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Allegiance Bancshares, Inc. (ABTX)
Q4 2018 Earnings Conference Call
Jan. 25, 2019, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
See all our earnings call transcripts.
Prepared Remarks:
Operator
Good day ladies and gentlemen and welcome to your Q4 2018 Allegiance Bancshares Earnings Call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions)
As a reminder today's conference is being recorded. I would now like to turn the call over to Courtney Theriot. Ma'am you may begin.
Courtney Theriot -- Senior Vice President & Manager of Financial Reporting
Thank you, operator, and thank you for 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; 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 provision or 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 email 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 will now turn the call over to our CEO, George Martinez.
George Martinez -- Chief Executive Officer
Thank you, Courtney. And we welcome all of you to our fourth quarter earnings call. We could not be more proud of Allegiance bank and our employees as we look back on a very successful 2018. It was a transformative year, and one that will serve as the foundation for the bank's continued growth for many years to come.
During 2018, we completed our core technology conversion and announced and closed our merger with Post Oak bank, both of which expands our opportunity to continue to be Houston's Premier Community Bank. We are committed to delivering personalized service to our customers and serving our communities. It is this commitment and that of our dedicated employees who have worked tirelessly to create a partnership that has already produced outstanding results. We're pleased to have received such a positive reaction from our combined customers in response to the merger and look forward to completing the operational integration during the first quarter of 2019.
We are also extremely pleased to report record earnings of $37.3 million, reflecting the continued execution of our growth strategy. With record asset growth of 62.8% and diluted earnings-per-share growth of 80.6%, 2018 was our best year yet. Our 2018 results are highlighted by core loan growth, low charge offs and the positive impact of the Post Oak acquisition which drove our strong performance.
We are particularly proud of the organic core loan growth of $294 million for the year, which is a tremendous accomplishment and is attributable to our experience in highly dedicated lenders along with our committed back office support team of bankers. Our charge off experience continues to remain strong as evidenced by net charge offs of only 6 basis points for the year.
Our team spirit is tremendous and is confirmed by being a repeat winner of the Top Workplaces Award by the Houston Chronicle for the ninth consecutive year. The feat only accomplished by 10 companies since the award program began out of 253 companies that participated. We're most excited about our continued growth prospects as we enter 2019, and plan to continue our ongoing hiring efforts.
We are pleased with the further enhancement of our Houston footprint with the branch acquisition in Sugar Land, which we plan to complete next month and the anticipated opening of a de novo bank office on the east side of downtown Houston in early 2020. Next, 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.
Steven F. Retzloff -- Chairman
Thanks George. I also welcome everyone to our fourth quarter conference call. I would describe our fourth quarter in one word, energized. This applies not only to our growing enthusiasm and upbeat esprit de corps which now includes our new team members from Post Oak Bank but also to the calculus that is driving our strong core earnings growth. Including acquisition accounting adjustments on October 1st, we added $1.16 billion of new core loans from the acquisition. We define our core loans as loans excluding our mortgage warehouse. The combination of the acquired loans with our core loans at September 30th, 2018 had us beginning the fourth quarter with $3.56 billion of core loans including acquisition adjustments.
Total core loans ended the quarter at $3.66 billion which produced an increase of $104 million during the quarter, an organic growth rate of 11.7%, which is quite impressive particularly during an early integration of this magnitude. In terms of growth rate, the fourth quarter represents the second best organic growth quarter for 2018.
For the trailing 12 months, core loans grew $1.46 billion or 66.3%, including the acquired loans from Post Oak. Core organic loan growth was a robust $294 million for the year. Given a slight decline in our funded mortgage warehouse lines, our 12 month trailing total loan growth was 63.3%, of which 12% was organic. During the fourth quarter, our combined lender team booked $353 million of new loans that funded to a level of $223 million by December 31st. This is a significant increase from the third quarter when $240 million of new loans were generated which funded to a level of $157 million in the third quarter.
Notably, paid off loans also increased from $91 million in the third quarter to $166 million in the fourth. The average size of the new organic core loans generated during the fourth quarter was $456,000 committed and $288,000 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 charged on our new fourth quarter core loans continued to improve. This quarter the average rate charge was 5.75%, which is an increase of 11 basis points over the third quarter new loans at 5.64%. As previously reported, the weighted average rate for new core loans in the fourth quarter of 2017 was 5.35%. Resulting from the new loans, the acquired loans which came with an average rate of 5.26% and the loan mix, the period end weighted average interest rate charge on our portfolio of core loans reflect an upward trend as the quarter end weighted average rate before accrued fees and acquisition accounting increased from 5.32% as of March 31st, 2018 to 5.37% as of June 30th to 5.44% as of September 30th and was now 5.47% as of December 31st, 2018.
