Allegiance Bancshares (ABTX) Q1 2020 Earnings Call Transcript

Allegiance Bancshares (ABTX)
Q1 2020 Earnings Call
Apr 30, 2020, 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 first-quarter 2020 Allegiance Bancshares, Inc. earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] It is now my pleasure to introduce Chief Accounting Officer Courtney Theriot.

Courtney Theriot -- Chief Accounting Officer

Thank you, operator, and thank you to all who have joined our call today. This morning's earnings call will be led by Steve Retzloff, CEO of the company; Ray Vitulli, president of the company and CEO of Allegiance Bank; Paul Egge, executive vice president and CFO; Okan Akin, executive vice president and chief risk officer of the company and president of Allegiance Bank; and Shanna Kuzdzal, executive vice president and general counsel. Before we begin, I need to remind everyone that some of the remarks made today may constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, as amended. We intend all such statements to be covered by the safe harbor provisions for forward-looking statements contained in the act.

Also note that if we give guidance about future results, that guidance is only reflective 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 Steve Retzloff.

Steve Retzloff -- Chief Executive Officer

Thank you, Courtney, and we welcome all of you to our first-quarter earnings call. All of us here at Allegiance certainly hope and pray that, under the current circumstances, the pandemic has had as little detrimental impact on all of you who are listening as possible with regard to your personal health, your business pursuits and particularly your outlook and vision for our collective future as we all work together for an effective and complete recovery, including locally, nationally and worldwide. Ray will speak to our well-executed pandemic response in recent activities in more detail, but I cannot delegate my expression of deep gratitude to the Allegiance bankers whose sacrificial efforts during late nights and consecutive entire weekends has been beyond inspirational and which constitute a significant adhesive for the communities we serve. Our focus, as the pandemic has unfolded, has not so much represented a shift to something new, but rather, due to unwelcomed circumstances, it has strangely showcased our bankers by being right where they have always pledged to be, taking care of our customers, their employees and their families.

As we report under today's present uncertainties, it is important to note that we entered 2020 in a position of considerable strength, bigger and better than ever, and we preserve that strength notwithstanding lower Q1 2020 earnings. During the quarter, our recurring pre-tax pre-provision earnings were solid. The bottom line was negatively impacted by significant provisioning due to the broader risks and uncertainties relating to the COVID-19 pandemic and ORE writedowns. Core NIM actually expanded in the quarter, and we like our prospect for maintaining a strong margin despite today's low interest rate environment.

Perhaps, most importantly, we ended the quarter at just over $5 billion in assets and in a very strong capital position with a consolidated total risk-based capital ratio of 14.73%, compared to a year earlier at 13.28%. And our bank-level regulatory capital ratios remain at near all-time highs. As we address the current economic environment, our super-community bank strategy is not only alive and well but, in my opinion, hits many proverbial bull's-eyes. By providing extraordinary service to small and medium-sized businesses in our region, while building the scale to provide a full range of relevant products and services, we are differentiated from the competition and able to take advantage of a long-held marketplace opportunity, which condenses down to two words: extraordinary service.

This differentiation, however, is less significant as a marketing talking point but rather more of a manifestation of a true value proposition for our customers, which we believe translates into an excellent risk/reward opportunity for our shareholders. In short, our close customer relationships are exactly what is required to address the current evolving needs of our client base. Just as we stepped up in the aftermath of Hurricane Harvey, we are at it again and even better at it than before. I also like the position that our super-community bank strategy places us in.

As a bank oriented toward small, local businesses, our loan portfolio remains granular, diversified, well underwritten by predominantly real estate assets, predominantly owner-occupied with an emphasis on personal guarantees from our borrowers. These customers are precisely the small businesses that are the target of the government's relief efforts through the PPP loans, and our team has stepped up in a big way to serve as a conduit in that effort, which Ray will explain shortly. As to broader exposures to the virus-related economic challenges, the analogy to masks and gloves or PPE that serve to protect the bank is our relative lack of or limited exposure to a number of hot topic risks, including direct oil and gas, shared national credits, hospitality, big-box retail, large land development, high-rise office and nonrecourse lending. Also, fortunately, for us, our technology is more solid than ever.

