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Aqua Bounty Technologies Inc. (Reg S) (NASDAQ:ABTX)
Q3 2018 Earnings Conference Call
Oct. 25, 2018 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the third-quarter 2018 Allegiance Bancshares earnings call. [Operator instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to Ms. Courtney Theriot.

Ma'am, you may begin.

Courtney Theriot -- Senior Vice President-Manager of Financial Reporting

Thank you, operator, and thank you all who have joined our call today. This morning's earnings call will be led by George Martinez, chairman and CEO; Steve Retzloff, president; Ray Vitulli, executive vice president and president of Allegiance Bank; and Paul Egge, executive vice president and CFO. 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. Reconciliations to non-GAAP financial measures that are discussed are presented in accordance to GAAP in our earnings release. 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 statement.

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 email you a copy. We also have provided an investor relat -- 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 will now turn the call over to our CEO George Martinez.

George Martinez -- Chairman and Chief Executive Officer

Thank you, Courtney, and we welcome all of you to our third-quarter earnings call. I'm extremely pleased to report record earnings of $8.9 million and diluted earnings per share of $0.65, reflecting the continued execution of our core strategies. Our third-quarter results are highlighted by core loan growth and strong credit quality, which grow over the strong performance of Allegiance. We're very proud of the core loan growth of 14.7% annualized during this quarter, which is attributable to our very experienced dedicated lenders.

Additionally, our credit metrics continue to remain strong as evidenced by net charge-offs of only eight basis points year to date. We were also thrilled to announce the closing of the merger with Post Oak Bank on October 1st, which expands our presence in the Houston area and further defines Allegiance as Houston's largest community bank. I would like to acknowledge Roland Williams, chairman of Post Oak, and Steve Retzloff for engineering this promising union. We're also grateful to the boards of directors and to you, the shareholders of both banks, for approving the merger proposal.

We are proud to welcome the employees, customers and shareholders of Post Oak to the Allegiance family as both banks share the same commitment to superior community banking and excellent customer service. A dedicated team of employees of both banks have worked incredibly hard to get us to this point, and we look forward to complete the operational integration of our two banks during the first quarter of 2019. Now Steve will describe our results in more detail followed by Paul, who will explain some of the numbers behind Steve's narrative. Then we will open the call for questions.

Steve Retzloff -- President

Thanks, George. I also welcome everyone to our third-quarter conference call. Our organic loan growth for the quarter picked up strong momentum and continues to be granular. Our core loans, which we define as loans excluding our mortgage warehouse, increased organically during the third quarter by $84.9 million or 3.7% over core loans at June 30, 2018, which was an annualized growth rate of 14.7%.

This compares favorably to the second quarter, when core loans increased 2.6% or an annualized rate of 10.4% and to the first quarter, when annualized growth rate was 8.6%. For the trailing 12 months, core loans grew $274 million or 12.9%. Taking into account our mortgage warehouse lines, our 12-month trailing total loan growth was 10.9%. During the third quarter, our lenders booked to $240 million of new loans that funded to a level of $157 million by September 30.

This is an increase over the second quarter, when $224 million of new loans were generated, which funded to a level of $135 million in that quarter. Notably, paid-off loans decreased slightly from $102.9 million in the second quarter to $90.8 million in the third. The average size of the core loans generated during the third quarter was $359,000 committed and $250,000 funded, which reflects our continued focus on the small- to medium-sized business sector as being central to our super-community bank strategy. The weighted average interest rate charge on our new third-quarter core loans continues to improve.

This quarter, the average rate was 5.64%, which is an increase of eight basis points over the second-quarter new core loan production, which were at 5.56%. As a result of the new loans and the loan mix, excluding fees, the period-end weighted average interest rate charge on our ending portfolio of core loans reflects a steady upward trend as the quarter-end weighted average rate before accrued fees and purchase accounting increased from 5.32% as of March 31, 2018 to 5.37% as of June 30, 2018 and now is at 5.44% as of September 30, 2018. Paul will discuss the resulting portfolio yields and margins in his report. The mix of new loan production based on third-quarter funded levels was represented by the following four commercial categories; owner-occupied commercial real estate, 25.8%; non-owner-occupied commercial real estate, 12.8%; commercial term loans, 14.9%; commercial working capital, 8.3%.