Also, as of December 31st, only a small portion of our variable rate loans are currently earning at their contractual floors. Paul will discuss the resulting portfolio yields and margins in his report. The mix of new loan production based on fourth quarter funding levels was represented by the following four commercial categories; owner occupied commercial real estate 18.3%, non-owner occupied commercial real estate 14.5%, commercial term loans 14.1%, and commercial working capital at 5.2%. These four commercial categories represented 52.1% of the new funded production compared to 61.8% for the third quarter, loans secured by one-to-four family residential real estate contributed 20.4% of the new funded core loans, construction and development including land loans contributed 19%, and multi-family contributed 1.8% of the new funded core loans during the quarter.
Due primarily to the acquisition, the overall loan mix altered slightly during the quarter with loans secured by residential real estate increasing from 14.1% of total funded loans to 17.5% and the commercial real estate declined from 46.1% to 43.1%. Given that Post Oak had no mortgage warehouse lines or SBA loans, these categories declined proportionately by about one-third of their prior levels. Other categories adjusted only slightly at the concentrations.
The slide deck posted on our website provides added color regarding our overall mix of loans. The average funded loan size ended the year at $332,000. It is notable that the average size of the acquired loans was in the same range at $312,000. Net charge offs experienced during the quarter was once again very low at $219,000 or an annualized rate of 2 basis points. 2018 net charge offs were $1.57 million or 6 basis points.
The Bank's quarter-end asset quality position is solid. Although non-performing assets increased from 56 basis points of total assets at September 30th to 72 basis points at December 31st, almost all of the increase was limited to precautionary measures taken on two loan relationships which I will describe shortly.
The larger of the two resulted in an impairment reserve of $2.4 million which was the largest contributor to our approximately $3 million provision for loan losses for the fourth quarter. Non-accrual loans increased during the quarter from $14.9 million to $32.9 million. The change reflected $5.3 million from the acquired loans and an additional $12.6 million net increase from the existing prior Allegiance relationships. Two relationships constituted 88% of the dollar, and both have been previously identified as watch list credits. The larger, a prior period impaired loan at approximately $7.6 million is a hotel which although current as to payment performance, has progressed slowly toward occupancy stabilization, and given our disciplined approach to ongoing credit evaluations was recently reappraised. The lower appraisal led to establishing an impairment reserve of approximately $2.4 million, which as I mentioned, was the bulk of the provision for the past quarter. The second is a $3.5 million SBA loan for a day care which was unable to open for the fall enrollment this past season. 2019 enrollments are anticipated to lead to improved cash flows for this customer.
The overall loan to value after giving credit to SBA guarantees and the established impairment reserves ended the year at 67% for non-accrual loans and 59% for impaired loans. SBA loans represented 19% of the non-accrual loans of which the largest loan is about half of that total. We believe the collectability of the unreserved loan amount on our non-accrual loans and other impaired loans as of December 31st remained quite manageable. In terms of our watch list, our classified loans as a percentage of total loans declined slightly, ending at 2.15% at December 31st, compared to 2.26% at September 30th.
Criticized loans increased slightly to 2.86% from 2.76% of total loans. Despite this overall stability, the specific reserves for the impaired loans increased to 16%, from 11.6% during the quarter due to a large degree to the aforementioned reserve on the hotel loan. Total deposits increased in the fourth quarter by $1.23 billion ending December 31st at $3.66 billion. For the past 12 months total deposits increased 65.4% with the acquisition. Year-over-year organic deposit growth was 7.5% highlighted by a 13.1% organic increase in non-interest bearing deposits.
As such and with the acquired deposits, the non-interest bearing deposit ratio ended the quarter at 33% compared to 30.9% at December 31, 2017. While WTI oil prices have gravitated down since we reported last quarter to the low 50s per barrel recently, Allegiance continues to not focus on this sector. Post Oak had a similar low degree of exposure and like Allegiance, had no reserve based lending. We are evaluating the indirect exposure of the acquired loans more closely, but have recognized overall strong credit quality for those identified thus far.