Our product set is aligned to our customers' needs, our service unparalleled, and our scale presents a great, long-term earnings potential. Finally, I would remind everyone that the Houston region has weathered many economic cycles and storms. It is a vibrant area of Texas, growing in economic diversity and continues to be for people like myself and most of our bankers who have called it home for our entire lives, a region filled with people who have a great heart, a strong will to succeed and understand deeply what it means to take the bull by the horns. So next, Ray will describe our loan and deposit production results, as well as an outlook on credit; followed by Paul who will cover our financial results.

We will then open up the call for questions.

Ray Vitulli -- President of the Company and Chief Executive Officer of Allegiance Bank

Thanks, Steve. Given the impact of COVID on how we do business and how we are assisting business owners, as Steve mentioned, I will provide details on our execution of both our business continuity plan and PPP loan approvals, followed by our normal reporting of first-quarter results. We are very pleased with all aspects of the execution of our business continuity plan. In early February, we placed our plan in motion, which resulted in a seamless transition from our normal work environment to all things necessary to meet the ever-changing requirements once COVID was declared a pandemic.

From working remotely to social distancing, to no more than 10 in the gathering, to creating COVID-related policies and procedures, to communicating internally and externally, our team executed in a way that I can only describe as extraordinary. We certainly leveraged our experience and best practices learned from Hurricane Harvey, but our agile project management process has paid off, and we are able to respond and deliver to whatever comes our way, sometimes within minutes. We're also very pleased with our PPP loan results and the impact of our efforts on the Houston region. As of April 26, we had more than 3,500 loans approved with aggregate approvals in excess of $640 million, affecting more than 55,000 jobs.

We believe that our super-community banking strategy allowed for these type of results as our bankers work closely with our customers. And the outreach, gathering of information and questions and answers were able to be handled by our bankers located in our 27 bank offices with support from our highly experienced SBA team and many other essential department areas. For some perspective on the first authorization of PPP funds, the $640 million in aggregate approvals represents 2.25% market share of all approvals in Texas and 0.21% market share of all approvals nationally, compared to our deposit market share of 0.49% in Texas and 0.03% nationally, meaning our PPP results were around five times would be expected for a bank of our size. We are now processing additional applications as a result of the funding reauthorization, and we'll be able to report total PPP numbers at a later date.

I will now go over our first-quarter results and provide some additional information on several segments of our loan portfolio, including the volume and nature of payment deferrals that have been granted as a result of the pandemic, before turning it over to Paul. Total core loans, which excludes mortgage warehouse lines, ended the first quarter at $3.95 billion, an increase of $47.4 million during the quarter or an annualized growth rate of 4.9%. This compares to the total core loan growth rate of 5.9% for the fourth-quarter 2019. During the first quarter, our staff and lending team once again booked a very strong $294 million of new loans that funded to a level of $202 million by March 31.

This compares to the fourth quarter when $299 million of new loans were generated, which funded to a level of $189 million by the end of the fourth quarter. Paid-off loans continued to be elevated at $204 million in the first quarter, compared to $182 million in the fourth-quarter 2019 and $188 million in the third quarter of 2019. To give you a picture of the increased level of paydowns over the prior year, paid-off loans for the year-ago quarter were $159 million. The average size of the new organic loans -- core loans generated during the fourth quarter was $323,000 with an average funded balance of $239,000, which, once again, reflects our continued focus on building a diverse and granular loan portfolio.

The average size of all funded loans ended the quarter at $344,000. Regarding interest rates on loans, based on total loan amount, the weighted average interest rate charge on our new first-quarter core loans was 5.08%, which is below the fourth-quarter 2019 weighted average rate of 5.39% and the third-quarter 2019 weighted average rate of 5.50%. The $203 million of paid-off core loans during the quarter had a weighted average rate of 5.34%. Carried core loans experienced advances of $142 million at a weighted average rate of 5.30% and paydowns of $94 million, which were at a weighted average rate of 5.25%.All in, the overall period-end weighted average rate charge on our funded core loans decreased 13 basis points, ending the quarter at 5.29%, compared to 5.42% as of December 31, 2019.

