Earnings Call Transcript
Stellar Bancorp, Inc. (STEL)
Earnings Call Transcript - STEL Q3 2020
Operator, Operator
Ladies and gentlemen, thank you for standing by. And welcome to the Third Quarter 2020 Allegiance Bancshares, Inc. 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. As a reminder, this call is being recorded. I would now like to hand the conference over to your host. Ms. Courtney Theriot. Ma'am, you may begin.
Courtney Theriot, Host
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
Thanks, Courtney, and we welcome all of you to our third quarter conference call. Thank you for your attendance. This is our third conference call since the pandemic and associated economic impact interrupted the nation's extended recovery from the Great Recession. Otherwise, everyone originally anticipated that the virus, at least as it relates to business interruptions, would have been in the rear-view mirror by now. We're all receiving forecasts that a full recovery will likely extend well into 2021, with some segments experiencing even further delay. Allegiance Bank has played our role to the fullest extent possible as a community bank, as we not only supported our pre-existing customers, but extended a helping hand to over 3,200 small businesses in our region through the PPP program who were not our customers. In fact, though we have an approximate 1.5% deposit market share in the Houston MSA, we completed over 7% of the region's PPP loan advances. We continue to work closely with all of these customers through the forgiveness phase, where our customer-facing Portal was open during the third quarter, with some forgiveness applications already being submitted by September 30. Additionally, our customers are hearing from our bankers as we reached out to virtually all of them in late Q3. This extensive reach was not only constructive for our ongoing loan grading process, but further exemplifies our value-added, one customer at a time approach to building relationships. We are left with an optimistic outlook for the recovery of our customer base while remaining cautious and prepared for stress scenarios. Though we have an active central marketing and PR department, it is every employee, every lender who delivers our greatest PR impact. We are proud of our bankers and, like our customers, are so very appreciative of their selfless efforts. To this point, we have not only received recognition as a top place to work but have recently been named as a top 10 finalist for the National Association of Corporate Directors NXT award for our commitment to diversity, equity, and inclusion. We believe our culture and super community bank strategy are key driving contributors to our past and future growth. We are committed to continuing our strong performance with an unending focus toward continuous improvement of customer and employee experiences that will build excellent long-term value for our shareholders. Our record third quarter results reflect our ongoing progress and disciplined strategies as we ended the quarter with record earnings per share, very low net charge-offs, strong positive growth, and stronger than ever capital allowance and liquidity positions. These earning power improvements are due to meaningfully growing our earning assets while maintaining the strength of our net interest margin and holding the line on non-interest expenses. We believe that our performance and balance sheet well-positioned us, as we remain cautiously optimistic given the ongoing uncertainties. I'll close my remarks emphasizing that Allegiance Bank is clearly more nimble than ever regarding business continuity. We are accelerating our shift to more paperless and efficient processes and service deliveries and are better positioned than ever to achieve our objective of organically driven market share growth. 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 up for questions.
Ray Vitulli, President & CEO of Allegiance Bank
Thanks, Steve. During the third quarter, our bankers continued their outreach efforts to our borrowing customers to get updates on financial conditions and perspectives on how the pandemic is affecting their industries, and to further develop the relationships with our new customers as a result of our outsized PPP efforts. The scope of this outreach resulted in contact with customers representing $3.6 billion in loans, or 79% of our funded loan portfolio. In addition to the outreach made by our bankers during the quarter, we saw a nice rebound in new loan originations, continued growth in new treasury customers as a result of the PPP, solid core deposit growth, the reopening of our lobbies for most of our bank offices, and the launch of a first-class PPP loan forgiveness platform, with subject matter experts available to guide our customers through the process, all while being prepared for two named storms that were headed our direction. Our bankers have exhibited an extraordinary commitment to getting things done and serving our customers, with many also navigating the challenges of the pandemic at home, including concerns about school reopenings, childcare needs, and taking care of their families. The execution of our business continuity plan has now become a seamless process with minimal disruption to how we conduct business. Whether