These four commercial categories represented 61.8% of the new funded production compared to 55.5% for the second quarter. Loans secured by one-to-four family residential real estate contributed 16.1% as the new funded core loans, construction and development, including land loans, contributed 16.7%, and multifamily contributed 3% of the new funded core loans during the quarter. The slide deck posted on our website provides added color regarding the overall mix of loans. The mix was little changed during the quarter in terms of concentrations or average size.

Based on a variety of factors, including loss history and economic conditions, among others and the release of our remaining special Harvey reserve of $500,000, no provision for loan losses was required for the third quarter. Net charge-offs experienced during the quarter were very low at $246,000 or an annualized rate of four basis points. Year to date, net charge-offs are running at eight basis points. The bank's quarter-end asset quality position is strong and very manageable.

Nonperforming assets remained low at 56 basis points of total assets at September 30, 2018, which has remained in a consistent range for the past year. ORE and ORA declined slightly to $2 million and primarily consist of a commercial building, which is being marketed for sale. The reduction of $500,000 was due to the receipt of an insurance check on an aircraft that was totaled during a recent storm that collapsed the hangar. Nonaccrual loans increased during the quarter from $12.1 million to $14.9 million.

The change reflected $550,000 being removed from seven relationships, about $350,000 of which were upgrades and about $200,000, which were charged off. We added two relationships to the nonaccrual list, both of which are well supported by real estate collateral. We believe the collectability of the unreserved amount on our nonaccrual loans and other impaired loans as of September 30 remained quite manageable and well-collateralized. In terms of our watch list, our classified loans as a percentage of total loans remained stable at 2.26% at September 30.

Criticized loans also remained stable at 2.76% of total loans. The specific reserves for the impaired loans increased to 11.6% from 10.5% during the quarter. With WTI prices in the upper $60s to low $70s per barrel lately, the outlook for our remaining oil price-sensitive loans remains bright. We ended the quarter with oil and gas-related loans at $57.8 million, once again down from $62.4 million at June 30.

And now the category represents only 2.4% of total loans. Total deposits increased in the third quarter by $120 million, ending September 30 at $2.43 billion. For the past 12 months, total deposits increased 6.4%. The core loans to deposit ratio decreased in the quarter to 98.3% from 99.7% at June 30.

We are pleased with the consistency of the noninterest-bearing deposit ratio, ending the quarter remaining at 32.4% compared to June 30 and is up from 30.4% at March 31. During the quarter, we were successful in growing noninterest-bearing deposits by $39.1 million or nearly 5.3% from June 30. The Houston MSA obtained over 110,000 jobs in the past year. It further increased from the 12-month trailing total of 79,000 reported last quarter, 63% of the service sector position and 37% of then goods produced.

The most recently reported Purchasing Managers Index was 61.2%, which is very positive and up from 56.3% in May. Other local economic indicators, including home sales, auto sales, etc., have been solid performers. Construction appears to remain positive as building permits are up 26% for August of '18 compared to August of '17, which totaled $534 million. Houston's unemployment rate was at 4.2% in August, down from 5.1% a year earlier according to the Dallas Fed report.

The overall tone with our commercial customers remains positive, and the local economic outlook is strong. Having completed the merger with the Post Oak Bank, Allegiance now has 29 offices and is rapidly gaining recognition as being Houston's bank. Although our service and community impact has been effective, we anticipate that our favorite local bank status or reputation will expand even faster as we complete the branding changes, the systems conversion and remaining more fully on display a Houston powerhouse, particularly for the small business community. Our sector focus, internal culture and scale remains our greatest source of confidence for improved performance for the coming year.

Finally, our legacy Allegiance team has been busy this past month working alongside our newest bankers from Post -- from the Post Oak organization, and our previous suspicions are proving to be correct. These guys are indeed very talented bankers. I'll now turn it over to our CFO Paul.

Paul Egge -- Executive Vice President and Chief Financial Officer

Thanks, Steve. Third-quarter net income was $8.9 million or $0.65 per diluted share as compared to second-quarter earnings of $7.6 million or $0.55 per diluted share. Our third-quarter results reflect solid loan growth, strong credit performance and a decrease in expenses relative to the second quarter. Particularly, those second-quarter expenses related to the core system conversion and the Post Oak transaction.