The mix of new loan production based on first-quarter funded levels was represented by the following four commercial categories: nonowner-occupied commercial real estate, owner-occupied commercial real estate, commercial term loans and commercial working capital loans. These four commercial categories represented 58% of the new funded production for the first quarter, compared to 57.5% for the fourth-quarter 2019, indicating our ongoing commercial concentration. I would now like to provide some additional information on three loan categories that could have heightened risk due to energy prices and/or the COVID pandemic, those being our oil and gas portfolio, our hotel portfolio and our restaurant and bar portfolio. Despite being a Houston region bank, our overall exposure to oil and gas is largely indirect as we do not have any reserve-based loans.

So we have defined the category to be any borrower that operates in or directly supports the upstream, midstream or downstream segments of the industry. At March 31, this category is approximately 2% of our funded loans or $80.7 million, of which $46.7 million was C&I and $34 million was commercial real estate. Regarding our hotel portfolio, at March 31, we had $133 million of hotel loans, of which $126.1 million was commercial real estate, $4.4 million was C&D and $2.6 million was in C&I. Of the CRE, $126.1 million, the weighted average LTV for the portfolio was 53.8%.

A 20% stress testing of the most recent appraised value, plus 6% marketing expenses, resulted in an overall collateral deficiency of approximately $1 million, and regarding our restaurant and bar portfolio, at March 31, we had $101.3 million of restaurant and bar loans, of which $71.1 million was commercial real estate, $27.9 million was C&I and $2.4 million was C&D. For the $71.1 million in CRE, the weighted average LTV for the portfolio was 47.7%. A 20% stress testing of the most recent appraised value, plus 6% marketing expenses, resulted in an overall collateral deficiency of approximately $8.2 million. In terms of our overall loan portfolio, the loan type mix was a little changed on a linked-quarter basis.

The slide deck posted on our website provides added color regarding our overall mix of loans. Asset quality at quarter end remained in a manageable position. The level of net charge-offs experienced during the quarter was $2.9 million or an annualized rate of 30 basis points, primarily due to a previously announced $2.1 million charge-off on a loan that had been impaired and reserved for in 2019 that is now in ORE. We are pleased to report that nonperforming assets, including both nonaccrual loans and ORE, ended the first quarter down from the fourth quarter, decreasing from 74 to 68 basis points of total assets.

Nonaccrual loans decreased a net of $6.8 million during the quarter from $28.4 to $21.6 million, primarily due to foreclosures of $8.7 million, charge-offs of $3 million and payoffs and payments of approximately $1.1 million. This decrease was partially offset by increases in nonaccrual loans totaling $6.1 million as a result of downgrades, primarily from 18 relationships, three of which totaled $4.1 million. The additional $2 million of downgrades was from 15 smaller relationships.Our ORE consists of six properties totaling $12.6 million. The largest is a $5.5 million commercial real estate property; with the second largest being a $5.2 million industrial commercial real estate property; and the third largest, a $995,000 residential lot.

The remainder are three smaller properties, one in Houston, one located in West of Houston and oen in Beaumont. All properties are being actively marketed, and several are currently in contract negotiations for a potential sale. Generally, we believe our nonperforming assets are well collateralized. In terms of our broader watch list, our classified loans as a percentage of total loans increased slightly to 2.41% of total loans as of March 31 from 2.23% as of December 31.

Criticized loans remained at 2.85% at March 31 and December 31. The specific reserves for the impaired loans ended the quarter at 11.3%, compared to 14.5% at December 31. On the deposit front, we saw a decrease in total deposits in the first quarter by $114.5 million but still up $173.5 million over the year-ago quarter. As we noted last quarter, we expected a portion of the late fourth-quarter 2019 growth to be temporary in nature.