during the pandemic or storm threats, we have the ability, technology, and expertise to run the bank as if we were working entirely on premise. We have served customers through our drive-throughs and by appointment since COVID was declared a pandemic. We have reopened 21 of our 28 bank offices to full lobby service and continue to do so when appropriate, following state and county guidelines. Last quarter, we announced the opening of our 28th bank office located in the Storage East end of Houston. This bank office serves a growing and vibrant community, and even with the pandemic, there's energy and excitement for what we believe will be a flagship location. We continue to look for opportunities to further expand our franchise and ensure our existing footprint is optimal for the communities we serve. As a result, earlier this month, we announced the permanent closing of our Anton office located in northwest Houston, an area where we have other Allegiance offices nearby to serve our customers. In terms of PPP, we are very pleased with our loan results and the impact of our efforts on the eastern region. As of September 30, we funded 6,334 loans totaling $710.2 million, affecting more than 60,000 jobs. Our approach to provide PPP loans to both existing customers and new customers has further strengthened our market presence. We are now executing the forgiveness process of PPP and working with our customers to complete the appropriate forgiveness application for further submission to the SBA. While we were pleased with the recent announcement of the simple forgiveness application for loans up to $50,000, we're hopeful additional legislation will provide for an increased threshold to $150,000. Of all PPP loans originated, 61% are $50,000 or less, and 83% are $150,000 or less in terms of the number of loans. To date, we have received forgiveness applications for 384 loans totaling $160 million; of those, 221 have been submitted to the SBA, with two having been approved and funds received. Speaking of the SBA, we were extremely pleased with where we stand in several categories of the recently published September 30 SBA fiscal year-end report. In the Houston district, Allegiance Bank ranked third in terms of SBA dollars funded and fifth in terms of the number of SBA loans originated. These results include both PPP and 7(a) loans and reflect our continued market share gains and prominence as a leader in providing SBA solutions to business owners in the Houston region. In addition to helping our customers through the PPP process, we also provided assistance to eligible borrowers with payment deferrals on outstanding loan balances of $1.15 billion, or 30% of core loans through September 30. Of this amount, approximately $240 million, or about 6% of core loans, remained on deferral at the end of the third quarter. I will now go over our quarterly results. Total core loans, which exclude PPP loans and mortgage warehouse lines, ended the third quarter at $3.88 billion, a slight decrease of $5.8 million during the quarter. During the third quarter, our staff and lending team booked $280 million of new core loans that funded to a level of $181 million by September 30, compared to the second quarter when $234 million of new loans were generated, which funded to a level of $148 million by June 30. Paid-off core loans were $181 million in the third quarter compared to $171 million in the second quarter and $204 million in the first quarter of 2020. The average size of the new organic quarter loans generated during the third quarter was $370,000 with an average fund balance of $240,000, which once again reflects our continued focus on building a diverse and granular loan portfolio. The average size of all funded loans ended the quarter at $343,000. Regarding interest rates on loans, based on the total loan amount, the weighted average interest rate charged on our new third quarter core loans was 4.63%, which is below the second quarter 2020 weighted average rate of 4.84% and the first quarter 2020 weighted average rate of 5.11%. The $181 million of paid-off core loans during the quarter had a weighted average rate of 5.33%. Carried core loans experienced advances of $96 million at a weighted average rate of 5.19% and paydowns of $104 million, which had a weighted average rate of 5.03%. Overall, the period-end weighted average rate charged on our funded core loans decreased by 8 basis points, ending the quarter at 5.16% compared to 5.24% as of June 30, 2020. The mix of new loan production based on third quarter funded levels was represented by the following four commercial categories: owner-occupied CRE, non-owner-occupied CRE, commercial term loans, and commercial working capital loans. These four commercial categories represented 73% of the new funded production for the third quarter compared to 56% for the second quarter of 2020, indicating our ongoing commercial concentration. In terms of our overall loan portfolio, the loan type mix was little changed on a linked quarter basis. The slide deck posted on our website provides additional 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 the COVID pandemic: our oil and gas portfolio, our hotel portfolio, and our restaurant and bar portfolio. Despite being a Houston region bank, our overall exposure