That said, we did incur some noninterest expenses related to the conversion of our core banking system during the third quarter of approximately $333,000, as well as expenses related to the Post Oak transaction of about $196,000. This compares to $1.1 million in core conversion expenses and $625,000 in Post Oak M&A expenses incurred during the second quarter. On an adjusted basis, excluding the conversion- and merger-related expenses, third-quarter adjusted net income would have been approximately $9.3 million or $0.68 per diluted share. Third quarter 2018 net interest income increased to $28 million from $27.8 million in the second quarter.

Net interest income increased 3.8% from the third quarter of 2017. But I should note, last year's net interest income did not have the cost related to the $40 million of sub-debt on our book. Net interest income increased 0.8% from the second quarter primarily due to growth in the average earning assets, partially offset by the rising cost on interest-bearing liabilities. Remember also that second-quarter 2018 interest income included approximately $342,000 in interest earn related to the payoff of previously nonaccrual loans and accruals related to the acceleration of the remaining purchase accounting discount from the Enterprise deal.

The tax equivalent net interest margin for the third quarter was 4.1% compared to 4.21% in the second quarter of 2018. Adjusting for the aforementioned interest accruals in the second quarter of 2018, the tax equivalent net interest margin would have been approximately 4.16%. Yield on loans in the third quarter was 5.49% versus 5.52% in the second quarter. Total yield on interest-earning assets was 5.12% for both the third and second quarters in 2018 compared to 4.87% for the third quarter of 2017.

Adjusting for the second-quarter 2018 interest accruals, yield on loans and total yield on earning assets would have been 5.46% and 5.07%, respectively. So progress is being made on overall asset yields. Much of our increased interest income in the third quarter was offset by the increase in interest expense due to higher costs associated with interest-bearing deposits and FHLB borrowings. Accordingly, the total cost of interest-bearing liabilities increased to 153 basis points from 137 basis points in the second quarter and 93 basis points in the year-ago quarter.

Overall, cost of funds for the third quarter was 109 basis points versus 98 basis points in the second quarter of 2018 and 63 basis points in the year-ago quarter. The composition of our funding and interest expense saw some shift during the quarter as we were successful in continuing to grow both our noninterest-bearing deposits and interest-bearing deposits during the quarter and decreased our FHLB borrowings. During the quarter, we also saw that the brokered CD market looked particularly favorable relative to FHLB funding, so we did substitute some FHLB borrowings with broker deposit growth of nearly $53 million during the quarter. Noninterest income increased slightly to $1.9 million for the third quarter from $1.8 million for the second quarter of 2018 and represents a nice pickup from the $1.4 million for the year-ago quarter.

Total noninterest expense for the third quarter was $19.2 million, down from $19.9 million in the second quarter and included the previously mentioned total of approximately $529,000 of pre-tax expenses related to the core system conversion and merger-related expenses. Recall as well the second quarter 2018 included a total of about $1.7 million in core conversion- and merger-related expenses. Efficiency ratio for the third quarter decreased to 64% compared to the 67.1% we posted for the second quarter of 2018. Adjusting for the conversion of merger-related expenses during the second and third quarters, the efficiency ratio would have been 62.6% for both the second and third quarters of 2018.

As Steve noted, we did not recorded a provision for loan losses during the third quarter due to excellent net charge-off experienced and the release of the remaining Hurricane Harvey reserve that was initially recorded in the third quarter of 2017. The ending allowance at $23.6 million is 97 basis points of total loans. Excluding the $48.9 million in mortgage warehouse loans, the ending allowance to total core loans would have been approximately 99 basis points. Our effective tax rate for the third quarter was 17.8% compared to 17.2% for the second quarter and 22.9% for the year-ago quarter.

Bottom line, our third quarter produced a return on average assets of 1.18% and a return on average tangible equity of 12.4%. At quarter end, book value per share was $24.49 and tangible book value per share was $21.35. I will now turn the call back over to George.

George Martinez -- Chairman and Chief Executive Officer

Thank you, Paul. Operator, we would now like to open the line for questions. 

Questions and Answers:

Operator

[Operator instructions] Our first question comes from the line of Matt Olney from Stephens. You may begin.

Matt Olney -- Stephens Inc. -- Analyst

Thanks. Good morning, guys.

George Martinez -- Chairman and Chief Executive Officer

Good morning, Matt.

Paul Egge -- Executive Vice President and Chief Financial Officer

Good morning.