The vast majority of the decrease in this category we call carried accounts, meaning the outflow was from accounts that remain at the bank as opposed to accounts being closed. The nature of the decreases were generally for tax payments, partner distributions and moves to brokerage accounts to take advantage of the opportunities in the equity markets. Noninterest-bearing deposits decreased $34.7 million during the first quarter but still up $35.6 million over the year-ago quarter. With that, our noninterest-bearing deposits to total deposits ratio was 30.8% for both March 31, 2020, and December 31, 2019, compared to 31.3% at March 31, 2019.

We seek to continue our track record of keeping this ratio at or above 30%. Back to some other items related to the effects of the pandemic on our borrowing customers. In March, we started to offer payment deferrals of generally no more than 90 days to eligible borrowers. As of April 26, we had deferred 1,563 loans with an aggregate loan balance of $838 million.

The deferrals in the largest categories by loan type are as follows: retail, 18%; C&I, 13%; hotel, 8%; C-Store, 8%; rental or investment property, 7%; one-four family, 6%; office, 6%; and restaurant and bar, 5%. Inclusive of these amounts were 1% of deferrals on oil and gas loans. As previously mentioned, our approved PPP loans totaled approximately $640 million. We are still gathering data for the entire population of PPP loans in terms of industry breakdown.

But for more than 75% of this population, the breakdown by industry is as follows: manufacturing, 15%; services, 13%; subcontractors, 11%; restaurants and bars, 6%; commercial construction, 6%; oil and gas, 5%; retail, 3%; hotels, 1%. While it is too early to quantify the impact of the CARES Act stimulus program, loan deferrals and PPP on our loan portfolio, we feel good that the impact will be a positive one and provides the bridge for our borrowing customers until we return to better economic conditions. As Steve mentioned, Houston is a vibrant, growing region, and our economic diversification of the region continues to increase with the expansion of sectors, such as the Port of Houston, Texas Medical Center and numerous process industries, which are all well noted in our prior-quarter calls. According to the Texas Workforce Commission, direct oil and gas jobs in the Houston MSA have decreased from 13.2% in 1991 to the current level of 8.6% of all jobs, indicating this improved diversification.

We remain enthused by the change that has taken place in the region over the past few decades and are optimistic of the market opportunity that lies ahead of us as the region's largest locally focused community bank. Finally, I want to acknowledge that the entrepreneurial spirit is in the DNA of all those that call the Houston region home. It is this spirit that attracts many to this region, contributing to the consistently strong population growth and demographic trends that we believe are the true success drivers for much of our clientele and the broader small- to medium-sized business community in Houston. I'll now turn it over to our CFO, Paul.

Paul Egge -- Executive Vice President and Chief Financial Officer

Thanks, Ray. As Steve mentioned, first-quarter results were significantly affected by the $11 million provision expense in response to COVID and OREO writedowns of $2.2 million during the quarter. Net income was $3.5 million or $0.17 per diluted share in the first quarter as compared to fourth-quarter earnings of $14 million or $0.67 per diluted share and first-quarter 2019 earnings of $12.7 million or $0.58 per diluted share. Recall that fourth-quarter 2019 performance benefited from certain onetime items that netted to additional pre-tax income of approximately $630,000.

Adjusting for these onetime events, net income would have been $13.4 million or $0.64 per diluted share for the fourth quarter. So if we adjust our first quarter for the $2.2 million OREO writedowns and net gain on sale of $125,000, net income would have been $5.2 million or $0.25 per share. Pretax pre-provision income for the first quarter was $15.3 million, compared to $18.5 million in the fourth quarter and $16.8 million for the year-ago quarter. Adjusting for OREO writedowns and net gain on sale income in the quarter, adjusted pre-tax pre-provision income would have been $17.4 million for the quarter as compared to an adjusted $17.9 million for the fourth quarter.

First-quarter net interest income was $45 million, up from $44.5 million in the fourth quarter, primarily due to lower interest expense, partially offset by lower interest income due to less purchase accounting accretion. Total interest expense decreased by $1.2 million, and acquisition accounting accretion decreased by $601,000 compared to the fourth quarter. Acquisition accounting accretion increased loan income by $1.1 million and reduced CD expense by $110,000 for a total positive effect on net interest income of $1.3 million during the first quarter. This quarter's accretion leaves $4.3 million in the loan mark and $466,000 in the CD mark.