Notwithstanding the recent softness in oil prices the economic data for the Houston region remains positive. According to the Texas Workforce Commission data the Houston MSA has gained over 114,000 jobs in the 12-month period ending November 2018. In its recent economic forecast report, the Greater Houston Partnership projected the area will gain 71,000 jobs in 2019 and upwards of 120,000 new residents. For the year 2018, single family homes sales reached a record level of 82,000 homes, up 3.8% from 2017 and ended the year with 3.5 months of inventory. Average home prices were up to $240,000, an increase of 3.4% over 2017. The Houston Area Purchasing Managers Index ended November at 54.9, continuing to indicate expansion. Unemployment was 3.8% in November, down from 4.4% a year earlier.
Finally, due to a strong residential market, construction appears to remain positive as building permits are up 12% for October 2018 compared to October of 2017. The overall tone with our commercial customers remains positive and the local economic outlook is strong. Prior to the merger, Allegiance Bank had 16 branch locations and Post Oak had 13. Due to its proximity to the largest Post Oak office, we have already closed one branch merging its production staff with others.
One additional Allegiance office closure is scheduled for the first quarter also due to their new nearby location. In addition, our purchase of a Sugar Land branch from another bank has been approved and is scheduled to close in the first quarter. The existing prior Post Oak branch in that area will subsequently close. The results of these strategic changes will be 27 branches, improved location prominence and cost efficiencies.
I will close, just as I began with the fact that we are excited and energized to be Houston's largest community bank. We continue to manage the bank with extraordinary performance in both the big and impactful things such as quality growth, but also in the small but significant things such as community service and support. The bank was recognized this past quarter as one of our officers Mark Vasquez received the George Bailey Distinguished Service Award from the American Bankers Association in October for his leadership of our response to Hurricane Harvey and other local community initiatives.
We thank all of our bankers who have contributed hours and hours of personal time to support these much-needed and ongoing volunteer efforts. With that, I will now turn it over to our CFO, Paul.
Paul P. Egge -- Executive Vice President & Chief Financial Officer
Thanks, Steve. Fourth quarter 2018 net income was $13.2 million or $0.59 per diluted share as compared to third quarter earnings of $8.9 million or $0.65 per diluted share. Our fourth quarter results reflect the inclusion of the Post Oak acquisition, which impacted our results through increased scale, related revenue and expense as well as some acquisition-related items such as acquisition accounting accretion, increased levels of CDI amortization and certain non-interest expenses, related specifically to the integration of the Post Oak transaction which we will detail later.
Fourth quarter 2018 net interest income increased to $45.8 million or 63.5% from $28 million in the third quarter and from $27.4 million in the fourth quarter of 2017, primarily due to growth in average earning assets as a result of the Post Oak transaction and continued organic growth. Average interest earnings assets for the fourth quarter increased 50.1% compared to the third quarter and 59.3% compared to the fourth quarter of 2017.
Within the fourth quarter, acquisition accounting accretion increased loan income by $2.7 million and reduced CD expense by $367,000 for a total positive effect on net interest income of $3.1 million in the quarter. This quarter's accretion leaves $14.2 million in loan mark and $1.3 million in the CD mark.
Tax equivalent net interest margin for the fourth quarter with 4.45% compared to 4.10% in the third quarter. Adjusting for the acquisition accounting accretion, net interest margin would have been 4.16% for the fourth quarter representing progress from Q3's 4.10%. Yield on loans in fourth quarter with 5.81% versus 5.49% in the third quarter and 5.34% in the year-ago quarter.
Total yield on net interest earning assets was 5.44% for the fourth quarter and 5.12% for the third quarter and 4.93% for the year-ago quarter. Adjusting for the acquisition accretion recorded in the fourth quarter, yield on loans and total yield on earning assets would have been 5.51% to 5.18% respectively. So we are seeing progress on core asset yields.
Our increased interest income for the quarter was partially offset by the increase in interest expense associated with the increased scale of our funding base as a result of Post Oak acquisition and overall trends in funding cost. The total costs and interest bearing liabilities was 153 basis points for the fourth and third quarters in 2018 and 100 basis points for the year-ago quarter.
Overall cost of funds for the fourth quarter was 106 basis points versus 109 basis points in the third quarter and 73 basis points in the year-ago quarter. Excluding acquisition accounting adjustments in the fourth quarter, the total cost of interest bearing liabilities would have been 158 basis points and the total cost of funds would have been 109 basis points.
The composition of our funding and interest expense saw some shift during the quarter due to the Post Oak acquisition and our continued success growing both our non-interest bearing deposits and interesting bearing deposits which allowed us to decrease our level of FHLB borrowings. Non-interest income increased to $2.3 million for the fourth quarter from $1.9 million in third quarter despite losses on the sales of the ORE and ORA of $429,000 during the quarter.