Matt Olney -- Stephens Inc. -- Analyst

I want to start on the deposit growth and deposit cost. It looks like interest-bearing deposit cost had a pretty good jump, about 20 basis points in the quarter. I heard the commentary on the brokered CD specials, but just looking for any other commentary beyond that as far as what you guys saw on the deposit side in the third quarter.

Paul Egge -- Executive Vice President and Chief Financial Officer

Sure. Now we're working very hard offensively and defensively to grow -- first off, to grow our deposit base, then also to keep our deposit base since we've got a consistent churn of maturing CDs, and we are operating in a particularly competitive market. So it's -- with the current interest rate environment, it has created more pressure than we initially expected as it relates to competition, as well as our efforts to aggressively grow our deposit base. So part of what you see in the interest expense line is a by-product of just that.

Matt Olney -- Stephens Inc. -- Analyst

OK. And then on the loan yield side, Paul, you've mentioned some adjustments I believe from 2Q to 3Q, I didn't quite get those written down. So what was the core loan yield in 2Q and 3Q once you adjust a few items?

Paul Egge -- Executive Vice President and Chief Financial Officer

Definitely. So when you -- if you -- adjusting for the interest accruals or one that were one-time in nature, the total yield on loans in the second quarter was 5.46%, and the total yield on earning assets would have been 5.07%. So the -- in that second quarter, you just had a little bit of inflated asset yields -- loan yields and asset yields, respectively, due to some relatively large accruals that were onetime in nature. Some of -- one -- I think most of it was the function of the payoff of previously nonaccrual loans, and then a portion of it was from the acceleration of what was the remaining purchase accounting discount on our Enterprise acquisition.

Matt Olney -- Stephens Inc. -- Analyst

And Paul, were there any adjustments in the third quarter to speak of?

Paul Egge -- Executive Vice President and Chief Financial Officer

No. I'd say we did have incrementally a couple of loans going nonaccrual, but that would be the only moving part, I guess, you could say, on the overall yields.

Matt Olney -- Stephens Inc. -- Analyst

So I guess just taking a step back, the core loan yields, once you make those adjustments, just moved up a few basis points. Yes, we saw a pretty big jump on the deposit cost side. So help me understand how much of this is a little bit usual from getting more aggressive on the deposit side versus expectations of just continued compression on that core margin.

Paul Egge -- Executive Vice President and Chief Financial Officer

Well, we fight a good fight on both fronts. The deposit and loan side, from of fighting perspective, remained to be extremely competitive. We are finding -- having a pretty decent amount of success on the loan side as far as what we're booking versus what's rolling off of our balance sheet. It just takes a little bit longer to manifest itself on the consolidated.

Ray, do you have anything to add?

Ray Vitulli -- Executive Vice President and President of Allegiance Bank

Yes, I would -- right. We're seeing just incremental -- increases on the loan side. Every month of every quarter, we're picking up a little bit on the loan side. The deposit side is just -- we're -- as Paul says, we're fighting the fight.

And we're really, within the organization, stepping up as we've already been but even more on the noninterest-bearing deposit-gathering side, and we see -- on that, we see nice growth. We think the leading indicator is new accounts opened, and we see nice growth in new accounts opened noninterest bearing. So that will turn into more deposits as time goes.

Paul Egge -- Executive Vice President and Chief Financial Officer

Exactly.

Matt Olney -- Stephens Inc. -- Analyst

OK. And then, I guess, why don't you layer on the impact of the Post Oak balance sheet? Can you speak more about the margin? And what we'll initially seen there? And then just kind of in 2019, your expectations of that margin?

Paul Egge -- Executive Vice President and Chief Financial Officer

They're very similar to us, but they have a little bit more front-end interest rate asset sensitivity exposure than we do. So that's to say they're -- we've thought to be interest rate neutral in our interest rate risk positioning. And they've actually been a little bit more asset sensitive. So when you part us together, notwithstanding our -- wanting to be interest rate-neutral, we've actually been slightly liability sensitive.

And we -- when we combine their balance sheet into ours, we actually end up being pretty much neutral, which is where we want to be. But they have more variable rate loans in their books and accordingly, more of that front end of the curve exposure that we don't have as much as -- in our current interest rate positioning. So it's -- net-net, it's a good thing.

Matt Olney -- Stephens Inc. -- Analyst

Got it. Got it. OK. That's all for me guys, thank you.