Yield on loans in the first quarter was 5.59% versus 5.65% in the fourth quarter and 5.86% for the year-ago quarter. Adjusting for acquisition accretion, yield on loans would have been 5.47% for both the first and fourth quarters, compared to 5.57% in the year-ago quarter. Total yield on interest-earning assets was 5.28% for the first quarter, 5.35% for the fourth quarter and 5.5% for the year-ago quarter. Adjusting for the acquisition accretion, total yield on earning assets would have been 5.18%, compared to an adjusted total yield on earning assets of 5.19% for the fourth quarter and 5.24% for the year-ago quarter.

Total cost of interest-bearing liabilities was 168 basis points for the first quarter, compared to 185 basis points for the fourth quarter and 178 basis points for the year-ago quarter. Overall cost of funds for the first quarter was 119 basis points versus 130 basis points for the fourth quarter and 127 basis points in the year-ago quarter. Excluding acquisition accounting adjustments in the first quarter, the total cost of interest-bearing liabilities would have been 170 basis points and the total cost of funds would have been 120 basis points. So tax equivalent net interest margin for the first quarter came to 4.15%, compared to 4.11% in the fourth quarter, expanding 4 basis points, notwithstanding lower acquisition accounting accretion.

Adjusting for the acquisition accounting accretion, core net interest margin expanded 10 basis points as net interest margin would have been 4.04% for the first quarter, compared to 3.94% for the fourth quarter. We are particularly pleased with our progress in the quarter on our core net interest margin driven by improvement in our cost of funds more than compensating for decreases in asset yields. Going forward, we feel well-positioned to maintain a strong net interest margin as we seek to further optimize our funding mix and maintain discipline on loan pricing. Noninterest income decreased to $2.7 million in the first quarter from $3.4 million in the fourth quarter, primarily due to fourth quarter being bolstered by certain nonrecurring revenue items, including $613,000 in the gain on sales of securities and $146,000 in lumpy SBIC income.

Total noninterest expense for the first quarter was $32.4 million, compared to $29.4 million in the fourth quarter, primarily due to $2.2 million of writedowns on other real estate owned. You'll remember that there were several onetime items to consider during the fourth quarter that decreased our noninterest expense by a total of approximately $870,000. So the efficiency ratio for the first quarter was 68.13%, compared to 62.2% posted in the fourth quarter and 64.97% for the prior-year quarter, primarily due to these writedowns on OREO. So if we adjust this quarter's efficiency for the OREO writedowns and fourth quarter's efficiency ratio for the aforementioned onetime items, our adjusted efficiency ratio for the first quarter would have been 63.48% as compared to an adjusted 62.12% for the fourth quarter.

The provision for loan losses was $11 million for the first quarter. This is more than 10 times the provision we took in the fourth quarter and the year-ago quarter. And it brings our allowance for loan losses to $37.5 million, representing 95 basis points of total loans. If you were to include the $4.3 million in the loan mark remaining on acquired loans, the ending allowance, plus loan mark to total loans, will be 106 basis points.

It is very important to note that we elected to take the relief that came with the CARES Act, and we deferred the implementation of CECL, so the reported allowance is under the current incurred standard. Our decision to take the relief was primarily a function of efficiency with respect to closing the books and related disclosures, comfort with the existing standard given economic uncertainties and our overarching preference to allocate time and focus on business continuity. The COVID-19 situation is fluid and brings significant economic uncertainty. Our entire team is focused on supporting our customers and better understanding the unique impacts of the pandemic and related oil price weakness on our individual customers and our loan portfolio as a whole.

We look forward to being able to further refine our allowance for loan losses with the benefit of additional time and information. Our COVID-related provisioning and OREO writedowns during the first quarter significantly impacted our bottom-line profitability metrics of ROAA and ROATCE for the quarter, which came out at 0.29% and 3.02%, respectively. Notwithstanding current economic uncertainties, we are buoyed by our strong margins, which drive a solid pre-tax pre-provision earnings stream, and we are fortunate to be at or near all-time, high-capital levels at our Allegiance Bank subsidiary. We feel very well-positioned given the circumstances.