to oil and gas is largely indirect, as we do not have any reserve-based loans. However, we have defined the category to be any borrower that operates in or directly supports the upstream, midstream, or downstream segments of the industry. As of September 30, this category is approximately 1.6% of our funded loans, or $74 million, of which $27.6 million was commercial real estate and $44.4 million was C&I. Of the $27.6 million in CRE, the weighted average LTV for the portfolio was 55.1%. A 20% stress test of the most recent appraised value, plus 6% marketing expenses, resulted in an overall collateral deficiency of approximately $397,000, increasing to $1.2 million at a 30% stress test. Regarding our hotel portfolio, as of September 30, we had $134 million of hotel loans, of which $124.6 million was commercial real estate, $10.8 million was construction and development, and $2.9 million was in C&I. Of the $124.6 million in CRE, the weighted average LTV for the portfolio was 59.4%. A 20% stress test of the most recent appraised value plus 6% in marketing resulted in an overall collateral deficiency of approximately $1 million, increasing to $5.4 million at a 30% stress test. Regarding our restaurant and bar portfolio, as of September 30, we had $117 million of restaurant and bar loans, of which $82 million was commercial real estate, $3.5 million was construction and development, and $31.5 million was in C&I. For the $82 million in CRE, the weighted average LTV for the portfolio was 59.9%. A 20% stress test of the most recent appraised value plus 6% in marketing resulted in an overall collateral deficiency of approximately $1.5 million, increasing to $5.6 million at a 30% stress test. Asset quality at quarter-end remained in a manageable position. The level of net charge-offs experienced during the quarter was $291,000 for an annualized rate of 4 basis points. Non-performing assets, including both non-accrual loans and ORE, ended the third quarter similar to the second quarter, increasing slightly from 77 to 78 basis points of total assets. Non-accrual loans increased a net of $4.7 million during the quarter, from $33.2 million to $37.9 million, primarily due to $7.1 million in new non-accrual loans, including a $3 million land loan that has matured and is pending financing from a different bank. The additional $4.1 million increase in non-accrual loans was from 16 relationships, three of which totaled $2.7 million, and the remaining $1.4 million was from 13 smaller relationships. These downgrades were partially offset by $1.9 million in payoffs and payments and $421,000 in charge-offs. ORE decreased to $8.9 million during the quarter, compared to $11.8 million for the second quarter, primarily due to write-downs of $1.9 million. The $8.9 million in ORE consists of four properties, with the largest being a $4.4 million commercial real estate property. The second largest is a $3.7 million industrial commercial real estate property, and the third largest is a $576,000 residential property. The remaining property is in Beaumont. These properties are actively being marketed, with the two largest properties in contract negotiations for potential sale. Generally, we believe our non-performing assets are well collateralized. In terms of our broader watch list, our classified loans as a percentage of total loans increased to 2.4% of total loans as of September 30, compared to 2.06% as of June 30. Criticized loans increased to 5.16% at September 30, from 3.2% at June 30. Specific reserves for impaired loans ended the quarter at 15.7% compared to 12.1% at June 30. On the deposit front, we saw an increase in total deposits in the third quarter by $216.7 million from the second quarter and up $1.02 billion over the year-ago quarter. The increase during the third quarter was primarily in money market and savings accounts. The increase over the prior year was primarily in the non-interest bearing deposit category, as a result of new accounts associated with PPP customers, as well as higher balances in our carried accounts. Non-interest bearing deposits increased by $18.6 million during the third quarter and were up $544.9 million over the year-ago quarter. With that, our non-interest bearing deposits to total deposit ratio was 36% for September 30, 2020, compared to 37.3% for June 30, 2020, and 31.5% for the year-ago quarter. We seek to continue our track record of keeping this ratio at or above 30%. With regards to the pandemic and COVID statistics for the Houston area, as of October 26, Harris County reported 158,758 total confirmed cases and 2,190 total deaths. Contrary to the trends in the broader U.S., Harris County is experiencing both the percent of positive tests and ICU beds occupied by COVID patients at levels well below the peak highs in July. While our trends are headed in the right direction, we remain highly focused on health and safety. During the quarter, Governor Abbott increased the capacity limit for most retail businesses from 50% to 75%. We remain cautiously optimistic about progress towards economic recovery in the Houston region while staying focused on our borrower profile of small to medium-sized businesses and the resulting granular portfolio with diversification across industries. I now turn it over to our CFO, Paul.