George Martinez -- Chairman and Chief Executive Officer

Sure. Thanks, Matt.

Operator

And our next question comes from the line of Brady Gailey from KBW. You may begin.

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

Hey, good morning, guys.

George Martinez -- Chairman and Chief Executive Officer

Good morning.

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

So I know earlier this month when you all announced that Post Oak had closed, you also announced the buyback. And if you look at what's happened to bank's stocks recently, you guys included – stock is a lot cheaper than it used to be. Maybe just give us your updated thoughts on how you guys are thinking about actually using the buyback here.

Paul Egge -- Executive Vice President and Chief Financial Officer

Certainly. Well, particularly with the current pressure on the stock, it makes the buyback discussion relatively more actionable than it was in the -- a couple of dollars north of $40 per share. Precisely, why we put it on? We -- there's certain restriction, such as blackouts and whatnot, that have limited our ability to use it, but we're certainly happy that we have that authority from the board. And we look forward to supporting the stock on a selective basis.

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

All right. And then just back to the net interest margin, as you look out from here, do you think that your net interest margin expands? I know Post Oak will come in and influence a little bit, but do you think we should expect NIM expansion from here on out?

Paul Egge -- Executive Vice President and Chief Financial Officer

I don't think it'd be wise to layer NIM expansion in. We're fighting really hard to keep NIM -- to maintain our NIM. I think with the addition of Post Oak, it really does protect our NIM, particularly given the ALCO-related dynamics of their balance sheet. But we didn't quite model in the extent to which competition would be driving up the interest expense on our liabilities over the last four to six months.

So really, we're very much in a defensive mode, of course, out there fighting the good fight on every loan we price, on everything we put on our -- on either side of our balance sheet.

Ray Vitulli -- Executive Vice President and President of Allegiance Bank

Yes. And let me add to that, Brady, we're not doing anything that would alter our target market as such that we would be chasing lower-priced lending, kind of, that middle market. So we're staying in focus on the market sector that we're -- we've been in. So there's no reason to think that we would affect -- and we already have a strong NIM, and we really want to work to retain the strength that we already have.

And we're going to stay in focus on the market.

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

OK. All right, and then lastly for me. Colin Frost reported earnings this morning. And they also, in their earnings release, announced that they're going to be a lot more focused on Houston going forward.

They're basically going to double their branch count in Houston over the next couple of years. They're going to add one branch a month throughout 2019 and 2020. Well, that -- I don't think they compete much against you guys just because you all are more focused on kind of the smaller business angle. But I was just wondering that how much you guys compete against Frost and with them making more of a move in Houston, if that's really going to have an impact on Allegiance.

Ray Vitulli -- Executive Vice President and President of Allegiance Bank

Brady, the direct competition is -- I wouldn't put them in the category of who we come up against the whole lot. My guess is that branch expansion would be a retail strategy. And as you know, we're really focused on the business -- the small business owner. So I wouldn't expect to come up, I guess, in too much other than maybe on the retail side with the little bit of retail that we do have.

Paul Egge -- Executive Vice President and Chief Financial Officer

From a competitive positioning standpoint, we love out-of-market banks coming into Houston. We're distinguished among the competition as being the largest bank exclusively focused on Houston, and we're pretty loud and proud about that. And we think that should mean something as we kind of build our brand value, particularly Post Oak conversion, I think it's on their side.

Ray Vitulli -- Executive Vice President and President of Allegiance Bank

Yes. Our strategy would be to continue to follow the same consistent patterns we've seen in the past. On occasional acquisition, we're definitely out there. We're the community bank of choice, I think, for community banks, we do the same type of customer relationships that most of the community banks in our area do.

And it's an easy transition for other bankers to join up with Allegiance. So you might see some of that. I doubt you'll see us opening up retail branches in San Antonio as a response to Frost's announcement. But we will continue to expand on our growth strategies.

We know we have the five by 20 growth strategy that we've created a few years ago, and we already accomplished that in three years instead of five years. So we're revisiting Allegiance, but we're staying consistent to our core strategies as we do that.

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

All right. Great. Thanks for the color, guys.

Paul Egge -- Executive Vice President and Chief Financial Officer

Yes.

Operator

Thank you. And our next question comes from the line of Brad Milsaps from Sandler O'Neill. You may begin.