In February, we announced the completion of our prior share repurchase authorization and a new share repurchase authorization, but we have not made share repurchases on the new authorization and do not see them on the near-term horizon. Our capital and liquidity positions are strong, and we are committed to maintaining financial flexibility as we navigate the current economic environment. Our board of directors declared a $0.10 dividend on April 23, and we currently feel good about our ability to maintain our strong capital position and our modest dividend. I will now turn the call back over to Steve.

Steve Retzloff -- Chief Executive Officer

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

Questions & Answers:

Operator

Thank you. [Operator instructions] And our first question comes from the line of Brad Milsaps with Piper Sandler.

Brad Milsaps -- Piper Sandler -- Analyst

Hey, good morning, guys.

Steve Retzloff -- Chief Executive Officer

Good morning, Brad.

Brad Milsaps -- Piper Sandler -- Analyst

I appreciate all the detail. I'm sure I missed some of it, but I'll have to go back and take a look, but certainly, appreciate all the detail you guys included this quarter. Kind of one big thing that stood out to me was the NIM expansion that you guys had in the first quarter. I'm just kind of curious if you could just talk a little bit more about your ability to hold loan yields flat and kind of what your outlook for the NIM would be sort of outside the impact of the PPP program.

Paul Egge -- Executive Vice President and Chief Financial Officer

Great question. Outside, I think for good intelligence as to how our NIM kind of performs through cycles, you can look back to the prior time period for which we had -- we're at a zero balance in interest rates, and we're able to maintain our loan yields nicely above the 5% level. And I think that is really what's going to help us maintain a comparably strong net interest margin. We've always battled a little bit of liability sensitivity as we sought to keep the company asset neutral or interest rate neutral.

But the balance and what we've always found ourselves battling is the liability sensitivity outweighing the asset sensitivity in our balance sheet. And here, the current interest rate environment really does play into our hand, to a degree, and it allows us to continue a process that we started six to nine months ago as the interest rate cycle turned, and that is strategically repricing our liabilities. And otherwise, we've got great protection on the assets side with floors. And even when we don't have floors, we, generally speaking, by the nature of the size of lending we do, we operate with floors in our overall lending pricing, whether they're technically there or not.

Brad Milsaps -- Piper Sandler -- Analyst

Thanks, Paul. I think in 2015 and '16, your deposit cost were maybe -- total deposit costs were maybe half of what they are now. Do you think this is a type of environment where you can drive deposit costs back to that level over, I don't know, call it, a three- or four-quarter period? Or do you think funding is still so competitive in your markets that it will be more difficult to do that this time around?

Paul Egge -- Executive Vice President and Chief Financial Officer

We still operate in a very competitive funding market, but I like our chances. It's going to take time, particularly as it relates to our CD book, which is large and will be subject to repricing. But it all depends on the relative duration of the current zero balance policy. The longer it lasts, the higher our probability is to work it down.

And also, it will also depend on the overall kind of loan growth dynamics that we have locally and regionally because that has a relatively large -- it's a relatively large arbiter as to how competitive the broader deposit market is locally and regionally.

Steve Retzloff -- Chief Executive Officer

Yes, Brad, there's something else to be said for -- this is Steve. Just the service experience that people are receiving from us right now, I think that's going to bode well for us when it comes to deposit pricing as well.

Brad Milsaps -- Piper Sandler -- Analyst

Got it. And Paul, kind of given where you are with funding, would you anticipate using the fed facility to fund the PPP program? Or do you have other sources in mind on how you kind of plan to fund that? Obviously, it will somewhat depend on how long the loans stay there, but just kind of curious what your thoughts are around that.

Paul Egge -- Executive Vice President and Chief Financial Officer

We're fully operational on the PPPLF funding program with the fed, and we'll be -- we're effectively going to pivot our daily cash desk from previously being managed -- managing excess and/or capital needs to target through the FHLB that's kind of aligned to the PPPLF line of credit. So we'll be using it to the extent necessary. And as it currently stands, we haven't had to use it much because the -- we booked the loans and fund the accounts in Allegiance Bank deposits. But we do expect that money to start being spent.

