It definitely puts us in a position for that, Brad. And that what you -- that mid- to high single absolutely puts us in where we will get our fair share and the stage is set for that. As Paul mentioned, we're in a 3-point stance, ready for that.

Yes. This is Steve, Brad. The effort that we put forth last year on the PPP really took our eye off the ball on loan growth, I mean, to the extent that we spent so much time and our team was just spending a tremendous amount of energy on taking care of our customers, outreach and PPP, we're going to repurpose that energy in '21. And while we have some PPP activity, we do believe that this team is ready to go in '21 for a pretty robust loan production year.

No, that's great color, Steve. Steve or Ray, what about hiring? Can you talk about that activity, if any, in the fourth quarter? And maybe kind of what your plans are for 2021?

Yes, sure. So for the whole year, we brought on 9 new producers for the year and then plus 2 internal promotions from our analyst pool. So feel really good about that. That's coming off 2019, which was -- we had 15. So a little bit down from 2019, but a really strong class of 9 for the year. And I would expect that to continue in 2021, something similar to what we did in 2020. We're talking to folks, a handful that we're talking to at this moment. So we feel good about it, Brad.

That's great. And then maybe just one more here. Paul, obviously, it looks like you've had some incentive kind of catch-up in the fourth quarter on the expense side. Is the fourth quarter, you think a pretty representation -- a pretty good representation of run rate expenses in '21? Or kind of based on some things you guys are doing, do you think you can kind of back off that rate a little bit?

Yes. The fourth quarter did feature some items that beefed up the overall level of expenses, but it does kind of present a little bit of a glide path as to what to expect in the -- in the quarters within 2021. It's actually a little on the high side. But it's -- that range of $32-or-so million is really consistent with expectations. And I think our spend story is largely going to be a function of a little bit of how our core loan growth story manifests itself in 2021. So we're very well positioned to actualize on whatever growth that's out there. And as we assess dynamics, ultimately, that can have a resulting effect as to how forward we are on spend.

Got it. And just a housekeeping question, Paul, do you happen to have the average balance of PPP loans in the quarter?

It was around -- I'm not speaking in approximations. I believe it was around 450 to 500.

Average balance on PPP?

Actually, that's...

It's more like 125, 135 range.

Yes, you ended the quarter at $570 million. So it's got to be north of there, right?

I'm talking about individual.

I just split the difference between where we were at the end of the third quarter.

Yes. It was a pretty steady flow of forgiveness during the quarter.

The majority of our forgiveness was in November. That was our largest kind of push for forgiveness, followed by December.

Our next question comes from Brady Gailey with KBW.

So, you had a decent amount of success with PPP Round 1. I know Round 2 is just now kind of starting, but any idea what the opportunity could be on Round 2 for you guys?

Okan, take this. Okan is managing that very, very well. So what do you say Okan?

Yes, thank you. So we started the PPP effort early on, opened our portal in January 11. We have -- what we're seeing is that the vast majority of the applications we're receiving are from second draw customers currently running at a rate I would think somewhere between 35%, maybe 40% of what we've done last time is what we're geared up to do easily. It could be more. We have twice the applications that have been requested by our customers that are actually in. So of every 2 applications received from customers, we have received 1 complete back so far. And based on what we're seeing, if that all continues to progress the same way somewhere around 35% to 45% is what I would expect.

So we did 700 last time. That would mean that we'd be in the 300 -- 250 to 300 kind of that ballpark.

All right. And then I think if you look at your core NIM ex accretion and PPP, I think you guys mentioned it was a little above 4%. I know in the past, you pointed to some NIM compression, but do you think at the 4% level, you've reached stability? Or are we going to see that core NIM dip into the 3s?

I think structurally, there's a chance you're going to see that core NIM dip into the 3s because the number cited is one where if you assume away both the balances and the revenue from PPP, I think what's more likely is that when PPP runs its course, the earning assets are likely going to be there, just redeployed into something other than PPP, and that has the potential to dilute overall earning asset yields, but the mix will be a function of what we're able to produce on core loan growth. And then separately, where we ultimately redeploy any excess liquidity. So it will be a different -- the NIM might be if this comes to pass, the NIM would be lower, but it would be a function of more structural implications as in a lower level of run rate core loans to assets. Does that make sense?

Yes. Yes, that makes sense. And then finally for me, just on buybacks and M&A. If you look at your currency, you're trading at about 135% of tangible book value. So it doesn't seem quite high enough to do bank M&A as a buyer, but maybe too expensive on the buyback front. So just thoughts on -- it looks like you repurchased about 1% of the company this quarter. Will that continue? And then thoughts on a bank M&A. Everybody is expecting 2021 to be a fairly active year. Do you guys think you'll be active as well in M&A?