Brad Milsaps -- Sandler O'Neill -- Analyst

Hey, good morning, guys.

Paul Egge -- Executive Vice President and Chief Financial Officer

Good morning.

George Martinez -- Chairman and Chief Executive Officer

Good morning.

Brad Milsaps -- Sandler O'Neill -- Analyst

Paul, I appreciate the color you gave us on expenses during the quarter. Just curious maybe you could -- maybe just a little more color on your outlook there, kind of, going forward. I think Post Oak typically ran a little over $8 million a quarter in expenses. Just curious, any update on timing of the cost saves, kind of, how that would impact the consolidated expense number as you guys have been making investments and continue to make investments.

Paul Egge -- Executive Vice President and Chief Financial Officer

Exactly. I mean we -- what you see in our noninterest expense base going into -- from June to September quarter is the impact -- the full-quarter impact of some folks that we brought on in June, which is very much reflective of what we've always been about, which is bringing on good talent to fuel growth in 2019, '20 and beyond. So we'll still continue to be forward about hiring folks to build market share in Houston. As it relates to that layering, the cost savings, it'll be more back half of '19.

We've got the conversion in the first quarter. And then you'll start seeing more in the second quarter but really more fully baked toward the back half of '19. But I guess mitigating that is, of course, the investment that we're going to continue to make in future years' production in lenders and the level of support that we need for them to succeed in taking market share.

Ray Vitulli -- Executive Vice President and President of Allegiance Bank

And we're managing our backswing, as well as our follow-through in that regard. We have one of the really good opportunities coming forward for us, just a number of people that we can add to those Post Oak offices, too. So while we will have our cost saves coming in, we're going to be doing our continued growth, what was the legacy core portion of Allegiance. So some of those numbers will blend together as we go forward.

But we're -- want to increase revenue. So another great way of addressing your efficiency ratio is to pump up the revenue, so that's a big focus of the bank.

Brad Milsaps -- Sandler O'Neill -- Analyst

Sure. So Paul, you would say that this quarter is a pretty decent run rate to kind of build off of, and then just plus Post Oak going forward?

Paul Egge -- Executive Vice President and Chief Financial Officer

I would say so. I mean, I think this quarter probably has -- this quarter, both for us and Post Oak, Post Oak had a nice quarter, for what it's worth, do reflect a little bit of pre-cost savings, to make up a word, because we've held off on hiring some certain roles or replacing roles where we've seen turnover, and they've done a little bit of the same. So there's a little bit of that playing into how we've operated, probably a little bit more on their side than on ours. But otherwise, absolutely, that's the only caveat I'd throw in.

Brad Milsaps -- Sandler O'Neill -- Analyst

And just bigger-picture question, Steve. Just on the efficiency, you guys of kind of bounced around low mid-60s to kind of ebbs and flows in terms of improvement. They were a little bit lower than you guys. I mean, kind of bigger picture, where do you think you can take that kind of through the end of next year?

Paul Egge -- Executive Vice President and Chief Financial Officer

Revenue is the part of the efficiency ratio calculation that is kind of the harder to underwrite because we can control the expenses and we're very thoughtful about how we layer on expenses. But the revenue dynamic, first off, since last year, it manifests itself in the subject that we put on that has an effect on our revenue. And then separately, the increase in interest expenses has been impacting our revenue, which has really served to mitigate what I think is some operating leverage that we've been getting out of the business on a core basis, when you take out one-time-related expenses. So a lot of good work's being done.

With Post Oak, I think you're going to see us get to the five handle and continue to kind of push forward into making progress. But the extent of that progress is going to be a function of how we're able to execute and succeed on managing noninterest expense -- or managing the interest expense side, as well as the noninterest expense side.

Brad Milsaps -- Sandler O'Neill -- Analyst

Great. Thank you, guys.

Paul Egge -- Executive Vice President and Chief Financial Officer

All right. Thanks, Brad.

Operator

And our next question comes from the line of David Feaster from Raymond James. You may begin.

David Feaster -- Raymond James -- Analyst

Hey, good morning, guys.

Paul Egge -- Executive Vice President and Chief Financial Officer

Good morning.

George Martinez -- Chairman and Chief Executive Officer

Good morning.

Paul Egge -- Executive Vice President and Chief Financial Officer

It sounds like you changed your last day.