Paul Egge, CFO
Thanks, Ray. We're very pleased to report record Q3 net income of $16.2 million, or $0.79 per diluted share, up from $9.9 million, $0.48 per diluted share in the second quarter, and up relative to the $12 million, or $0.57 per diluted share posted in the third quarter of 2019. Adjusting for that $1.9 million in OREO write-down, net income would have been $17.6 million, or $0.86 per diluted share in the quarter. Pretax pre-provision income for the third quarter was $21.2 million, compared to $22.6 million in the second quarter and $17.7 million for the year-ago quarter. Adjusting for that $1.9 million in OREO write-down, pretax pre-provision income would have been a record $23 million for the third quarter. Net interest income was the key driver of our pretax pre-provision earnings power in the quarter, where we saw net interest income increase by $1.1 million, or 2.1%, to $51.9 million from $50.8 million in the second quarter, primarily due to lower interest expense and the impact of additional income from our larger securities portfolio in the quarter. Total interest expense decreased by $703,000, while total interest income increased by $359,000 during the third quarter. The impact of acquisition accounting accretion continued to decrease in the third quarter. Accretion increased loan income by $516,000 and reduced CD expense by $82,000 for a total positive effect on net interest income of $598,000 during the third quarter, versus the total positive impact of $666,000 in the second quarter and $2 million in the year-ago quarter. This quarter's accretion was $3 million in the loan mark and $281,000 in CD mark. The yield on loans in the third quarter was 4.89%, impacted by both the full quarter impact of average PPP loan balances in our average earnings assets and lower purchase accounting accretion as compared to the previous quarters, which were 5.13% for the second quarter and 5.73% for the year-ago quarter. Adjusting for acquisition accretion, yield on loans would have been 4.84% for the third quarter, 5.8% in the second quarter, compared to 5.53% in the year-ago quarter. Excluding PPP loans, yield on loans would have been 5.25% in the third quarter versus 5.44% in the second quarter. The total yield on interest-earning assets was 4.58% for the third quarter, down from 4.83% for the second quarter and 5.43% for the year-ago quarter, reflecting the aforementioned effect of PPP balances in lower accretion income, as well as higher average securities balances in the earning assets. Excluding PPP loans, total yield on earning assets would have been 4.85% for the third quarter versus 5.07% in the second quarter. Our cost of interest-bearing liabilities continued to decrease in the third quarter to 105 basis points from 119 basis points in the second quarter and 188 basis points in the year-ago quarter. The overall cost of funds for the third quarter was 69 basis points versus the 79 basis points posted in the second quarter. We are pleased to deliver lower cost of funds, and we expect to continue to improve our funding costs in the current industry environment. Notwithstanding such significant average balance mix shift towards lower yielding PPP loans and securities, we're really proud to have maintained a solid tax-equivalent net interest margin of 3.95% in the third quarter, compared to 4.1% in the second quarter and 4.16% in the year-ago quarter. Excluding PPP loans and related revenue, net interest margin would have been 4.12% for the third quarter. Going forward, we feel well-positioned to maintain a strong net interest margin as we seek to further optimize our funding mix and maintain discipline on loan pricing. Our non-interest income increased to $1.9 million for the third quarter from $1.6 million in the second quarter. This was largely due to differences in gains and losses on the sale of securities and OREO between the quarters. Otherwise, non-interest income was stable quarter-over-quarter. Total non-interest expenses for the third quarter were $32.6 million, compared to $29.7 million in the second quarter. The difference is largely attributable to the $1.9 million of write-downs on other real estate loans in Q3, but we should also note that Q2 featured deferred costs related to PPP loans recorded in the second quarter that lowered the salary and benefits line by $1.6 million. While on the topic of PPP loans and income statement impact, we should note that we expect to recognize approximately $21 million in aggregate origination fee income and approximately $1.4 million in remaining aggregate deferred origination costs into the yield over the life of the individual PPP loans. As we experience SBA forgiveness or early payoff on individual loans, we look forward to accelerating the recognition of the remaining origination fee income and costs. The efficiency ratio for the third quarter was 60.38%, compared to the 56.92% we posted for the second quarter and 62.88% for the prior year quarter. Note that if you were to adjust the third quarter efficiency ratio for the OREO write-down, it would have been 57.13%. The provision for loan losses was $1.3 million for the third quarter, compared to the provision we took in the second quarter of $10.7 million. Our year-to-date provisions total $23 million, bringing our allowance for loan losses to $48.7 million, representing 106 basis points on total loans. If you were to include the $3 million in loans marked remaining on acquired loans and exclude the PPP loan balances, the ending allowance plus loan mark to core loans would be 133 basis points. As we mentioned in the first quarter call, we elected to take the relief that came with the CARES Act, and we deferred the implementation of CECL, so the reported allowance is under the current incurred standard. Bottom line, our third quarter ROAA and our ROCE metrics came to 1.09% and 12.72% respectively, and that's with the OREO write-downs in the quarter. The quarter-end tangible book value per share was $24.97, which marks an increase of approximately 10.4% since year-end 2019, which we're very proud of, notwithstanding the challenges posed in 2020 so far. While COVID brings about significant economic uncertainties, we're buoyed by our strong margin, recurring earnings power, and capital position, as well as our prospects for accelerated revenue recognition for PPP forgiveness in the next couple of quarters. All in all, we feel well positioned as we navigate the current economic environment. We feel confident about our ability to maintain a strong capital position and our dividend. To that end, our board of directors declared a $0.10 dividend on October 22. I will now turn the call back over to Steve.
