Allegiance Bancshares, Inc. (ABTX) on Q3 2021 Results - Earnings Call Transcript
Operator: Good day and thank you for standing by. Welcome to the Allegiance Bancshares Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Courtney Theriot, Executive Vice President and Chief Accounting Officer. Please go ahead.
Courtney Theriot: 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 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 Retzloff.
Steve Retzloff: Thank you, Courtney. Welcome, everyone, to our conference call and we appreciate your attendance. As seen in our press release this morning, Allegiance has continued to provide very strong results in the third quarter. Net income of $19.1 million or $0.93 per diluted share reflected a continuation of the PPP loan forgiveness cycle and increased investment 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 our 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 the 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.
Ray Vitulli: 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 a 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 paydowns 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 to 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 a 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% 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 the 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.
Paul Egge: Thanks, Ray. We are pleased to report another solid quarter of earnings, with net income of $19.1 million or $0.93 per diluted share as compared to $22.9 million or $1.12 per diluted share in the second quarter and $16.2 million or $0.79 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 pretax 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 owned. Net interest income once again was a key driver to our pretax 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 was $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 of net PPP fee income into yield during the third quarter and 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 ago 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 PPP -- 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-over-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 in . Total non-interest 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 wealth, we are pleased to be holding the line on expenses. 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 losing 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 loans. 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 our momentum as we close out 2021 and move into 2022. I will now turn the call back over to Steve.
Steve Retzloff: Thanks, Paul. With that, I will now turn the call over to the operator to open the line for questions.
Operator: Our first question comes from David Feaster with Raymond James. Your line is open.
David Feaster: Hey, good morning, everybody. I just wanted to follow-up on the origination. It's great to hear that you guys are continuing to set new records. I just wanted to get 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.
Ray Vitulli: David, to 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 are -- have good sentiment about the future. And we do have all of our entire lending stats 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 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.
Steve Retzloff: During 2020 we turned our sights to helping customers through PPP, even in a little bit in 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.
Ray Vitulli: And I would just add, David, on the loan originations from PPP, we're still -- 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. The record is really -- doesn't have much meaningful originations from the PPP side yet.
David Feaster: 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. 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?
Ray Vitulli: 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 4.57%. 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. If you kind of -- one -- 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, ticked down just a tad. So that's a little bit of a good -- 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 rate side.
David Feaster: Yes. Yes, that makes sense. And then 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 probably see some more securities purchases, do you think we should see some additional compression? Or just -- could this be the trough as the earning asset mix is set to improve and new loan yields have at least stabilized? I guess just how do you think about some of the puts and takes with the margin as we look forward?
Paul Egge: David, I'll take that. Really, the largest dynamic that's going to drive 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 those on the books on for. 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 paydown. So it's -- 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 on the -- 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 paltry returns by comparison to that core loan profile.
David Feaster: Okay, that's helpful. Thanks, everybody.
Steve Retzloff: Thanks, David.
Operator: Our next question comes from Brad Milsaps with Piper Sandler. Your line is open.
Brad Milsaps: Hey, good morning guys. I appreciate the commentary around the uptick in production. When I think about Allegiance bigger picture, I think high single-digit, low double-digit type of loan growth. Obviously, I think we can throw 2020 out the window 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 the pieces in place to accelerate growth off the levels you're seeing? It just seems things have been sort of stalled out for a bit even COVID notwithstanding.
Ray Vitulli: Yes. So the -- when we talk about this how we get to the loan growth, it starts with -- I mean it starts with the origination. So where for quarters and quarters, we had talked about a -- 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 paydowns and then the amortization of the portfolio and if we can get some little uptick in our advances and are 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 and 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 and as well as seeing some of that unfunded fund which is just goes straight to the bottom line when our unfunded funds up. And we have about $1 billion in unfunded right now.
Steve Retzloff: And a couple of quarters ago, we mentioned that we would be entertaining maybe slightly larger loan relationships and kind of just we're exploring that territory. Ray, what was the number in terms of percentage growth? From this year alone, we've...
Ray Vitulli: Yes. We're up -- relationships over our larger relationships are now up about 50% of what we -- this year. So that's helping on both the origination side and...
Steve Retzloff: And it's coming off of a pretty small base. So there's a lot of room and a lot of potential for us to kind of move a little bit larger in relationship size or even loan size for that much. And so we're working pretty hard on all fronts and it's showing up. We just -- unfortunately, like the rest of the country, we're seeing paydowns at this particular point in time.
Brad Milsaps: 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 up back up to it.
Steve Retzloff: Yes. I believe that's a true statement.
Ray Vitulli: Yes.
Brad Milsaps: Okay. And Paul, you alluded to this a little bit but your average cash, I think average liquidity doubled -- almost doubled linked quarter and then the period in cash was almost $300 million higher than the average. 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 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.
Paul Egge: Absolutely. We have 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 -- putting cash into securities. In particular, we don't -- 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 want -- we're valuing having excess liquidity to fund up our potential $1 billion 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 liquidity and capital standpoint to support growth as well as plenty of financial flexibility without taking .
