Earnings Call Transcript - STEL Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2020 Allegiance Bancshares, Inc. Earnings Conference Call. 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. Please go ahead, ma'am.

Courtney Theriot, Moderator

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.

Steve Retzloff, CEO

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 Vitulli, President and CEO of Allegiance Bank

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 charged 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 three 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 five relationships, two of which totaled $2.2 million and the remaining $194,000 was from three 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 consists of five 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 two 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 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.

Paul Egge, CFO

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 pre-provision 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 was $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. The 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, the 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 cost of interest-bearing liabilities continued 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 loans. So bottom line, our fourth quarter ROAA and ROATCE metrics for the quarter came to 1.05% and 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.

Steve Retzloff, CEO

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

Operator, Operator

Our first question comes from Brad Milsaps with Piper Sandler.

Brad Milsaps, Analyst

Ray, I was writing quickly during some of your commentary and may have missed the number, but I believe I heard production of $310 million during the quarter. What did that fund amount to in terms of outstandings? It sounds like that was higher compared to the previous quarter. Based on that, how do you feel about loan growth in 2021 considering your finish to the year?

Ray Vitulli, President and CEO of Allegiance Bank

Sure. Thanks, Brad. Yes, the $310 million was the originations for the quarter, which funded up to $220 million, and that was an improvement compared to the third quarter. Importantly, this is our first quarter exceeding $300 million since the third quarter of 2019. We are really excited about that momentum going into 2021. Additionally, the fourth quarter was a time where we maintained customer outreach and continued our banking activities. It was encouraging to see core origination return to the levels we previously expected, particularly the $300 million benchmark we have discussed before.

Brad Milsaps, Analyst

Do you think one quarter may not indicate a trend, but does that suggest a potential for a growth rate in loans higher than a mid-single digit rate in 2021? Or is it expected to be even higher?

Ray Vitulli, President and CEO of Allegiance Bank

Yes, I believe that's a positive development. It certainly positions us well for that, Brad. Achieving mid- to high single digits definitely indicates we are on track to receive our fair share, and we are prepared for that. As Paul indicated, we are in a strong position, ready to move forward.

Steve Retzloff, CEO

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.

Brad Milsaps, Analyst

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?

Ray Vitulli, President and CEO of Allegiance Bank

Yes, certainly. For the entire year, we added nine new producers and promoted two individuals from our analyst pool. I feel positive about that outcome. In comparison to 2019, when we had 15 new hires, this is a slight decrease, but the nine we brought on this year form a really strong group. I anticipate similar hiring numbers for 2021, akin to what we achieved in 2020. We're currently in discussions with a few candidates, so I feel optimistic about our prospects, Brad.

Brad Milsaps, Analyst

That's great. And then maybe one more question for you, Paul. It seems like there was some incentive catch-up in the fourth quarter regarding expenses. Do you believe the fourth quarter reflects a good indication of run rate expenses for 2021? Or based on your plans, do you think there's a possibility to reduce that rate a bit?

Paul Egge, CFO

Yes, the fourth quarter included some items that increased overall expenses, but it does give a clear indication of what to expect in the upcoming quarters of 2021. It's somewhat elevated, but that range of around $32 million aligns well with our expectations. Our spending will largely depend on how our core loan growth develops in 2021. We are well positioned to take advantage of any growth opportunities that arise. As we analyze the dynamics, that will ultimately influence how aggressive we are with our spending.

Brad Milsaps, Analyst

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

Paul Egge, CFO

It was around 450 to 500.

Ray Vitulli, President and CEO of Allegiance Bank

Average balance on PPP?

Paul Egge, CFO

Actually, that's...

Ray Vitulli, President and CEO of Allegiance Bank

It's more like 125, 135 range.

Brad Milsaps, Analyst

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

Ray Vitulli, President and CEO of Allegiance Bank

I'm talking about individual.

Steve Retzloff, CEO

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

Paul Egge, CFO

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

Operator, Operator

Our next question comes from Brady Gailey with KBW.

Brady Gailey, Analyst

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?

Steve Retzloff, CEO

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

Okan Akin, Chief Risk Officer

Yes, thank you. We initiated the PPP effort early, launching our portal on January 11. Currently, most of the applications we are receiving are from second draw customers, which is roughly 35% to 40% of what we accomplished previously. We are well-prepared to handle more than that. We have received twice the number of applications requested by our customers. For every two applications we have received, one has been completed. If this trend continues, I would anticipate around 35% to 45%.

Steve Retzloff, CEO

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

Brady Gailey, Analyst

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?

Paul Egge, CFO

I believe there is a possibility that core net interest margin may decline into the 3s. The figure mentioned assumes the exclusion of both balances and revenue from PPP. It seems more probable that when PPP concludes, the earning assets will still exist, albeit redeployed into different areas beyond PPP, which could lead to a reduction in overall earning asset yields. However, the composition will depend on our ability to generate core loan growth and how we choose to utilize any excess liquidity. Therefore, if this scenario unfolds, the net interest margin could indeed be lower, reflecting structural changes related to a decreased level of core loans relative to assets. Does that make sense?

Brady Gailey, Analyst

Yes, that makes sense. Finally, regarding buybacks and M&A, your currency is trading at about 135% of tangible book value. This suggests it may not be ideal for bank M&A as a buyer, and possibly too high for buybacks. You repurchased around 1% of the company this quarter. Will that trend continue? Additionally, considering the expectation for 2021 to be an active year for bank M&A, do you anticipate being engaged in M&A as well?

Paul Egge, CFO

Sure. I'll begin with the discussion on share repurchases, followed by M&A, with Steve also sharing his insights. Regarding our approach to repurchasing shares, we don't consider current share prices prohibitively expensive for active buybacks. The execution of this will depend on our 10b5 plans and related factors. We view share repurchases as an effective strategy for managing our capital structure and ratios, appreciating the flexibility it offers in shaping our return on tangible common equity. We believe this could yield positive returns in terms of valuation in the future. As for M&A, our current valuation doesn't prevent us from participating, though it might be more favorable. We believe we're in a better position now compared to 3 to 6 months ago regarding our currency, and we intend to be proactive if the right opportunity arises.

Steve Retzloff, CEO

Yes, there's no doubt about that. There are two main factors that influence the M&A environment. One is the currency, which is always better when it's higher, and we are moving in that direction. The other factor is the uncertainty surrounding COVID. A year ago, we were all quite confused by that situation. As that uncertainty begins to fade, I believe this year will see an increase in discussions, and we may witness some deals occurring. We are actively engaged, and people are aware of that. We continue to have conversations in our region.

Operator, Operator

Our next question comes from Matt Olney with Stephens Inc.

Matt Olney, Analyst

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 costs will be comparable to the pressure on the core loan yield?

Paul Egge, CFO

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.

Steve Retzloff, CEO

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.

Matt Olney, Analyst

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?

Paul Egge, CFO

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

Steve Retzloff, CEO

Slightly over $33, yes.

Matt Olney, Analyst

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?

Paul Egge, CFO

I want to emphasize the importance of scale and its advantages. We clearly see its impact in the current interest rate situation and the potential effects on our revenue structure from banks. Achieving cost savings through scale is a significant focus for us. Additionally, we believe that expanding our diversity of income sources to increase noninterest income can greatly contribute to developing a more robust and varied revenue stream.

Steve Retzloff, CEO

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.

Matt Olney, Analyst

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?

Steve Retzloff, CEO

Ray, do you want to cover that in detail?

Ray Vitulli, President and CEO of Allegiance Bank

Yes, of course, Matt. The total amounts to about $16 million, with part of that being nonaccrual. This involved a small number of loans, all of which had already been identified as either watch-list credits or in worse condition. We felt it was appropriate and proactive to take this action. It was a prudent decision for those loans, and whether we do this again in the future will depend on a case-by-case assessment of the situation with these problem credits.

Matt Olney, Analyst

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

Ray Vitulli, President and CEO of Allegiance Bank

It was actually pretty... 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.

Paul Egge, CFO

Think about 10% or so.

Steve Retzloff, CEO

Yes.

Operator, Operator

Our next question comes from David Feaster with Raymond James.

David Feaster, Analyst

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.

Ray Vitulli, President and CEO of Allegiance Bank

Yes, we monitor the distribution of our customer base, both new and existing. The $310 million figure represents a 60-40 split between existing and new customers. However, some new customers from the PPP program may currently be classified as existing, which complicates the categorization. While our existing customer share is substantial, it's worth reassessing to clarify how many truly fall under the new category. We are making significant progress and forming relationships with those customers we acquired through PPP. Of the 6,000 PPP loans we issued, over half were to new clients who are now generating new business on the treasury side. Our onboarding rate for treasury in 2020 was double what it was in 2019. We’re also receiving new loan requests from these customers, which gives us confidence in converting them into permanent clients. The $310 million figure reflects a positive trend of growth and expansion, indicating that we are gaining market share and experiencing significant growth.

Operator, Operator

We are now showing no further questions at this time. I would now like to turn the call back over to Steve Retzloff for any further remarks.

Steve Retzloff, CEO

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.

Operator, Operator

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