Steve Retzloff, CEO
Yeah, thanks, Paul. Really great numbers. With that, I will now turn the call over to the operator to open the line for questions.
Operator, Operator
Thank you. And our first question comes from Brad Milsaps from Piper Sandler. Your line is open.
Brad Milsaps, Analyst
Hey, good morning, guys.
Steve Retzloff, CEO
Good morning, Brad.
Brad Milsaps, Analyst
Appreciate all the color and detail as always. Wanted to maybe start with the net interest margin rate. It sounds like you're starting to see a little bit more pressure on loan yields. Understand you still got some tailwind on the positive side of things, but just kind of taken all together, would you guys, to the extent you continue to grow loans, expect probably not on balance which you saw in the third quarter. But just incremental, pressure from here, as you kind of move into 2021?
Paul Egge, CFO
Hey, Brad. I think we might experience a bit more pressure as we approach what could be a floor. However, there is still competitive pressure in the market. I noticed we dropped 21 basis points quarter to quarter on new loans and the rate on new loans booked. That gap did narrow slightly compared to the previous quarter. So ideally, with the competition, the pressure may not be as significant, but we are still keeping our deals competitive, even if we might face a bit more pressure. Nonetheless, we were quite satisfied with the volume of new loan originations for the quarter; it represented a nice rebound.
Steve Retzloff, CEO
A lot of the delta in NIM from the second quarter to third quarter was really structural in nature. It's largely a function of kind of that the new normal, I guess you could say, with the earning asset mix. We did see signs of stabilization during the quarter, but there is potential for stress. The levers that will drive kind of the forward NIM profile is going to be the extent to which core loan growth can accelerate to change and get us back to a similar earning asset mix or closer to kind of the prior normal from the new normal. But as we're feeling and the rest of the industry is feeling, I guess we're going to get the test and whether there can be too much of a good thing as it relates to excess liquidity on our balance sheet. We really saw that stair step move here in this quarter, but we hope we're doing everything we can to protect our margin, notwithstanding pressures that are out there.
Paul Egge, CFO
That said, Steve, the weighted average rate in the third quarter of 4.63% is impressive compared to the numbers we're hearing from others, and we achieved $380 million from that. Thanks to our detailed approach and focus, we're still managing to secure relatively strong rates.
Brad Milsaps, Analyst
Yeah, just curious. That was sort of my follow up is raised, or Steve, is there sort of a line in the sand that you draw on? What you guys do is pretty unique. Obviously, you want to get paid for the risk you're taking with some of the smaller credits. Is there a level that you guys sort of won't go below, or at this point you're just kind of taking what's out there in the market?
Steve Retzloff, CEO
We're pretty disciplined with our pricing model on the rates we offer. We're seeing some three-handle, even some two-handle type rates out there. We're probably not going to play in that game, especially for some of these beyond five-year fixed-rate terms. So kind of the blocking and tackling type winning that we do, I think should still be in this general range. If someone's coming in with one of these, 2.85% or something, we're probably not going to have a lot of discussions about it.
Paul Egge, CFO
Yeah, it's a risk-return decisioning as well. We always look at risk when pricing out loans.
Brad Milsaps, Analyst
Got it. And just continuing with the margin call, Paul, just kind of a housekeeping item. I tried to back into it, but we're the fees that you recognize with PPP this quarter, right just under $3 million, is that the right number? And if I understand correctly, you still have $21 million yet to come?
Paul Egge, CFO
It's probably closer to $4 million. And if 21 million you got to net out, I think around $1 million of deferred costs. So what's left, net of deferred costs, is just under $20 million to recognize over the remaining life of those loans unless we get a reason to accelerate.
Brad Milsaps, Analyst
And the $4 million would be inclusive of the 1% coupon, right?
Paul Egge, CFO
Yes.
Brad Milsaps, Analyst
Okay. And then just finally, on credit. You guys do a lot of SBA lending. I'm curious, if you guys have kind of what percentage of the portfolio is maybe coming off of that six-month period where the SBA was paying, making payments on behalf of those customers and sort of how that relates to maybe some of your deferral numbers and how you think about provisioning, if there is any impact at all going forward.
Steve Retzloff, CEO
Thank you, Brad. The majority of our SBA portfolio is currently based on the payments being received through September and October. We've been in communication with our customers and our state portfolio, and we are observing some requests for deferment in that portion. Overall, considering the support from the payments, PPP funds, idle funds, and the deferment options provided by the bank, the SBA portfolio is performing relatively well.
Brad Milsaps, Analyst
Okay, great, thanks.