Fourth quarter also represents a very nice pickup from the $1.6 million from the year-ago quarter, again, despite those losses we experienced from the sale of ORE and ORA. Total non-interest expense for the fourth quarter was $29 million compared to $19.2 million in the third quarter and included $840,000 merger-related expenses. The fourth quarter increase was primarily due to additional salaries and benefits that we absorbed, added headcount from Post Oak, increased occupancy expense as a result of that incremental Post Oak offices, and an increase of about $1 million in core deposit intangible and amortization.
The efficiency ratio for the fourth quarter decreased to 60.30% compared to 63.95% we posted in the third quarter and 66.5% for the prior-year quarter, despite the $840,000 in merger-related expense. Excluding these merger-related expenses and earlier core conversion expenses, the efficiency ratio for the third and fourth quarters of 2018 would have been 62.19% and 58.55% respectively.
As Steve mentioned, the provision for loan losses was $3 million in the fourth quarter. Net charge offs this quarter were $219,000 which makes the year-end net charge offs to total $1.6 million or only 6 basis points on average loan for 2018. The ending allowance at $26.3 million is 71 basis points of total loan. So we mentioned the $14.2 million in loan mark remaining on the acquired loans. If you were to include the loan mark, the ending allowance plus loan mark to total loans is 109 basis points and 111 basis points on core loans, if you were to exclude mortgage warehouse loans.
This compares to 97 basis points of total loans and 99 basis points of core loans at September 30th. Our effective tax rate for the fourth quarter was 18.6% compared to 17.8% for the third quarter as municipal securities and BOLIs represent significantly smaller portions of our revenue mix.
Bottom line, our fourth quarter produced a return on average assets of 1.12% in return on average tangible equity of 11.66%. We are particularly pleased with the progress in our earnings power on a pre-tax pre-provision basis, as our pre-tax pre-provision ROAA during the quarter was 1.63%. And if you were to exclude merger-related expenses, it would have been 1.70%. We believe we are very well-positioned entering into 2019 as a significantly larger and more profitable company than we began 2018.
Before passing the call back to George, I should note that during the fourth quarter we made some share repurchases under our board authorized share repurchase program. We repurchased just over 69,000 shares at a weighted price of $30.45 per share during the quarter. I will now turn the call back over to George.
George Martinez -- Chairman & Chief Executive Officer
Thank you, Paul. Operator we would now like to open the line for questions.
Questions and Answers:
Operator
Thank you so much. (Operator Instruction). Our first question comes from Matt Olney with Stephens. Your line is now open.
Matthew Covington Olney -- Stephens Inc. -- Analyst
Hey thanks, good morning guys.
George Martinez -- Chief Executive Officer
Good morning, Matt.
Matthew Covington Olney -- Stephens Inc. -- Analyst
I want to start on the core margin. The core margin reacted nicely in the fourth quarter with the Post Oak balance sheet. I think that was pretty close to what you guys talked about previously. So with that being said where do you see this core margin going in 2019?
Paul P. Egge -- Executive Vice President & Chief Financial Officer
Core margin in 2019 is going to be 100% a byproduct of how we're able to execute on our loan and deposit growth in the year. If we're able to fully fund our core loan growth with core deposits, we could see our core net interest margin expand to the extent we're less successful in execution, you could see it go the other way or you could see some level of pressure. We're extremely focused on 2019 on two things, deposit growth just as much as prior, but secondarily with the uptick in -- in prime that we've experienced over the last 12 to 18 months, repricing our existing renewing loans on our books as well as new loans at favorable pricing to the bank.
So we think the combination on executing on both of those strategies will serve to mitigate any potential pressure out there relating to margins. But it's a -- each and every day it’s a function of our execution.
Matthew Covington Olney -- Stephens Inc. -- Analyst
Okay. That's helpful. Paul, let me ask it this way. If I were to look at just the legacy Allegiance balance sheet in the fourth quarter, any -- any indication how the margin performed in the fourth quarter kind of ex Post Oak? Just trying to get a feel for what the trend was in the fourth quarter.
George Martinez -- Chief Executive Officer
Hey Matt, this is (inaudible) on the loan, so for the whole year just to give you a feel, we originated about $1 billion of new loans and we renewed about $1 billion of loans. That's for the full year and in the fourth quarter on a combined basis. And for the fourth quarter those origination's and renewals were at a rate higher than the third quarter. And then that was higher than the second quarter. So the trajectory is that we picked up a little on the average yield on loans is picked up each quarter in '18 and fourth quarter was a good quarter in that respect. The renewals, those loans renewed at a rate higher than the rate that were coming off of.
Matthew Covington Olney -- Stephens Inc. -- Analyst
What about on the liability side? I think in the prepared comments there was a remark about the improved funding allowed you guys to pay down some FHLB. Did I hear that correctly? And at what point of the quarter did we see that? And what's the view on FHLB borrowings in 2019?
Paul P. Egge -- Executive Vice President & Chief Financial Officer
Just for perspective, at this point last year, we were $2.9 billion thereabout bank that had borrowings from the FHLB at $282 million. As we sit today partially as a function of our execution throughout 2018 but also partially as a function of an accretive funding base that was brought on as a function -- as part of the Post Oak acquisition, we're sitting at $4.65 billion in assets and we're borrowing almost $60 million less from the FHLB, which from a funding mix perspective is accretive. And the core rationale for that is two-fold and it's very much a function of being able to execute on deposit side throughout the year as well as what we brought on as part of the Post Oak deal. Where the goal is to continue to optimize our mix, first and foremost we want to be able to fund our loan growth. But the second and equally prominent goal is to optimize that funding base.
Matthew Covington Olney -- Stephens Inc. -- Analyst
Got it. Okay. And then shifting over to the operating expenses, how should we think about those expenses in 2019? Remind me of the cost savings you expect from Post Oak. Do we see any of that in the fourth quarter? Just help me understand kind of the pace of those cost saves in 2019.
Paul P. Egge -- Executive Vice President & Chief Financial Officer
You would've seen very little in the fourth quarter and you're not going to see that much in the first quarter. And I would say you’ve actually, you've seen savings in the fourth quarter, it's just that they've been mitigated by transaction expenses and of course the core deposit intangible amortization which kind of came in a little, core deposit intangible came in higher than initially expected and the amortization number came in higher and that mitigates kind of the effect of core cost savings. We had obviously $840,000 of merger related expense. That's more direct. But we also had certain expenses in the fourth quarter that were redundancies.
So if you look at the DP line, we are running through data processing. We are running some redundant systems. Most of that goes away in the first quarter, but there actually will be trails later into the year. But where you'll see the operating leverage and relative operating efficiencies really expand to the -- improve to the positive will certainly be the second quarter -- more so the third quarter. First quarter will still have non-recurring expenses relating to the merger. There will be cost savings in the first quarter, which will be mitigated by one-time expenses. And then, we will get into a run rate in the back half of the year that will be reflective of the operating efficiencies that we expect from the transaction.
Matthew Covington Olney -- Stephens Inc. -- Analyst
Okay, thanks guys. I will hop back in the queue.
Operator
Thank you. Our following question comes from Brad Milsaps with Sandler O'Neill. Your line is now open.
Brad Milsaps -- Sandler O'Neill -- Analyst
Hey, good morning guys.
Paul P. Egge -- Executive Vice President & Chief Financial Officer
Good morning, Brad.
Brad Milsaps -- Sandler O'Neill -- Analyst
Paul, I was writing quickly during your comments around the accretion numbers. It sounds like if you got about a little over $14 million left in a loan mark and about $1.03 million in the CD mark, can you tell me how the contribution broke down this quarter? And then, what you think the accretion schedule will look like going forward as you look out through 2019?
Paul P. Egge -- Executive Vice President & Chief Financial Officer
So, this quarter, the CD decreased our expenses by $397,000 and the loan mark was around -- the accretion from loan $2.7 million. Expectations for 2019 would be on the CD side, approximately $800,000, on the loan side. So that would be a decrease in expense of approximately $800,000 through the year. On the loan side, the approximation would be about $7 million, although that can have some variation as it relates to the behavior of the loan portfolio that we bring in. And then, separately, wasn’t part of your question, but CDI, if you think about the run rate on that and expense that came in, higher because the CDI came in higher as the by-product of the interest rate environment and that will hit our non-interest expense base in 2019 to the tune of just under $4 million.
Brad Milsaps -- Sandler O'Neill -- Analyst
Great, that's helpful. That was my next question. Do you think, just to follow on Matt's expense kind of line of question, do you think your third quarter run rate expenses would be less than kind of where you were in the fourth quarter of this year, if that's kind of the targeted time or you kind of have the stars aligning so to speak in terms of having the cost savings out or do you think because of investments you're making at the company it would still be higher than kind of this fourth quarter run rate?