Brad Milsaps: Can you talk about -- okay. Can you talk about the yields of some of the bonds that you're buying or that you bought in the third quarter?
Paul Egge: 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, when you 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 that -- some of that profitability move the proverbial needle as much.
Brad Milsaps: Okay, great. And then, maybe final one for me. I saw professional fees are also doubled linked quarter, Paul. Anything there that we should be aware that might reverse out? Just kind of wanted to get a sense of kind of what -- kind of where you thought the core sort of expense rate might be.
Paul Egge: Definitely expect that to be one-off. So it was -- the run rate would pivot back to your second quarter run rate.
Brad Milsaps: Great, thanks guys. I appreciate the color.
Operator: Our next question comes from Brady Gailey with KBW. Your line is open.
Brady Gailey: Hey, good morning guys. Just a 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. Is that -- that feels like the right number for you guys?
Paul Egge: 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.
Brady Gailey: 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 like two to three quarters?
Paul Egge: 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 and less things were to change materially than our record third quarter. And that would leave some, of course, to go into 2022 as well.
Brady Gailey: All right. And then on the M&A front, I mean, it's been, what, three years or so since you've announced and closed the Post Oak deal. Anything new on that front? Are you still actively looking for possible targets?
Ray Vitulli: I would say we're still very interested in that prospect. And as we kind of move into '22, it's definitely something that's on front of mind. Nothing actionable at this point that there is to report today but there -- it's a -- from an acquisition perspective, there's candidates out there and we will look at all of them that come our way.
Brady Gailey: Okay. And 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. I mean 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?
Paul Egge: 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 mix. 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.
Brady Gailey: And where are you guys running on interchange fees on an annual basis roughly right now?
Paul Egge: Our most recent quarter is $771,000. That's -- 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. So initiatives, 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.
Brady Gailey: All right, great. Thanks for the color.
Steve Retzloff: All right, thanks.
Operator: Thank you. Our next question comes from Matt Olney with Stephens. Your line is open.
Matt Olney: 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?
Paul Egge: You're going to have to make me dig around but it is significantly higher than in the past.
Steve Retzloff: Well, even a big portion of our reserves were driven by that.
Paul Egge: Yes. Actually, you all haven't asked a 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, $900,000 and change was driven by the increase in unfunded commitments.
Ray Vitulli: Yes. Just to clarify, Matt, the -- I think about things as $1 billion unfunded. It was $1 billion at the end of the year. It's $1.6 billion today.
Matt Olney: Okay. So I'm sorry, it's $1.6 billion today and it was $1 billion at 12/31 last year, is that right?
Ray Vitulli: That's right. Yes.
Matt Olney: Got it. Okay. And then you also mentioned the provision expense. The $1 million of that was from the unfunded commitment growth. I guess the question is, if originations stay at this elevated level and it sounds like they could give some of the progress you're making in 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?
Paul Egge: The provision is very dynamic. There are so many forces at play. The unfunded is meaningful. But as that funds, there's less of the need for a reserve for unfunded and then, of course, a need for funded. What's very interesting here is of that provisioning -- 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 loosen some of those key factors. So there is potential as it relates to where the economy goes and where sentiment goes for a lot of things to ultimately drive our reserve levels. And the CECL has a way of -- we're getting used to CECL with -- up to this point has a way of introducing a little bit more uncertainty. But the real effect that it's going to have on our provisioning levels is going to be a function of paydown. 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.
Matt Olney: Okay, yes. Now I get it, it's a nuanced top 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 in the near term.
Paul Egge: Absolutely. We have one 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 payoff, 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 scale is 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 it's definitely an option that we're very thoughtful around.
Matt Olney: Okay. 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, 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-bearing deposit cost, about 7 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 for the next few quarters? Or do you think there could be -- one would be greater than the other?
Paul Egge: 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 originations, 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.
Matt Olney: Okay. All right, guys, that's all for me. Thanks for your help.
Operator: Thank you. Our next question is a follow-up from Brad Milsaps with Piper Sandler. Your line is open.
Brad Milsaps: Hey, thanks for taking the 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.
Paul Egge: We would be thrilled to see a 25 to 50 basis point increase in Fed funds. We're not as -- 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 NIM profile or 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 that as sensitive as most but we look forward to the potential revenue benefits that would come.
Brad Milsaps: Okay. And then, just housekeeping. Do you have the average balance of PPP loans in the quarter?
Paul Egge: That I do not have. I'll let...
Steve Retzloff: It started at what and ended what, do you know that number?
Paul Egge: They've got that info .
Steve Retzloff: They got that, okay. So the timing of that is hard to...
Paul Egge: Yes. You're consistent in that I had it last quarter and I'm -- apologies for not having it at my fingertips this quarter.
Brad Milsaps: No problem. No problem. We can follow-up, I appreciate it. Thank you.
Steve Retzloff: Thank you.
Operator: Thank you. And I'm currently showing no questions at this time. I'd like to turn the call back over to Steve Retzloff for closing remarks.
Steve Retzloff: 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.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