Operator, Operator
Thank you. And our next question comes from Matt Olney from Stephens. Your line is open.
Matthew Olney, Analyst
The level of operating expenses and the run rate from here? Thanks.
Paul Egge, CFO
Certainly, reasonable guidance would be to take that Q3 number and adjust against OREO expenses. There's some seasonality and some modest growth to be expected from that. But we're working to hold the line as much as we can on expenses, really just cognizant of the challenge revenue environment.
Matthew Olney, Analyst
Yeah, that was my follow-up question was just to kind of bigger picture on expenses and the opportunities you see there to cut back on expenses. I think you mentioned the branch closing. I didn't know if there were more opportunities there. And then are you still committed to the new hiring that you've been doing for a number of years? Thanks.
Okan Akin, Chief Risk Officer
I'll touch on the branch and the hirings, Matt. By near term, as far as the further consolidation, I don't see much near term. We constantly have to make sure our footprint is optimal, both in terms of consolidation and in the long-term, for other markets where we do not have a presence. As for hiring, it did slow down a little bit in 2020. But through September, we had six producers plus two from internal promotions for officers to the lender development program. We're having meetings throughout regular meetings with potential talent that we're considering. It definitely slowed down. It's not so much of a target. It’s just when we have strategic opportunities for talent, we will make that investment.
Steve Retzloff, CEO
We want to emphasize too that we have some embedded capacity with our lending staff at the present time as well to help drive further growth. Some of the younger ones, some of the newer entries into the company still have room to certainly build their portfolios. So there's definitely capacity there.
Paul Egge, CFO
Okan probably has some comment on that.
Okan Akin, Chief Risk Officer
We have ongoing initiatives to enhance operational efficiency and productivity since the start of the year. We've implemented our electronic deposit origination and loan origination solutions, which saw great acceptance from our employees and customers during the PPP funding. We expect these solutions to be fully utilized in the early part of 2021, leading to significant improvements in these areas. Additionally, we are forming a solutions team under our CIO's office that will focus on operational efficiency and productivity gains throughout 2021. We also anticipate some cost controls arising from these initiatives.
Matthew Olney, Analyst
Right. And then I guess switching gears, Steve and Ray both mentioned the success of the PPP program for the bank, and a big chunk of the originations went to new customers. How should we think about converting those new customers into loan growth outside of PPP in the future?
Steve Retzloff, CEO
I wanted to just say as fast and as early as possible, that's how we should think about it. We are all over it. We’re evaluating those customers in terms of our outreach. Our treasury management group is getting in touch with them through the lenders. Ray can give you additional detail, but we're definitely seeing that as a great opportunity. I mean, it's really one of our strongest opportunities to grow organically and kind of move our loan to deposit ratio — core loan to deposit ratio back up to the levels that we like to see.
Ray Vitulli, President & CEO of Allegiance Bank
Yeah, Matt, I would just say that where it starts on the conversion is going to be on the deposit side, and then that will manifest into loan growth fees. We're working to convert those customers to full business customers, starting with Treasury. When we look at our numbers of onboarding, we've had a really solid percentage of onboarding that includes new PPP customers every quarter since the pandemic. So our bankers are in front of those PPP customers, and there will be loans coming from that. The kind of the first step is getting them on the deposit side.
Steve Retzloff, CEO
Even the testimonials from those customers are valuable as they say they were able to get the response they were looking for until they turned to Allegiance. Those testimonials are actually good referral sources for us.
Matthew Olney, Analyst
Okay, great. That's all for me. Thanks, guys.
Operator, Operator
Thank you. Our next question comes from David Feaster from Raymond James. Your line is open.
David Feaster, Analyst
Hey, good morning, everybody.
Steve Retzloff, CEO
Hey, David.
David Feaster, Analyst
Deposit growth has been tremendous. I'm just curious how much of this has been from the PPP dollars and how much you estimate might still be in there? And then how much might be just from the treasury management team or clients holding cash and what's the early read on the fourth quarter? And how sticky do you think these deposits will be as we go through 2021?
Steve Retzloff, CEO
So, David, on the deposits, when we look at the deposits that were brand new related to PPP, because we can certainly track those, which is a little bit different from PPP that were existing customers. Something like 20% of those balances might still be here, and that's about half of what the PPP volume was with the new customer. So most of our deposit growth has been replacing and then in excess of some of the PPP funds that have come out of the bank. If that helps you.