And at which point, we'll be accessing the PPPLF with the fed.

Brad Milsaps -- Piper Sandler -- Analyst

Got it. And Paul, final question for me. I apologize if I missed this, but do you think you can kind of hold expense growth to kind of this low kind of single-digit rate in 2020, even if you incur some additional COVID-related or PPP-related expenses over time, etc.?

Paul Egge -- Executive Vice President and Chief Financial Officer

I think so. I mean, we're obviously being very mindful of discretionary spend, but we're being -- we're focused on, as we've always been focused on, kind of spending to support the business through this cycle. So we do think that you can expect, I think, spend to not vary too widely from current levels.

Steve Retzloff -- Chief Executive Officer

Yes. I think, generally, we're -- we believe we're probably incrementally leverageable as we grow through over the rest of the year and next year.

Brad Milsaps -- Piper Sandler -- Analyst

Great. I'll hop back in the queue. Thank you.

Operator

Thank you. Our next question comes from the line of Matt Olney with Stephens, Inc.

Matt Olney -- Stephens Inc. -- Analyst

Hey, thanks. Good morning, guys. Want to go back to the discussion around loan growth. And on the prepared remarks, I think there was a mention that the paydowns were elevated again in the first quarter as they were most of last year.

Some of your peers have pointed toward a slowdown of the level of paydowns given the uncertainty. Did you see this toward the end of the quarter? Or have you seen this in recent weeks?

Ray Vitulli -- President of the Company and Chief Executive Officer of Allegiance Bank

Matt, no. I think the $200 million in paydowns was pretty reflective of the entire quarter. I don't think there was any peak or valley in the quarter. It was pretty consistent.

So it may -- we may see something different in the second quarter, but for the first quarter, it was elevated. There were still some -- early in the quarter, and so it probably closed later in the quarter. But there were still some rates out there that were offered that were -- had a three handle. So we did lose some of those loans to more favorable pricing that maybe was quoted at the beginning of the quarter that maybe got closed at the end of the quarter.

That's all I could think about maybe.

Matt Olney -- Stephens Inc. -- Analyst

I guess, Ray, just in general, are you seeing some of the competition pull back just overall in recent weeks that would lead you to believe that the paydowns could slow this year?

Ray Vitulli -- President of the Company and Chief Executive Officer of Allegiance Bank

The -- I would say that the paydowns would have been slow, at least the conversation around paydowns and anything non-PPP related. So core is probably has been shifted a little bit out. But whether that results in the outlook on the year, Matt, I don't have -- I don't know that. I think that there's definitely been a pause in the industry of movement of core loans, but I don't know if we can just say that's the way it's going to be if we're going to enjoy, let's say, lower payoffs for the rest of the year.

Steve Retzloff -- Chief Executive Officer

Yes. And that's a great question. I just feel highly speculative to think about it from the rest of the year and where that's going to go.

Matt Olney -- Stephens Inc. -- Analyst

Sure. No. I appreciate it. It's still very early in the process, so I definitely I appreciate that.

And going back to the discussion around operating expenses, Paul, I think you mentioned that the $2.2 million of writedowns in the first quarter. So if we remove that, I guess, is it fair to think about the overall launch point of expense growth this year somewhere in that $30 million to $30.5 million range per quarter?

Paul Egge -- Executive Vice President and Chief Financial Officer

Yes.

Matt Olney -- Stephens Inc. -- Analyst

OK. And then just overall, you gave us some good details on your loan portfolio on Slide 13 from a risk management standpoint. You gave us hotels, the restaurants, the retail and the indirect impact of oil and gas, and that's helpful. I'm curious, how are you guys assessing the more riskier, the more dangerous part of the portfolio at this point? Where -- what has your attention at this point within those descriptions?