David Feaster -- Raymond James -- Analyst

Yes, apparently. You're obviously a high-growth bank, done a tremendous job growing loans, the hiring efforts are paying off. I just wanted to get your thoughts on loan growth going forward. Do you think you can maintain this mid-teens rate going forward? And I guess, given the competition on the funding side, have you had discussions internally about throttling back growth to limit NIM compression and help maintain profitably?

Ray Vitulli -- Executive Vice President and President of Allegiance Bank

David, so on the loan growth side, we -- it kind of starts with us for -- we measure loans originated. And we've been somewhere around $200 million and $250 million in loans originated every quarter. And then it all kind of comes from that, what happens with -- how much is that fund, what happens with payoffs, and what happens with the carried portfolio? So we've seen this kind of $225 million is our -- around what we've been originating a quarter, somewhere between $225 million and $250 million, we really like that number. And the growth that, that produces is the growth that it produces.

So that's about somewhere between $900 million and $1 billion a year in originations. And the growth will be a function of how much is that, what payoffs we have, and what happens with our carried portfolio. The -- we're -- as far as throttling back, we've tried so as long as we have discipline in pricing model for those loans. So loans were able to get the pricing.

We'll continue to do what we do, which is originate this somewhere between $900 million and $1 billion a year.

David Feaster -- Raymond James -- Analyst

OK. That's helpful. One of the limiting factors on your hiring side has been capacity and branch presence in certain regions, which as we've talked about, the Post Oak deal helps alleviate. I guess, first, did you hire any lenders in the quarter? And secondly, how have conversations trended of late, given the deals closed? And could hiring even potentially accelerate from here?

Ray Vitulli -- Executive Vice President and President of Allegiance Bank

The Canada flow has been great. In the third quarter, we had four hires; and then that followed the last month of the second quarter, which had two hires. So that was six. We had zero in the first quarter.

So that was six in total for the year. And we're very excited about those. There's actually a -- there was actually a fifth hire in the third quarter that we don't count as production, but it's support for our SBA initiative. And that was really a key hire with Post Oak coming on.

Post Oak really did not have a -- was not originating SBA loans. So we basically put a producer on the SBA side that will work with that bunch of lenders to increase the SBA production. Our SBA pipeline is greater than it's ever been, even right now, before the Post Oak. So I would say we really had five in the third quarter, but as far as what we call producers, it was four.

And the Canada flow has been great. So yes, we have -- as Steve mentioned, there's capacity in those offices, and I mean we're working on that right now.

David Feaster -- Raymond James -- Analyst

OK, terrific. Last one for me, could you just talk about credit quality overall? What you're seeing in your footprint? Is there anything causing you any concern or sedimentary thing? Things might be getting overheated. We've heard pricing in CRE is getting tough in certain markets. And maybe as a follow-on, just quantify the Harvey reserve release.

And how you think about provision expense into next year?

Steve Retzloff -- President

Yes. Let me address a little bit. The Harvey reserve was $1.7 million, a little over that, a year ago, and we did that as a really a cautionary type of an act. We just really never had anything that came through.

So little by little, as we got more comfortable with the risk diminishing away from the impact of Harvey, we slowly put that back and gave it back. So we had just last little bit of $500,000 left in that. We did -- we do our allowance for loan loss analysis almost like everybody else and factor in a number of things. It's a pretty sophisticated model.

And with our more recent low charge-off rate, that's having more impact on our model today than a year ago when we had some losses in '17. But those are getting older, and as the model progresses, it produces what it does. And basically -- it tells our team and guides our team toward establishing the allowance every quarter. So we didn't -- we ended up the quarter with the Harvey reserve at $500,000 not needing a provision.

It's -- remains our -- all of our asset -- our loan assets continue to be very granular. We're not in the large CRE markets, certainly not in large $40 million multifamily. We're not in Amazon-sensitive retail. We don't have a lot of large office buildings or anything of that nature that we saw there that -- I'd go under stress back during the oil price decline.

So we continue to be very regular, and we do concentration analysis by industry. We keep it as distributed as possible across a lot of different sectors. So anyway, again, our average loan size is pretty small. So we'd like the portfolio effect of having so many different loans in different sectors.

So from an overall asset quality perspective, there's nothing that looks scary that we're looking at today. And looks very manageable, and we're going to want to continue to do the block and then tackle and on that -- at that level that we've always done. We're -- really, our offer to the market is not so much transactional deals as it is our service. And that service is provided by our relationship lenders.