David Feaster, Analyst
Okay, that's helpful. And then I guess, how do you think about the reserve going forward? You grew another two-basis points ex-PPP? I guess do you think we're there in terms of reserve builds maybe in the fourth quarter? What should we expect kind of a true-up as you implement CECL? Or does your model pretty much already contemplate that through the Q factors?
Paul Egge, CFO
Good question, David. I'd say, reflecting on CECL, we've got a pretty significant reserve build thus far this year, totaling around $20 million, when you go point to point. We will be operating under CECL in the fourth quarter, and that will also be taking into account our day one adjustment at 1/1/2020. You guys recall, we gave guidance as to around what that was relative to our 12/31 number; it's about a third or so. Really, when you take the totality of where we are, I don't see huge potential for kind of a true-up or catch-up, so to speak. It's hard to kind of predict what our 12/31 model is going to say here at the 29th to 30th of October. Ultimately, I don't see there being a huge true-up, but we're going to go based on our model methodology as of 12/31. It will be our first run, I guess second official run with CECL.
David Feaster, Analyst
Okay, got it. And then maybe just have a high-level question. Just as I step back, it seems to me like this environment really reinforces kind of your structure and your business model. I'm just curious, how do you think about your posture here? Maybe what lessons have you learned that can help you position even better going forward? And what initiatives do you think are really going to allow you to outperform your peers going forward?
Steve Retzloff, CEO
I'll let probably everybody chime in here, David. What we're extremely excited about is this market share opportunity that we have through PPP. We are well positioned with both our lending staff and those new customers that we're converting over for PPP, and our brand awareness in the market is growing every day. We talked about us being third in number of PPP loans. We are seeing lending and deposit market share metrics that are third in the MSA, which is mostly controlled by out-of-state banks, large banks. We think there's tremendous opportunity there. We're hitting it hard, and we're extremely proud of where we sit and where we're positioned.
Ray Vitulli, President & CEO of Allegiance Bank
And I might add, it's really hard for us to forecast how the long-term story is going to play out, but we really do feel as well positioned as anyone in our market to get more than our fair share of whatever loan growth there is out there. And that’s between the momentum we have and the embedded capacity that we referenced in our team.
Steve Retzloff, CEO
Yeah, I’m a little bit more boring. I think the guys in our office see me that way as well, but we’re at 80%, roughly, core loans to deposits. We need to grow that a little bit, but any incremental gains there over the next year are going to just accrue right to the bottom as we control our expenses, continue to grow the bank's footings, and do the right things with regard to capital management as well. It’s a little here, a little there, talk here, tuck there, and we’re going to improve our overall performance. That is a boring answer, but like Ray said, I think our brand is really taking off. It’s been 13 years now; we just celebrated our 13th birthday. The name Allegiance Bank is getting better known every day, particularly with the response that we gave to the PPP and the small business customer. So we’re pretty encouraged.
David Feaster, Analyst
Okay, that's great. Thanks, guys.
Operator, Operator
And our next question comes from John Rodis from Janney, Montgomery. Your line is open.
John Rodis, Analyst
Good morning, guys. Thanks for all the color.
Steve Retzloff, CEO
Good morning, John. First-time caller.
John Rodis, Analyst
Interesting times for sure. Just most of my questions were asked and answered, but just one question on the securities portfolio. You guys continue to grow that during the quarter. And I'm sure it's a function of what's going on in the loan portfolio and deposits. But how should we think about the size of that portfolio going forward?
Paul Egge, CFO
We appreciate the current size of our securities portfolio and don't intend to significantly increase it from this point. Any growth we see will mainly be influenced by our substantial assets and liquidity. Ideally, we prefer to allocate our excess liquidity into loans. We believe the current size of our securities portfolio is optimal. However, if we continue to have an excess of liquidity, we may start to expand that portfolio, although that is not our preferred approach. The main takeaway from the recent customer acquisition opportunities, particularly from PPP, has resulted more in increased deposits rather than loans, which is critical as customer acquisition remains a priority. Currently, this is reflected in higher deposits, whereas two years ago, we saw that in excess loans.
Steve Retzloff, CEO
Yet, if I say that the pressure on investment yield in that excess liquidity does embolden us to really be disciplined when it comes to deposit pricing. So, our team is well aware of those investment yields.
Ray Vitulli, President & CEO of Allegiance Bank
That's a good point. We do have a ways to go as it relates to kind of improving our cost of funds. And we're being pretty assertive about that, of course not being mindful not to upset the apple cart. But we're driving incremental improvement.
John Rodis, Analyst
Sounds good. Thanks, guys. And just one other question, just on the topic of M&A. Just any thoughts there? Have you had many discussions, what are you seeing in the market today?