Sure. I'll first start on the repurchase discussion, and then we'll hit on M&A, and Steve will add some thoughts there, too. But from the standpoint of our stance on repurchasing, we don't think current share prices are necessarily too expensive to be an active share repurchaser. And ultimately, how that manifests itself will be a function of our 10b5 plans we put in place and whatnot. But we do see share repurchases as a very viable tactic to manage our capital structure and our capital ratios. And we value the flexibility that comes with that as it relates to managing and shaping our return on tangible common equity profile. And we think that would have the potential to pay dividends down the road in -- from a valuation standpoint as well. From an M&A standpoint, I wouldn't say that our current valuation necessarily boxes us out. But you're right, it could always be better. I think we have -- we're in a better place now than we were 3 to 6 months ago as it relates to our currency. And ultimately, we plan if the right opportunity presents itself to be active.

Yes, there's no doubt about that. There's 2 things really that kind of drive the M&A mood, I guess, is one is the currency. And it's always better to be higher, and we're moving in that direction. So that's good. But the other one is the cloud of uncertainty with regard to COVID. A year ago, we were all kind of perplexed with that. And so as that cloud starts to lift, I think this is going to be a year where those conversations will heat up, and we may see some deals take place. So we're active, and people know that. And so we're -- we maintain conversations in our region.

Our next question comes from Matt Olney with Stephens Inc.

I wanted to circle back to the discussion on the core margin. And Paul, you mentioned that the liquidity aspect is going to be challenging as some of these PPP loans are paid down. And that's definitely something we're hearing from other banks. But if we try to put liquidity aside and the PPP impact aside, I'm curious if you think that the improvements of lower interest-bearing deposit cost, will be comparable to the pressure on the core loan yield?

We still have room to go to improve our cost of funds, and we look forward to really seeing that manifests itself, albeit a little bit more gradually quarter-over-quarter in 2021 than it was in 2020. But we still see that as a real driver and ultimate protector of our overall NIM profile as we go forward. We're very pleased to note that a lot of that loan growth we had in the fourth quarter or really that production we had in the fourth quarter, which was quite strong at over $300 million was actually at pricing that was a basis point higher on core loan yields than it was in the prior quarter. So we're seeing stabilization as it relates to the yields on our core loans, but we are very mindful of the competitive environment that we're in and the fact that core loan yield could be subject to additional risk. That said, I'm pretty buoyed by the last quarter's pricing as it relates to our core loans. And I think that helps us to be able to protect our overall revenue prospects in 2021 and beyond.

That and our sense right now is that we have a growing pipeline as well. So good momentum. We obviously had good new loan production in the fourth quarter, and we feel good about our pipeline as it sits. Will that hold? We don't ever know that, but we certainly feel really good about our entry into '21 with regard to that. And so that growth in the loan portfolio is going to mitigate an awful lot of that NIM compression pressure.

Okay. And then going back to the share repurchase discussion, you may have mentioned this, I just missed it. What was the average price of the 270,000 shares, I think, you mentioned that you repurchased in the fourth quarter?

I believe it was around $33 and change. We'll have that in our 10-K. Yes.

Slightly over $33, yes.

And then you mentioned the M&A. I was wondering if you could be more specific and just talk about the M&A priorities for the bank at this point. What are you looking for? Is it simply additional scale within the greater Houston market? Or is it something besides that?

Well, I'll hit first and foremost on scale and the power of scale. We see that kind of loud and clear as it relates to the current interest rate environment and potential pressures on the revenue profile to spread away in the banks. So scale and being able to get cost savings is obviously an operating leverage, is ultimately high on our minds. But separately, to the extent we're able to broaden our interest -- our diversity of income profile to get more noninterest income, we see that as being potentially powerful as it relates to really building a more diversified and strong revenue profile.

Each one of the potential candidates for that are unique, and we'll evaluate each one on their own merits. But primarily, I guess, the one thing that would probably guide us in this year is kind of stay in the region, and I would call that the Houston to Beaumont, Gulf Coast, Southeast Texas region is where we'll be expending our energy.

Okay. Okay. That's helpful. And then just lastly, in the prepared remarks, there was some mentions of the loan sale with nonaccrual loans. I missed some of the details behind that. Can you just kind of go over with the highlights of that? And is that something you would consider again in 2021?

Ray, do you want to cover that in detail?

Yes, sure. So yes, Matt. So the total is about $16 million, of which a portion of that was nonaccrual. So it was a handful of loans, really all previously identified as loans that were watch-list type credits or even more deteriorated than that. So it's a tool that we had that we felt to be proactive, was appropriate. And we've -- it was prudent -- it was the right thing to do for those loans, whether we do it in the future or not, it's just really on a case-by-case basis depending on where we stand with those -- with these problem credits.