So Ray, I don't know if you can add any color to that.

Ray Vitulli -- Executive Vice President and President of Allegiance Bank

I would just add, I think you asked about the pricing on the loan side. So generally the pricing is a function of the loan size. So so long as we stay in the space that we stay in and we're able to get the pricing that we like, as you go out, it gets -- it just gets more competitive. We heard yesterday of a 4.9%, 15-year fixed loan.

We're not going to participate in a 4.9%, 15-year fixed rate loan or even, for the most part, 10. We may do a 10-year, but we're going to have a pricing reset somewhere in the middle. So it's competitive as you get up the loan size ladder.

Paul Egge -- Executive Vice President and Chief Financial Officer

And to be clear, we don't have anything left in the Harvey reserve, if that was a part of your question.

Ray Vitulli -- Executive Vice President and President of Allegiance Bank

It's gone. Yes, it's zero now.

David Feaster -- Raymond James -- Analyst

OK. Thanks, guys.

Operator

[Operator instructions] Our next question comes from the line of Bryce Rowe from Baird. You may begin.

Bryce Rowe -- Baird -- Analyst

Thanks. Good morning.

Paul Egge -- Executive Vice President and Chief Financial Officer

Good morning.

George Martinez -- Chairman and Chief Executive Officer

Good morning.

Bryce Rowe -- Baird -- Analyst

Paul, I wanted to just maybe double back on the margin, if you don't mind, and some of the deposit costs. Just curious, as we saw the 20 basis points or so of cost increase on the interest-bearing deposit side of things. Now should we expect continued or similar increases in fourth quarter and then maybe into '19 if we get another rate increase by the -- by this? Just trying to gauge the pace of the increases here over the near term.

Paul Egge -- Executive Vice President and Chief Financial Officer

Yes. We'd like -- we're going to be doing -- working hard to try and mitigate that migration upward, but there is going to be some -- I mean, our CD book, there's a relatively large piece. It's repricing on a monthly basis. And on -- in many cases that's picking up in yield.

It's kind of hard to speak with any granularity as to the extent it's going to manifest itself in the fourth quarter. While we do expect really as a function of the interest rate environment to be seeing continued migration in our cost of funds. We can do our best to mitigate it through the success we've been having on the noninterest-bearing side, and we have got some leading indicators that suggest that some of that success has a good potential to continue. But it's -- in a competitive market that we operate in, working both offensively and defensively, it's having an effect on our margin.

Bryce Rowe -- Baird -- Analyst

Understood, understood. And then I wanted to kind of ask a housekeeping question. Last quarter, Paul, you called out the split in the income statement from the conversion expenses into the salary and benefits line and into the other line. So just curious where the conversion expense had fell here in the third quarter.

Should we have a good idea of run rates in modeling going forward?

Paul Egge -- Executive Vice President and Chief Financial Officer

Now I don't have the detail on that this quarter. But I can speak directionally in that the largest pieces were probably in the BP line and the salary and benefits line because we still have some data cleanup that required some extra cuts and other kind of expenses. So apologies for not having that detail with you this time around.

Bryce Rowe -- Baird -- Analyst

No, that's fine. That's exactly what I needed. I think that's all I've got. I appreciate the detail.

Talk to you all soon.

Paul Egge -- Executive Vice President and Chief Financial Officer

Thank you, Bryce.

Operator

Thank you. And I'm showing no further questions at this time. I'd now like to turn the call back to George Martinez for final remarks.

George Martinez -- Chairman and Chief Executive Officer

Once again, we appreciate your time and interest in Allegiance. We look forward to speaking to you again in the future. Thank you very much.

Operator

[Operator signoff]

Duration: 46 minutes

Call Participants:

Courtney Theriot -- Senior Vice President-Manager of Financial Reporting

George Martinez -- Chairman and Chief Executive Officer

Steve Retzloff -- President

Paul Egge -- Executive Vice President and Chief Financial Officer

Matt Olney -- Stephens Inc. -- Analyst

Ray Vitulli -- Executive Vice President and President of Allegiance Bank

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

Brad Milsaps -- Sandler O'Neill -- Analyst

David Feaster -- Raymond James -- Analyst

Bryce Rowe -- Baird -- Analyst

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