Ray Vitulli, President & CEO of Allegiance Bank
We maintain regular communication with local bankers and other companies in the area. Many solid banks have been in a wait-and-see mode during the pandemic due to the uncertainty. I believe we might begin to see some activity in 2021, with conversations possibly picking up a bit late this year or early next year, but there's nothing to announce at this time.
Steve Retzloff, CEO
It does take two to tango. So it will be a function of how that works, not only for folks like us who are potential buyers, but also the people on the other side.
Ray Vitulli, President & CEO of Allegiance Bank
And I'd just say if there are any of our smaller brothers listening today, we love them.
John Rodis, Analyst
Sounds good, guys. Thank you.
Steve Retzloff, CEO
Great.
Operator, Operator
Thank you. And our next question comes from Matthew Olney with Stephens. Your line is open.
Matthew Olney, Analyst
Yeah guys. Just a follow-up on the OREO write down that you guys had this quarter. Any color you can provide about which property that was? Any color at all. Thanks.
Ray Vitulli, President & CEO of Allegiance Bank
Not a lot of color. I mean, it's just a process. It's a discipline on our part to mark our ORE to current market valuations. We do have two large pieces, which is a vast majority of our ORE. We do have some negotiations underway right now. We're optimistic about being able to reduce that ORE balance significantly. But, it hasn't happened yet. The more we're with those properties and more aware of the proper valuation, things change. The world changes around this; one has some COVID-related pressure on it because of the nature of the property. The other has been on the books for a while; it kind of had a little bit of an oil and gas history to it. We think we’re at the right level right now on those properties. Experience teaches you what those values should be.
Matthew Olney, Analyst
Okay. And then any update on the hotel loan that's on non-accrual? I think it was around $7 million in Q3. I think with a similar amount last quarter as well.
Steve Retzloff, CEO
No update to that. Like a lot of Houston, the occupancy and RevPAR is still challenged. We feel like we're properly reserved on that though. We keep watching it and hoping for the best for that particular property. More broadly, we are seeing a little bit of RevPAR increase across the board, although it continues to be challenging in this market kind of more broadly. Some of our properties are doing rather well, but that had a little surge over the summer in Galveston and a couple of other locations. Simply speaking, the experts tell us that it's going to be a gradual improvement through '21 and even into '22 before the hotels get better.
Matthew Olney, Analyst
Okay. And you still have your script in front of you from prepared remarks, but the level of criticized loans, I want to make sure I got that right. I wrote down the level of September 30 was 5.16%, up from 3.20%. Did I get those numbers right?
Steve Retzloff, CEO
I got it here. Page 10. So you say criticized, Matt?
Matthew Olney, Analyst
Criticized? Yes.
Steve Retzloff, CEO
Yes, 5.16% from 3.20%.
Matthew Olney, Analyst
Got it. And as you look at that linked quarter change, any notable takeaways as far as types of credits, or is it mostly this COVID hotspots we were talking about? You guys have been with oil, gas, hotels, and restaurants.
Okan Akin, Chief Risk Officer
So this is Okan. In the third quarter, the largest migration we saw in our portfolio is in the hotel portfolio, which impacted these numbers significantly. Having said that, that is the overall portfolio. When you look into hotels, we have 32 loans currently under deferment out of 81 hotels. Our conservative underwriting with hotel loans is putting us at an average weighted LTV at 59%. We're watching this portfolio closely. But that's where we're seeing the most impact on our criticized loans.
Steve Retzloff, CEO
The hotel industry experienced job losses, but the restaurant industry is showing signs of recovery, with Houston data indicating that 60% of the jobs lost in that sector have been regained. Overall, we are feeling relatively positive about both industries at this time.
Matthew Olney, Analyst
Okay. And then, Paul, I think the tax rate was a little bit higher in the third quarter. What's the outlook on the effective tax rate?
Paul Egge, CFO
It's going to get a little bit with respect to some of our tax-preferential securities have grown, but I think it's something in the '19 handle as a more normalized number.
Matthew Olney, Analyst
Okay, guys. Thanks for all your help. Appreciate it.
Steve Retzloff, CEO
All right. Thanks, Matt.
Operator, Operator
Thank you. And that does conclude our question and answer session for today's conference. I'd like to turn the call back over to Steve Retzloff for any closing remarks.
Steve Retzloff, CEO
Just want to continue to thank and appreciate everybody for your time and your interest in Allegiance. We look forward to speaking to you next quarter. So thank you very much. Appreciate it.
Operator, Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect.