Allegiance Bancshares (ABTX) Q3 2019 Earnings Call Transcript

Allegiance Bancshares (ABTX)
Q3 2019 Earnings Call
Oct 25, 2019, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Allegiance Bancshares, Inc. third-quarter 2019 earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I'd now like to hand the conference over to your speaker today, Ms.

Courtney Theriot, executive vice president and chief accounting officer. Please go ahead.

Courtney Theriot -- Executive Vice President and Chief Accounting Officer

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; Paul Egge, executive vice president and CFO; 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 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'll 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. Third quarter of 2019 was a productive quarter for us, in which our team of dedicated employees worked to achieve several strategic objectives. We were particularly pleased to see quality growth in noninterest-bearing deposits of 18.5% annualized for the third quarter compared to the second quarter, and broader success on the deposit front that allowed us to let nearly $100 million in broker deposits roll off the balance sheet during the quarter. New loan production was strong at just over $315 million, approximately in line with expectations, although net loan growth came in below expectations due to higher-than-anticipated loan payoffs.

We continue to exercise discipline on pricing and terms. At the end of the quarter, we successfully completed a $60 million subordinated debt offering, which enhances our capital position and also positions us well for future growth. Our investment in our culture across Allegiance is reaping great rewards as we are seeing successes from our recruiting efforts over the years and our ability to increase market share. We added two new lenders during the third quarter to support our future growth and made the strategic hire of a chief information officer to enhance our utilization of technology in all aspects of our business.

At the same time, some bankers have left the bank, and as a result of productivity gains, many will not need to be replaced, thereby improving our cost structure on a go-forward basis. We continue to focus our efforts on creating new and deepening existing customer relationships by providing the same steadfast commitment to delivering personalized service for which we are known within our community. It is this commitment that has helped us grow to better serve our employees, our customers, shareholders, that sets us apart as a premier community bank in the Houston region. We are encouraged about our position of strength and our outlook for the remainder of the year as we work to leverage our talent and capital to produce results for our shareholders.

This morning, we also announced a time line for transitioning to Steve as CEO of Allegiance Bancshares. I will remain as chairman of the board, but Steve as the new CEO will be leading the earnings calls going forward. As I prepare to step away from CEO duties at the end of the year, I'm extremely pleased with the accomplishments of the entire Allegiance family in building Houston's largest community bank, and I know the best is yet to come. 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.

Steve Retzloff -- President

Thanks, George. I also welcome everyone to our third-quarter conference call. We recently completed our 12th year since our start-up in 2007 and are currently ranked 11th in deposit share within the Houston MSA. We accomplished this by way of a near-even split between organic growth and acquisitions.

The brand value behind the Allegiance name and the differentiation that accompany our super-community bank strategy continues to grow and be recognized. Being Houston's bank is core to our identity, and as we continue to gain market share. That relationship deepens every day, not only through the bank services we provide but also from the many hours of volunteer service our staff contributes to the local community. Allegiance Bank was recently recognized for our many efforts with the 2019 Community Builder Award by the West Houston Assistance Ministries.

Our commitment, Beaumont was also reflected through participation by Allegiance bankers from both Houston and Beaumont in their World Habitat Day event. For these and many other community activities, we appreciate the ongoing generosity and dedication from all of our employees. First, I will review our loan production metrics for the third quarter. Total core loans, which excludes mortgage warehouse lines ended the third quarter at $3.85 billion, an increase of $37.6 million during the quarter or an annualized growth rate of 4%.

This compares to the organic growth rate of 4.5% in the second quarter. Year to date, core loan growth has been $189 million or 6.9%. During the third quarter, our staff and lending team once again booked a very strong $315 million of new loans that funded to a level of $210 million by September 30th. This compares to the second quarter when $327 million of new loans were generated, which funded to a level of $222 million by the end of the second quarter.

Paid-off loans continued to be high at $188 million in the third quarter, compared to $175 million in the second quarter and $159 million in the first. The average size of the new organic core loans generated during the third quarter was $407,000 committed and $270,000 funded, which once again reflects our continued focus on building a diverse and granular loan portfolio and as the average size of our funded loans ended the quarter at $337,000. Regarding interest rates on loans, based on total loan amount, the weighted average interest rate charge on our new third quarter core loans was 5.5%, which is below the second quarter weighted average rate of 5.74%. The $180 million of paid-off core loans during the quarter had a weighted average rate of 5.74%.

Carried core loans experienced advances of $109 million at a weighted rate of 5.67% and paydowns of $103 million, which were at a weighted rate of 5.54%. All in, the overall period-end weighted average rate charge on our funded core loans, excluding fees and acquisition accounting, decreased eight basis points during the quarter, ending the quarter at 5.45%, which is close to where the year began at 5.47% as of December 31, 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, 22.2%; nonowner-occupied commercial real estate, 15.6%; commercial term loans, 13.1%; commercial working capital, 8.3%.

These four commercial categories represented 59.2% of the new funded production, compared to 48% for the second quarter and 59.8% for the first quarter of 2019, indicating our ongoing commercial concentration. Loans secured by one to four family residential real estate contributed 21.8% of the new funded core loans; construction and development, including land loans contributed 11.7%; and multifamily contributed 2.6% of the new funded core loans during the quarter. The overall loan mix was little changed on a length-quarter basis. The slide deck posted on our website provides added color regarding our overall mix of loans.

Asset quality at the quarter end remained in a manageable position. The level of net charge-offs experienced during the quarter was once again very modest at $729,000 or an annualized rate of seven basis points. So far, 2019 year-to-date net charge-offs have been at a rate of five basis points as compared to six basis points for all of 2018. Nonperforming assets, including both nonaccrual loans and ORE, ended the quarter up from the second quarter, increasing from 77 to 88 basis points of total assets.

Nonaccrual loans increased a net of $3.3 million during the quarter from $31.3 million to $34.5 million, resulting from both increases and decreases. The decreases were from payoffs of approximately $3.4 million; payments applied to principal of just under $1 million; foreclosures of three properties from two relationships of $2 million, which are now ORE; and charge-offs of $729,000. The increase is totaling $10.3 million for downgrades primarily from two relationships, one at $9 million and a smaller load of approximately $600,000. The additional $700,000 of downgrades was from six smaller relationships.

Regarding the two larger relationships, the smaller one, which is at $600,000, is fully reserved. The larger is a commercial construction project, where although a recent appraisal reflects adequate loan-to-value coverage, project delays and increased construction costs led to the downgraded status. We are working to optimize the outcome of these relationships. To that end, I am pleased to report that since the end of the quarter, two other nonaccrual loans totaling approximately $1.8 million have paid off.

These specific reserves represent approximately 18% of the outstanding balance of the nonaccrual loans. Approximately 75% of the outstanding balances are collateralized by real estate, and the overall estimated loan-to-value at the unreserved exposure of the nonaccrual loans is 80%. Our ORE consists of five properties totaling $8.3 million. The largest is a $5.8 million industrial/commercial real estate property which has a recent appraised value of $6.5 million and is being marketed.

The second largest at $1.2 million is a lot located in the well-established upscale River Oaks subdivision. The third largest is a $575,000 home in a popular gated community. The remainder are three smaller properties, located west of Houston. Overall, we believe our nonperforming assets are well collateralized and manageable.

In terms of our broader watch list, our classified loans as a percentage of total loans increased slightly, ending at 2.18% of total loans as of September 30th, compared to 2.02% at June 3rd. Criticized loans decreased slightly to 2.87% at September 30th, compared to 2.91% at June 30th. The specific reserves for the impaired loans ended the quarter at 18.2% from 20.4% at June 30. On the deposit front, we are pleased by the changes in our deposit mix in the quarter.

Total deposits increased in the third quarter by $36.8 million, representing a 3.8% annualized growth rate in the quarter and 8.5% year to date while, as George mentioned, noninterest-bearing deposits increased $54 million or an annualized growth rate of 18.5%. With that, noninterest-bearing deposits improved to 31.5% of total deposits at September 30th, compared to 30.4% at June 30th and to 31.2% at March 31st, 2019. Finally, the deposit mix further improved during the quarter as we were able to let just under $100 million of broker deposits roll off the balance sheet. Obviously, we are pleased with the recent mix change and continue to focus the entire Allegiance team on our core deposit growth initiatives from both borrowing and nonborrowing customers.

As to the Houston economy, let's first look at the data. The West Texas Intermediate oil price began 2019 at its low of $46.50 has traded as high as $66.30 and is more recently in the mid to low 50s range. The Houston MSA has added 81,000 jobs over the past 12 months, led by professional, scientific and technical services, some manufacturing, other services, distribution and healthcare. Houston unemployment rate was at 3.9% in August, compared to 4.4% a year ago.

Home sales are on the pace for a record-setting year at 58,128 homes sold through the first eight months of 2019. The local area Purchasing Managers Index registered in the expansion zone at 51.6% in August. New vehicle sales are down, 2.4% year to date, showing more slowing in recent months than earlier in the year. But the Port of Houston is reporting increased tonnage, up 4.7% year over year.

And finally, hotel occupancy is down slightly, and average room rates are down a bit. With all of that, there are both signs of strength and some softening. We do, however, note the benefits of Houston's growing population as well as increased economic diversification in globalization. We continue to be disciplined with regard to underwriting standards and monitoring of our relationships in pursuit of consistent, strong, long-term asset quality performance.

As I conclude, I would note that so far in 2019, we have added 13 new lenders, one of which a promising promotion from within. Construction continues to make progress for our new leased branch office in the east side of downtown Houston. The leadership team for that new office and the Easton community anxiously await opening of the branch in early 2020. Finally, as George mentioned, I have humbly accepted the request and election by the board of directors to serve as CEO of the company as George Martinez leaves that responsibility, but continues to serve close by as our chairman.

I'm excited to serve in this capacity alongside Ray Vitulli, who will ably serve as president of the company and CEO of Allegiance Bank; with Paul Egge, our talented CFO; and Okan Akin, soon to serve as the bank's president. I mentioned these three today, but my thoughts of appreciation contain many others. And in contrast to most new CEOs, mine is not a newfound excitement. Rather, my journey began 12 years ago when George and I co-founded the bank and has since evolved into tremendous confidence in our ability to represent excellence for all of our stakeholders as we both weigh and pursue our future.

My great confidence comes from my familiarity with the leadership, talent, and culture that exists at all levels in our organization. I am so grateful to be able to serve the individuals who very much deserve all of the credit for our past accomplishments and from whom our high expectations are derived. With that, I will now turn it over to our CFO, Paul.

Paul Egge -- Executive Vice President and Chief Financial Officer

Thanks, Steve. Third-quarter net income was $12 million or $0.57 per diluted share as compared to second quarter earnings of $14.2 million or $0.66 per diluted share. Third-quarter performance is impacted by a certain onetime item, most notably $1.4 million of severance costs, partially offset by a $676,000 small bank assessment credit from the FDIC, netting to additional expense of about $755,000 in the quarter. Also recall that second-quarter performance benefited from significant nonrecurring revenue items, partially offset by acquisition expenses, netting to an approximately $1.5 million benefit.

Adjusting for these onetime items, net income would have been $12.6 million or $0.59 per diluted share for the third quarter versus an adjusted $13.1 million or $0.61 per diluted share in the second quarter. Third quarter net interest income was $44.8 million, down from $45.6 million in the second quarter, primarily due to lower acquisition accounting accretion versus the second quarter as higher interest-earning assets was essentially offset by lower net interest margin before acquisition accounting. In the third quarter, acquisition accounting accretion increased net interest income by $2 million, compared to $2.8 million during the second quarter. Beginning the third quarter, acquisition accounting accretion increased loan income by $1.9 million and reduced CD expense by $154,000 for a total positive effect on net interest income of $2 million.

This quarter's accretion leaves $7.2 million in the loan mark and $694,000 in the CD. Yield on loans in the third quarter was 5.72% versus 5.88% for the second quarter and 5.49% for the year-ago quarter. Adjusting for the acquisition accretion recorded during the third quarter, yield on loans would have been 5.43% versus 5.62% in the second quarter. The total yield on interest-earning assets was 5.43% for the third quarter, 5.58% for the second quarter and 5.12% for the year-ago quarter.

Adjusting for the acquisition accretion, total yield on earning assets would have been 5.26%, compared to an adjusted total yield on earning assets of 5.34% for the second quarter. The total cost of interest-bearing liabilities was 188 basis points for the third quarter, compared to 186 basis points in the second quarter and 153 basis points for the year-ago quarter. Overall cost of funds for the third quarter was 133 basis points versus 132 basis points in the second quarter and 109 basis points in the year-ago quarter. Excluding acquisition accounting adjustments in the third quarter, the total cost of interest-bearing liabilities would have been 190 basis points, and the overall total cost of funds would have been 135 basis points.

During the quarter, we did see inflection in our cost of funds on a monthly basis, and we feel well positioned to show incremental improvement in our cost of funds as we work to reprice our deposits in the current lower interest rate environment. Taxable net interest margin for the third quarter was 4.16%, compared to 4.33% in the second quarter. Adjusting for the acquisition accounting accretion, the net interest margin would have been 3.97% for the third quarter, compared to 4.07% in the second quarter. Noninterest income decreased to $2.9 million for the third quarter from $3.8 million for the second quarter, primarily due to the second quarter being bolstered by certain nonrecurring revenue items, including $846,000 on the gain of sale securities and $214,000 of lumpy SBIC income.

Total noninterest expense in the third quarter was $30 million, compared to $30.1 million in the second quarter. Note that during the third quarter, we incurred $1.4 million of severance expenses, partially offset by the $676,000 Small Bank Assessment Credit from the FDIC. The efficiency ratio for the third quarter was 62.88% from 61.93% that we posted in the second quarter and 63.95% for the prior-year quarter. Excluding the onetime expenses during the quarter, the efficiency ratio for the third quarter of 2019 would have been 61.3%.

The provision for loan losses was $2.6 million for the third quarter, and the ending allowance at $29.8 million is 77 basis points of total loans. If you were to include the $7.2 million in the loan mark remaining on acquired loans, the ending allowance plus loan mark to total loans is 95 basis points. Bottom line, our third-quarter 2019 produced a return on average assets of 0.98%, and a return on average tangible equity of 10.33%. On a pre-tax pre-provision basis, our ROAA during the quarter was 1.45%.

And excluding the onetime items previously discussed, it would have been 1.51%. Last, we'd like to highlight that we were actively repurchasing shares under our new repurchase authorization, buying just over 437 shares at a weighted average price of $32.45 per share during the quarter. We feel comfortable with our capital position and our flexibility to consider future share repurchases under the existing authorization. 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 & Answers:

Operator

[Operator instructions] Our first question comes from Matt Olney with Stephens. Your line is now open.

Matt Olney -- Stephens Inc. -- Analyst

Hey. Thanks. Good morning, guys.

George Martinez -- Chairman and Chief Executive Officer

Good morning, Matt.

Steve Retzloff -- President

Good morning.

Matt Olney -- Stephens Inc. -- Analyst

I'll start on the deposit side. I think Paul, I believe you mentioned that this was an inflection point on the deposit cost side. In the third quarter, we still see higher deposit costs versus 2Q. So I'm curious, what month did this inflect in 3Q? And can you give us some color about how much improvement of deposit costs we should expect over the next few quarters?

Paul Egge -- Executive Vice President and Chief Financial Officer

Certainly. It's a little bit slower on the way down than it was on the way up. Interestingly enough, the deposit costs or cost of funds really peaked in June and July and showed positive -- decreased slightly in August and September, respectively. So progress is being made, but the -- it sure did ramp up a lot faster than it's coming down, really because we want to be as thoughtful as possible as we approach those repricing discussions with our depositors, particularly since we still have growth ambitions as it relates to ensuring that those deposits stay at the bank.

Matt Olney -- Stephens Inc. -- Analyst

OK. Great. And then on the loan side, I think it sounds like the payoffs remain elevated. I think it's a theme that we're hearing from others as well.

Anything you can point to specifically that you've seen recently? Is it bank competition, nonbank competition? Are these borrowers selling their businesses? Any more color's appreciated.

Ray Vitulli -- Executive Vice President and President

Hey, Matt, the -- we hadn't looked at that really on just the entire year because the outsized payoffs has really been that way for all three quarters. And if you look at all three quarters in aggregate and you look at those paydowns, we're seeing about 20%, 21% of paydowns are related to better terms, better pricing where we're just -- we just remain disciplined on those loans as far as how we price. And then about 80% is in the category of sale of business, sale of company, cash in bank to -- I just got the loan, had nothing to do with competition or anything like that. So that's where we stand year to date.

And we are looking at that but again, we're going to remain disciplined in our pricing, and I think we may see some of that in the company. That's what's happening in the competitive market on the loan side.

Matt Olney -- Stephens Inc. -- Analyst

And, Ray, are you sensitive that those headwinds and those challenges intensified in the third quarter or had just remained consistent throughout 2019?

Ray Vitulli -- Executive Vice President and President

I think on the -- I looked at it on a year-to-date basis, there may have been a little uptick in the third quarter in the better terms, leaving for terms and conditions. But it looks to be pretty consistent over all three quarters.

Matt Olney -- Stephens Inc. -- Analyst

OK. And then as far as the producer headcount, I think, as Steve said, it's been 13 year-to-date additions. But on the other hand, it sounds like you've lost a handful of employees. Were those revenue producers or nonrevenue? And how many employees have you lost? And I guess, just give us the overall headcount of the total producers.

Ray Vitulli -- Executive Vice President and President

On the producer side, the -- in the quarter, the two that were added in the quarter kept our producer level the same. So we entered the quarter with 115, and we finished the quarter with 115. So there was an add of two and a loss of two.

Matt Olney -- Stephens Inc. -- Analyst

Got it. OK. Thank you, guys.

George Martinez -- Chairman and Chief Executive Officer

Yes. Thanks, Matt.

Operator

Our next question comes from Brady Gailey with KBW. Your line is now open.

Brady Gailey -- KBW -- Analyst

Thank you. Good morning, guys.

George Martinez -- Chairman and Chief Executive Officer

Good morning.

Steve Retzloff -- President

Good morning.

Brady Gailey -- KBW -- Analyst

I wanted to start with the sub debt raise of $60 million at a pretty attractive cost. How do you think that plays into continuing the buyback? I mean, you've repurchased about 6% of the company year to date. Do you anticipate utilizing the full $60 million of sub debt to continue to repurchase stock here?

Paul Egge -- Executive Vice President and Chief Financial Officer

Well, our first kind of step on bringing that sub debt in was to pay down our holding company line of credit, which we did in early October and then the remainder and what we had drawn to finance some repurchases ahead of that sub-debt raise. So some of that repurchase activity that we stated on the prepared comments had been financed by the holding company line of credit. And then what remains of that proceeds in the bank would be sufficient to cover any additional share repurchases under our existing plan.

Brady Gailey -- KBW -- Analyst

OK. All right. And any color on the CECL impact to your reserve that's coming up next quarter?

Paul Egge -- Executive Vice President and Chief Financial Officer

I can provide some -- our reserve will be higher directionally. I've note that probably the -- one of the larger points of comparison is the fact that the discount that we have on purchased loans will manifest itself more directly in a reserve, come CECL adjustment on January 1, and then the adjustment will go from there. And we're comfortable with the levels. And in particular, we feel like we've been able to be pretty agnostic as it relates to the outcome of CECL because of that Tier 2 capital treatment from the overall reserves did it not fall into the income statement.

Brady Gailey -- KBW -- Analyst

All right. And then you had roughly $2 million of accretable yield this quarter. I know CECL can impact that number just as that $7.2 million discount moves into the reserve. Do you expect a notable drop-off in yield accretion in 2020?

Paul Egge -- Executive Vice President and Chief Financial Officer

Yes. And actually, it stands to reason as you've seen, the accretion we've had since the closing of the transaction. What you witnessed in the first three quarters was a transaction -- first quarter -- pardon me, the fourth quarter of '18 and the first two quarters of '19, relatively higher levels of accretion. It dropped off rather significantly here in the third quarter.

It'll step -- it's scheduled to set down to, by a large margin, here in the fourth quarter. I'd say that at least 25% if you don't have an impact from early paydowns and some of the things along those lines. There's a lot of stuff that can affect the schedule of our accretion. And then what's left really accretes into the earnings stream at a less rapid pace.

So 2019 -- 2020 accretion will be significantly lower than 2019 accretion levels.

Brady Gailey -- KBW -- Analyst

All right. That's helpful. And then finally for me, the benefit you saw from the FDIC assessment credit. I mean, is there any of that left that will be a benefit in future quarters?

Paul Egge -- Executive Vice President and Chief Financial Officer

Yes, there is a -- some left for the fourth quarter. I don't believe it will be as large as the third quarter. We were fortunate in that we get the benefit -- based on timing, we get the benefit of both our Small Bank Assessment Credit and that of Post Oak. So we will have some remaining benefit going into the fourth quarter.

And we're hopeful that future assessment credits could come through from the FDIC, but we'll see.

Brady Gailey -- KBW -- Analyst

Right. Great. And George, good luck in retirement, wish you all the best.

George Martinez -- Chairman and Chief Executive Officer

Thank you, Brady.

Operator

Our next question comes from Brad Milsaps with Sandler O'Neill. Your line is now open.

Peter Ruiz -- Sandler O'Neill + Partners, L.P. -- Analyst

Hey. Good morning. It's actually Peter Ruiz on for Brad.

George Martinez -- Chairman and Chief Executive Officer

Good morning, Peter.

Peter Ruiz -- Sandler O'Neill + Partners, L.P. -- Analyst

Just wanted to maybe follow up on the margin. I appreciate all the color you guys gave, but just was thinking about -- you've previously kind of indicated that you thought the NIM could maybe hold steady here even on future rate reductions. But just wanted to get your sense on what that looks like going into 2020 if we do get this -- get another cut here in -- next week and just what you guys are thinking from here.

Paul Egge -- Executive Vice President and Chief Financial Officer

Certainly. We're working hard to execute such that we can maintain a stable NIM. The structural implication of the sub-debt deal will have some effect on our NIM positioning. And as we see in the longer term, we like our overall NIM story by virtue of the nature of our lending being a little higher rate, and you just really have to go back to the prior interest rate cycle two or three years ago to see where our yield on interesting assets played out or tend to be.

We do have a rate-sensitive liability base. So we think as we hit floors, there's the potential for there to be some wind at the back of our NIM. But up to this point, we've been feeling pressure. And it's hard right now, given some changes in the funding markets and the lending markets, our competitive markets, to give too bullish signals on NIM, notwithstanding the fact that, kind of broadly speaking, we like the NIM implications of where we operate our business.

Peter Ruiz -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. Maybe following up on Matt's question. Just in terms of the deposit cost, you mentioned you reached an inflection point. Total deposit costs were essentially flat linked to quarter.

So can you kind of give a sense of where spot rate kind of deposit costs were for some of the products, maybe the month of September versus where they were in July?

Paul Egge -- Executive Vice President and Chief Financial Officer

They're certainly lower. I mean, we -- if you follow where the wholesale curve was in September versus July, we try to keep our pricing at consistent spreads from that. And so that's what's enabled us to have a little bit more of a -- empowerment when we go to repricing discussions with some of our more price-sensitive deposits. But we tend to kind of base our pricing -- deposit pricing methodology based on the competitive markets we're in using where the wholesale FHLB and brokered curves are as the baseline and pursuing certain spreads within there and then letting that guide a little bit of our -- of how we think about exceptions.

So I think that point-to-point comparison would probably be the right thing to look at probably with a little bit of a lag, particularly as it relates to how we approach the deposit repricing discussion, there is some lag, particularly on the CDs since it's a function of that, of what's coming due and renewing. But other than that, we try to -- we do operate on somewhat of a lag. So the benefits aren't going to be as stairstep as they would in some cases. Although we do have certain portions of our deposit base that our 100 beta linked to Fed funds.

It's just that's not the preponderance.

Peter Ruiz -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. Great. Thank you.

Operator

[Operator instructions] Our next question comes from the line of David Feaster with Raymond James. Your line is now open.

David Feaster -- Raymond James -- Analyst

Hey. Good morning, guys.

George Martinez -- Chairman and Chief Executive Officer

Good morning, David.

David Feaster -- Raymond James -- Analyst

I'd just like to follow up on that, the comments on -- about your -- floors on your loan portfolio. Could you give us some more details into that? How much of your book has floors? How close to -- are we to hitting those? And ultimately, given your history and your client base, how effective have floors been? And how effective do you expect them to be at protecting loan yields?

Ray Vitulli -- Executive Vice President and President

Well, about a third of the portfolio is variable and almost, I would say, other than the SBA piece that's in there, those loans generally have floors. So I think the question is where does the floor -- what is the level of the floor? So, I mean, we've seen floors that are -- some floors that we've had that never -- we never busted through the floor, even on a rising rate environment and some of those loans are still on the book. So I mean the floor is going to range somewhere between four something to five -- fours and the fives. So we feel really good about that on our variable book.

And that's -- again, that's about a third of the portfolio.

David Feaster -- Raymond James -- Analyst

OK. That's helpful. And then I guess, so looking to the core NIM, you've got the sub debt coming off. It sounds like loan yields, there were some noise there that are -- caused loan yields to decline more than what we would have expected.

I mean how do you think about a core NIM next year as we -- with the prospect -- you got the September cut coming through and prospects of another one. I mean do you think we're going to have a core NIM here in the mid 3.80s ? Or is there opportunity to get it closer to 3.90.

Paul Egge -- Executive Vice President and Chief Financial Officer

Where we'll project our core NIM is the -- where we operate and where we land and our ability to have a little bit more pricing power than the anecdotal discussions of loan competition out there about kind of 10-year nonrecourse funding at 3.85. We don't operate in that type of market, in general. And we're not -- we do see that competition. But generally speaking, it's not targeted toward our client base.

And we're -- we've historically been able to benefit from some pricing power as a byproduct, and we're going to seek to do just that in this rate environment to overall kind of maintain a floor on the overall yield story on our assets and put us in a position to appreciate the lag benefits of repricing the deposits. So we see that as being a medium to long-term stabilizer in our NIM. So, but in the short term, as you see in the third quarter, we felt the squeeze and how it plays out and then determines probably what's a little more uncertain for us as we know and are pretty confident in the overall strength of our long -- medium and longer-term NIM composition in a down rate environment.

George Martinez -- Chairman and Chief Executive Officer

We're just going to remain very disciplined on pricing and underwriting and terms and so forth. And given the kind of the smaller loan-type customer, as Paul says, we're underwriting that particular client base at rates that are commensurate to the type of risks that they pose. And the underwriting, like I say, is not changing in terms of credit quality.

David Feaster -- Raymond James -- Analyst

OK. That's helpful. And kind of along the same lines, I mean, with you sticking to your guns in terms of underwriting and pricing and that as Ray talked about, increasing competition and elevated paydowns, I mean, how do you think about loan growth going forward? I mean, some originations are obviously holding up pretty well. But I mean, given elevated pay downs and potentially higher competition, is a more of a mid- single-digit rate of growth more appropriate or do you think you can stay somewhere in that high single-digit level or north of that?

Ray Vitulli -- Executive Vice President and President

Well, I mean we're originating. And other than the -- I mean, paydowns are a big piece. But I mean, we're originating to grow than what you're describing. We do have -- with the lenders we brought on board, we do have capacity of market share growth that we're going to rely on to get the growth that we -- that we're looking for.

So it's like we've seen this year, it's a function of the pay downs, and we'll just continue to originate. And we like that leading indicator, which is the levels of originations we've had and we're happy with that.

David Feaster -- Raymond James -- Analyst

OK. All right. Thanks, guys.

Operator

Our next question comes from Matt Olney with Stephens. Your line is now open.

Matt Olney -- Stephens Inc. -- Analyst

Hi. Yes. Just a follow-up on the overall strategy here. We're talking about the revenue headwinds with respect to the margin and slower loan growth from some of these paydowns.

And I'm just curious on the operating expenses and if you're going to slow down the rate of expense growth. And so specifically, I'm looking for some help on operating expense growth in 2020.

George Martinez -- Chairman and Chief Executive Officer

We're -- we've been unabashedly investing in the future for many years. And then there comes times when you can take advantage of some of that previous spin and leverage off of that into the future. And we feel like there's probably a reasonable amount of opportunity for that on the margin going forward. So we're looking for improvements.

The spend rate is probably tapered a little bit just in some of the changes in the third quarter and year-to-date, such that I think we can take advantage of that a little bit in Q4 and early in '20. And so again, we've got capacity and a lot of the lenders already. We are opening an office in January. We are proud of that, as we mentioned.

Those lenders that are in there are already working for the bank so that's not a net increase. So we're -- we think we can improve that operating leverage a bit going forward. And I mean, loan growth will certainly be a part of that equation. And with NIM?

Paul Egge -- Executive Vice President and Chief Financial Officer

Yes. In George's prepared remarks, he acknowledged, really leveraging productivity gains and where we have retirements or certain levels of turnover of being in the position to not replace. And yes, I think that can have structural benefits in helping our cost structure, notwithstanding the fact that we want to maintain a growth posture and continue to invest in the business.

Matt Olney -- Stephens Inc. -- Analyst

And I respect that you guys are probably in your budget planning sessions for next year but, Paul, are there any numbers you can help to put behind that as far as thinking about the expenses in 2020?

Paul Egge -- Executive Vice President and Chief Financial Officer

[Inaudible] Seeing that we don't have a practice of giving guidance just yet. I'll defer on that but we are planning to be mindful of some of the potential realities of the current environment as we plan for 2020.

Matt Olney -- Stephens Inc. -- Analyst

OK. And then I'll also ask about credit quality. I think you mentioned in the prepared remarks, the addition of a $9 million -- I think that was a nonaccrual loan, if I heard it correctly, commercial construction loan with some delays. Any more color on that? What type of project is this? Any specific reserve? And what's the loan-to-value on this project?

Steve Retzloff -- President

The loan-to-value in that kind of 80%, 85% range. And not too much color on the loan but it looks like a viable project with good demand that just experienced some delays and a few cost overruns. Some actually weren't even caused by mother nature. But yes, we feel good about what we're doing to work with that particular borrower in that case.

But -- and that was a big part of the number. When you look at the nonaccruals or the nonperforming assets that -- the big jump was that one loan. But again, real estate collateral is something that doesn't run away at the end of the day, and you still have it to work with. So we feel good about that one, at least in terms of the base and type of nature of it.

Matt Olney -- Stephens Inc. -- Analyst

And there was a higher provision expense for loan losses this quarter. Was there something specific on that loan or a separate loan that drove that?

Paul Egge -- Executive Vice President and Chief Financial Officer

Nothing specific on that one. But there was some impairment activity on smaller loans. I think Steve actually acknowledged a little bit of that. What you did see is by virtue of the to-date accretion on the acquired loans.

Our methodology called for topping off our allowance for our loan losses relating to the relative size of the discount on the acquired loans. So that ended up being a relatively meaningful piece of the overall provisioning story.

Matt Olney -- Stephens Inc. -- Analyst

Got it. OK. Thank you, guys.

Operator

I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. Martinez for closing remarks.

George Martinez -- Chairman and Chief Executive Officer

Once again, we really appreciate your time and interest in Allegiance and our team looks forward to speaking to you again in the future. Thank you very much.

Operator

[Operator signoff]

Duration: 47 minutes

Call participants:

Courtney Theriot -- Executive Vice President and Chief Accounting Officer

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

Brady Gailey -- KBW -- Analyst

Peter Ruiz -- Sandler O'Neill + Partners, L.P. -- Analyst

David Feaster -- Raymond James -- Analyst

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