Paul P. Egge -- Executive Vice President & Chief Financial Officer
The way I kind of say is it's kind of like taking two steps -- the NIE story is kind of like two steps forward, one step back when you get to the point of further off in the year. You'll see in the operating efficiencies, but on the absolute value number, we have and will continue to make incremental investments into the business. If anything, you'll see us targeting hiring incrementally more lenders than the one lender a year pace that we were at before to -- one lender a month, pardon me, pace that we had kind of referenced before to drive current and future growth in the bank. So, we will -- the number, I don't have in front of me right now, but it's -- I think you are going to expect that the NIE, the stand-alone NIE base of ABTX grows and the cost saves will be a function of the pre-deal expense base of Post Oak going in at an inflationary level.
George Martinez -- Chief Executive Officer
And I might add, Brad, that the ads of lenders and I'll ask Ray to provide the numbers, but when we just talk about the class was 2016, which was the lenders we hired that year, I mean what are they up to now, Ray, in terms of production?
Ramon A. Vitulli -- President & Chief Operating Officer
Yeah, Brad. So, the Class of ’16, that is probably now in future quarters just roll the Class of ‘16 into the -- what we call the legacy. But the whole bank right now is averaging $35 million in loans per lender and Class of ‘16 is at $35.5 million. So, we'll move that into the legacy and then now focus on Classes of ‘17, ‘18 and ’19. The embedded capacity of ‘17 and ‘18 classes is right around $340 million if you take where they are now to get to that $35 million of average.
George Martinez -- Chief Executive Officer
So, we're excited about the opportunities in -- what I'm trying -- getting at is, that if we can bring on those lenders over the year, that's just going to give us a lot of capacity for the future.
Brad Milsaps -- Sandler O'Neill -- Analyst
That's helpful. And Ray, maybe just one follow-up. Just kind of on-lending in general, now that you have the combined companies together, what's your sense of kind of what the loan growth opportunity is in 2019 in percentage terms?
Ramon A. Vitulli -- President & Chief Operating Officer
Well, we'll see how the percentage turns out, I'd say just on the origination side, which is what we like the leading indicator. We were somewhere around -- we originated $900 million, $950 million in 2018 and that's $220 million a quarter. If you look at the fourth quarter, which was around $350 million, that should be -- it should be similar to that. So 1.5 times what we were doing. We've gone from -- currently from 73 lenders to now 107. So it's right around 1.5 times of what we experienced in 2018 as far as the origination side. We'll see what happens with the waterfall chart to see how our growth ends up, but it'll start with the origination.
George Martinez -- Chief Executive Officer
We're also quite pleased in the fourth quarter that a -- pretty much proportional amount of our new production came from the Post Oak side, that lending team that we brought over, so they hit the ground running and we're really encouraged by that.
Brad Milsaps -- Sandler O'Neill -- Analyst
Great that's helpful. Thank you guys very much.
Operator
Thank you so much. Our follow-on question comes from Mike Belmes with KBW. Your line is now open.
Michael Belmes -- KBW -- Analyst
Hey, good morning.
George Martinez -- Chief Executive Officer
Good Morning.
Michael Belmes -- KBW -- Analyst
So just following up on the loan growth question, in the fourth quarter were the level of payoffs paydowns kind of above or below expectations?
George Martinez -- Chief Executive Officer
Slightly above, but when you take a -- 1.5 times the -- on a combined basis, it may be slightly elevated but nothing unusual as far as the payoffs.
Michael Belmes -- KBW -- Analyst
Got you. So it sounds like then you guys have had really impressive organic loan growth this past quarter that it's likely to continue at maybe this same level going forward then?
George Martinez -- Chief Executive Officer
We feel confident about what we're doing, yes.
Michael Belmes -- KBW -- Analyst
Perfect. And then coming back to the core margin, appreciate the color on accretable yield and whatnot. From interest rate sensitivity position, you guys are still targeting neutral, I'm assuming. So we could kind of expect maybe a flattish plus or minus a couple of basis points depending on funding for the core name right?
George Martinez -- Chief Executive Officer
I'd say so. I mean if you're going off the ALCO interest rate risk modeling which of course is flawed to a degree since it's thinking about solely parallel shifts but thanks in part to the acquired assets, we're actually gone from being slightly liability sensitive, to being slightly asset sensitive on the overall balance sheet. But our target is to remain neutral and really try not to take interest rate risk instead (inaudible) and -- or grow the business to growing loans and deposits.
Michael Belmes -- KBW -- Analyst
Perfect and then just one last one from me. On the tax rate, you talked about the shift and kind of your non-taxable securities and loans and whatnot. Was the fourth quarter maybe a good run rate to use going forward?
George Martinez -- Chief Executive Officer
I'd say so.
Michael Belmes -- KBW -- Analyst
Perfect, thanks for taking my question.
George Martinez -- Chief Executive Officer
As we continue to grow, just with a lesser focus on tax preferential revenue, you may see a trend -- see our tax rate trend incrementally up as opposed to down, but I think where it’s at is (inaudible).
Michael Belmes -- KBW -- Analyst
Got it, thanks.
Operator
Thank you. Our following question comes from Daniel Mannix with Raymond James. Your line is now open.
Daniel Mannix -- Raymond James -- Analyst
Hey, good morning.
George Martinez -- Chief Executive Officer
Good morning.
Daniel Mannix -- Raymond James -- Analyst
Just want to start by going back to deposit. So you talked about FHLB declination recently, you're sitting at about 100% on the loan to deposit ratio. Can you talk about what your comfort level is with that ratio as you look forward here into 2019 and beyond? And along those lines, if you are to see some outsized growth on the loan side, talk about how you think about the trade-off between that and accelerating deposit cost to help fund that growth?
Paul P. Egge -- Executive Vice President & Chief Financial Officer
The way we kind of think about funding our loan growth, if there’s organically a little bit of a timing delay when we bring on our lenders wherein they're able to grow loans, generally speaking that’s when they’re able to grow their deposit book. And that's where kind of, that's a micro level, we're in on a macro level, we use wholesale funds to help manage that differential. And that's where we tend to have -- that's how and why we have wholesale funds on our balance sheet. So our goal is to only really use the wholesale funding FHLB principally in managing that timing differential that you see play out on a macro level and the extent to which we're using FHLB funding is going to be a byproduct of our success and funding our core loan growth to core deposit. We've got a lot of initiatives in place from treasury management. Another standpoint,we’re getting full relationships from our lending customers, but we are very aware of the reality and the challenge in doing that. So that's where FHLB fundings and other sources of funding play into the mix. Greg, you have (inaudible).
George Martinez -- Chief Executive Officer
Yes, I’ll just -- I would just add just two things to follow up with Paul. One, Paul mentioned treasury management. We've gone from a basically a one person team to a five person team in our treasury management sales, which is three treasury management sales and two what we call on-boarding specialists to help collaborate with all the bank offices to generate that non-interest income – or non-interest bearing deposits that we enjoy from our business customers.
The other thing to touch on is just with the combination, Steve had mentioned there were some overlap, but those back office that don't have overlap are actually distinct markets that we're now we'll be able to enjoy kind of a cross-sell of deposit growth. For example, we already have customers -- Allegiance did not have presence in certainly in Sugar Land, the Woodlands, Conroe. So, we're already having customers open up accounts in those offices. We haven't even converted the systems yet. That's a pretty good sign. The -- and conversely with Post Oak, Post Oak customers did not have, let's say, out in Katy or Gulf Freeway or Clear Lake. So as far as the footprint in our deposit opportunity, we're very encouraged by the footprint of the brick and mortar offices.
Daniel Mannix -- Raymond James -- Analyst
That's a great color. Thank you. Wanted to move on to capital mix. According to our math, it looks like it's going to be growing at a pretty nice clip going forward here. Can you talk about what the capital priorities are with the buyback in place now, how do you think about potential dividend, looking at that trade-off versus your organic growth and potential M&A opportunities?
George Martinez -- Chief Executive Officer
The number one and what we believe is the highest value use of our capital is growing the business. But we are fortunately in a position where our returns on tangible capital are getting quite healthy and we plan on kind of continuing to build on that. So it does create a new level of capital flexibility that we have not necessarily had it in the 11-year history of our high growth bank.
So it does create new conversations around the boardroom. And that's why we're very pleased to have the Board -- share repurchase authorization in place, hadn't put it in place in the third quarter before it got popular. And we're very happy to put that into use a little bit here in the fourth quarter.
So that I think it's kind of the first step we like to value and benefit of what that does to provide liquidity to our shareholders. And then otherwise, we're going appreciate our capital flexibility for M&A purposes and the discussion as it relates to a dividend would be a board-level discussion down the road.
Daniel Mannix -- Raymond James -- Analyst
Got it. Just one more if I could. Just wanted to end with just your pulse on the competitive landscape in Houston over the last, excuse me, couple weeks we've heard a lot of focus on the particular market. So just wanted to again get your pulse on it and understanding if M&A has created any opportunity for you guys to gain market share, potential hiring, any disgruntled lenders out there that you guys have been able to pick up? Thank you.
Paul P. Egge -- Executive Vice President & Chief Financial Officer
Well I don't know about disgruntled, but we have made -- we made hires in 2018. Few of those came from through acquisition where we were able to get the lender and they did not go with the bank that was the purchaser. So those opportunities to continue in 2018. Collectively, we interviewed 34 candidates, qualified candidates for lending or deposit gathering position, so that candidate flow is still very good.
It is competitive, but usually once we get or able to get the quality lenders here, the environment here has fostered as we talked about this class of ’16. In three years, that class of ‘16, has already met, basically achieved deposit -- loans and deposit levels that were at the level of the legacy lenders. So, we're encouraged by the candidate flow and what we can do in 2019.
Daniel Mannix -- Raymond James -- Analyst
All right. That's it from me. Thanks gentlemen.
George Martinez -- Chief Executive Officer
All right.
Operator
Thank you. (Operator Instructions) We have a following up question from Matt Olney from Stephens. Your line is now open.
Matthew Covington Olney -- Stephens Inc. -- Analyst
Hey thanks for taking the follow up. I just want to go back to credit quality. I think you mentioned in the prepared remarks there were two loans -- legacy loans that I guess drove some of the non-accrual increase. I believe that the size of those loans was a little bit bigger than I was expecting, relative to your traditional sweet spot business loans below $0.5 million.
Can you just kind of remind me of the details behind that and were those SBA loans you said? Just any more details about how you guys got involved in those loans would be appreciated.
George Martinez -- Chief Executive Officer
Well one thing is, just because the average loan size is in that $300,000 range, we obviously do loans up to the $10 milllion, $12 million size range (inaudible) loan relationships. So obviously there's an entire scale there. So one of them was a hotel loan that we funded the construction on a few years ago and it's just been kind of a little bit slower in getting its occupancy up. It was benefited actually a little bit for a time period due to the Harvey experience and where a lot of people stayed in the hotel for a temporary period of time which kind of masked its real organic business base.
And -- but it's growing a little bit and -- it just doesn't have quite the cash flow we would like to see. There was a lot of equity put into it by the borrower and we were comfortable with it in the underwriting, and -- but we've since put it on non-accrual just as really to be cautious about it, and he is current on his payments, but the appraisal which really looks at where the occupancy is today and the rate of acceleration of the occupancy and it came in low and so we just simply put in a reserve for that one.
And the other one is an SBA loan. That first one, the hotel is not SBA, the second one is.
Matthew Covington Olney -- Stephens Inc. -- Analyst
Got it. And so as far as the provision expense in the fourth quarter, I missed what the comments were on that. Was that provision expense as a result of specific allowance on that hotel loan or was the provision expense in fourth quarter more from the growth?
George Martinez -- Chief Executive Officer
More from the hotel, I mean it was the $3 million total provision expense in that hotel. We actually increased and put in a reserve for that hotel of $2.4 million. If we had not put that in there it would have been like say 600. So it was large part due to that one hotel loan. And there -- obviously there's a lot of other moving parts in there as well, but net-net, that was a big contributor to it.
Matthew Covington Olney -- Stephens Inc. -- Analyst
So I guess how should we be thinking about provision expense for loan losses in 2019, give – given that healthy growth that you talked about previously?
George Martinez -- Chief Executive Officer
They’ve just -- thinking in terms of -- you have your growth, you have your net charge-offs and then you have the purchased loans that come back in through being re-underwritten by the bank as they renew, we will just continue to factor those into our model. Obviously, we look at the qualitative factors in the model as well.
But when you get to the end of the quarter and you assessed your portfolio, you take everything into consideration when you do that. So I don't -- there's nothing left to appreciate from what we currently have experienced. So going forward, it would all be strictly from growth and any charge-off rate, and I have no evidence that indicates that would be incremental over what we've experienced historically.
Matthew Covington Olney -- Stephens Inc. -- Analyst
Okay. Thanks for the comments.
Operator
Thank you. I am showing no further questions at this time. I would now like to turn the call back to George Martinez for any closing remarks.
George Martinez -- 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
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.
Duration: 51 minutes
Call participants:
Courtney Theriot -- Senior Vice President & Manager of Financial Reporting
George Martinez -- Chief Executive Officer
Steven F. Retzloff -- Chairman
Paul P. Egge -- Executive Vice President & Chief Financial Officer
Matthew Covington Olney -- Stephens Inc. -- Analyst
Brad Milsaps -- Sandler O'Neill -- Analyst
Ramon A. Vitulli -- President & Chief Operating Officer
Michael Belmes -- KBW -- Analyst
Daniel Mannix -- Raymond James -- Analyst
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