And Ray, just any color on the pricing of those loans versus where you had them on the books more recently?

It was actually pretty...

[Indiscernible] type of value. Yes, right.

Yes, we had identified a reserve on a number of those loans that we basically just recognized that loss through the reserve we'd already had on the books. So we basically picked up a price that was equivalent to what the net book value was.

Think about 10% or so.

Yes.

[Operator Instructions] Our next question comes from David Feaster with Raymond James.

I just wanted to start, just curious on the kind of the pulse of your clients. How much of this growth, it's great to see the accelerating originations. How much of it is existing clients maybe expanding versus new client acquisition from the new lenders or the PPP program, and just kind of, I guess, their thoughts on additional investment and growth as we're heading into 2021. Obviously, Texas, the economy is strong there. But just curious, the pulse of the client.

David, yes. So we do keep track of that, exactly what you're asking new customers and existing customers. So when you look at the $310 million, the $310 million was actually 60-40 of existing to 60 to 40 of new. The qualifier, I would say, though, there is that we have a bunch of new customers that are going to fall into the existing category right now because of -- because they might have been here from PPP. So while I say a 60-40 existing, we really need to do another look at it to really see what are new -- maybe new, which is another category probably. But I guess the answer is, is that we're definitely getting traction and building relationships with customers acquired through PPP. And of our 6,000 PPP loans that we made more than half were to new customers. So those new customers are turning in the new business on the treasury side. We're onboarding. We -- basically, every quarter of 2020 was twice of the onboarding of treasury that we did in 2019 and then we're seeing new loan requests from those customers as well. So we feel really good about it and of converting those to permanent customers and the mood is, I mean, when you originate $310 million, I think that's pretty indicative of the mood that there is some growth and expansion happening. I mean, definitely market share -- there's definitely market share gains in there, too, but there is some growth and expansion.

Okay. That's helpful and encouraging, too. And then it was great to see the C&I growth in the quarter. I mean, we've been talking about that for a while. Just curious the composition of your pipeline. And maybe what do you think C&I can potentially be a larger contributor going forward?

It's certainly, there's definite an upside on the C&I, David. The challenge there is utilization. We're -- we will -- we definitely book quality lines of credit to customers. The question is utilization. And when they -- when we -- most customers get back to seeing revenue growth, and we'll see more utilization, which will result in larger funding. But there is an opportunity for us, and we have experienced C&I lenders in our producer team.

Okay. And then just last one from me. Just any thoughts on the competitive landscape. It seems like almost as fast as originations are growing, payoffs and paydowns are accelerating too. Just curious how much of this is just strategic that you're passing on because of unattractive terms or rate or clients just using cash to pay down debt or even asset? Just any comments on the competitive landscape and payoff and paydown activity?

Yes. So the -- you mentioned the cash to pay down debt. That is a component that we hadn't seen before, where customers are just liquid and just -- it's not a function of rate or sale of property, just reducing, delevering on their own balance sheet. So we're still seeing some of that. We are passing on some pricing terms. But as Paul mentioned, this $310 million that we originated in the fourth quarter came on at $464 million. The $280 million that we did in the third quarter came on at $463 million. So really like that trend there of picking up a basis point on the $300 million that happened in the third quarter. So those are kind of positive signs and kind of a reflection of the competitiveness.

Our next question comes from John Rodis with Janney.

Just one question for me on fee income. The rebate line item ticked up a little bit in the quarter, but still well below 2019 levels. How should we think about that going forward in the current environment?

I'd see that tick up as a relative outlier. It was a function of larger-than-normal cash balances being held at our correspondent bank that hopefully, will not necessarily be the case as much going forward, predominantly from the standpoint of deploying that liquidity into core loans. Or to a lesser extent, securities as opposed to cash in our corresponding bank account.

I guess, Paul, along those lines as far as the securities portfolio goes, like you said, you grew that, what, about $100 million during the quarter. So you -- should we expect that to continue to move somewhat higher? I guess, and it's a trade-off with loans and deposits, too, I realize. But how should we think about that?

Ideally, no. Really, what you saw there is an investment in short variable rate, 0% risk-weighted cash alternative type of securities. So it's really a function of excess liquidity and ultimately, deciding to deploy it somewhere where we're not taking significant amounts of credit or interest rate risk, but doing better from a risk-weighted capital standpoint -- risk-weighted asset standpoint and otherwise on bank cash.

And I'm not showing any further questions at this time. I would now like to turn the call back over to Steve Retzloff for any further remarks.

Thank you, operator. Well, once again, guys, we appreciate your time and interest in Allegiance Bank, and we look forward to speaking to you again in the future. So thank you all very much.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.