Ray Vitulli -- President of the Company and Chief Executive Officer of Allegiance Bank

Well, one thing we can look at, Matt, is the deferrals associated with some of those buckets. So it's not that it's 100% deferral on those buckets. So there are -- we do have some, what sometimes Steve says, well-heeled customers that are in those segments. But the other ones, we are seeing deferrals.

We do have some SBA loans in those buckets, and those SBA loans are right now enjoying six months of payments on those SBA loans as part of the CARES Act. So it's pretty early, but I think the fact that we -- that we're talking about lodging, foreign restaurants and oil and gas is obviously top of mind for us.

Steve Retzloff -- Chief Executive Officer

Partly, it's just really going to be looking at it in kind of that detail level, but we've got a pretty good amount of restaurant loans. But a lot of that CRE, it would be the C&I portion of that, that you'd probably have little more concern about, and yet, we don't have a lot to go on about what the recovery will look like for them. Hotels is mostly CRE, really good loan to value overall, really good stress test results. In the oil and gas, I look at that.

We've got about 45% or 46% that's upstream related, and the rest is midstream to downstream, some refineries, a lot of gas distribution-related businesses, people that support. But when you look at the upstream side, we -- a number of those companies are related to one of our guarantors that has -- probably one of our largest depositors in the bank in terms of cash deposits. So we feel very good about a big, big portion, probably more than a third of our upstream is related to that one relationship. So we've got good CRE collateral on a lot of that as well, so it's a little early to tell.

When we did our quarter-end analysis for the reserve, it was based on the data, the quantitative analysis. And obviously, we're going to be watchful for that as the quarter progresses, and we'll update our analysis from that. But we feel very good about where we go into this from a collateral strength of guarantor, quality people, great business operators. We like our customers as much as they like us, so it's going to take a little time to sort it all out.

Matt Olney -- Stephens Inc. -- Analyst

Got it. And then just one more question. I guess, Paul, back to you on the discussion around the margin, can you just remind us what portion of your loans are variable versus fixed? I think you touched on this earlier, but I missed it. And then within variable, how much of those loans are now at their full rate?

Paul Egge -- Executive Vice President and Chief Financial Officer

All right. So you've got about a little under a third of our loans are in -- are variable-rate loans. And really, all of them -- just about all of them are at or through floors, so are supported by floors or are at floors. There's very few loans in our loan book that are -- that do not have floors.

So appreciably, everything is at or below a floor. And I think only about a third of what we currently have is at or below a floor, so to the extent -- or at a floor. So to the extent we were to get rate hikes of that variable rate -- variable portion, only a third of it would be sensitive to a rate change. But really, almost all of that portion of our loan portfolio is supported by floors.

Matt Olney -- Stephens Inc. -- Analyst

OK. Thank you, guys.

Paul Egge -- Executive Vice President and Chief Financial Officer

All right. Thanks, Matt.

Operator

Thank you. And our next question comes from the line of Brady Gailey with KBW.

Brady Gailey -- KBW -- Analyst

Hey, thanks. Good morning, guys.

Steve Retzloff -- Chief Executive Officer

Hi. good morning, Brady.

Brady Gailey -- KBW -- Analyst

What is the average fee for Phase 1 of the PPP?

Steve Retzloff -- Chief Executive Officer

Average fee --

Ray Vitulli -- President of the Company and Chief Executive Officer of Allegiance Bank

It's around 3%.

Brady Gailey -- KBW -- Analyst

3%. And in Phase 1, you did $640 million. Any estimate on how active you'll be in Phase 2?

Ray Vitulli -- President of the Company and Chief Executive Officer of Allegiance Bank

It will be less than $640 million.

Steve Retzloff -- Chief Executive Officer

That's what you do.

Ray Vitulli -- President of the Company and Chief Executive Officer of Allegiance Bank

Yes. Sorry. I mean, we'll know here pretty soon. I think we still have a window.

The window is still open as of today, right?

Steve Retzloff -- Chief Executive Officer

Yes. We're still funding today. So we've been getting approvals.

Ray Vitulli -- President of the Company and Chief Executive Officer of Allegiance Bank

Yes, Brady. It would be some -- I don't expect -- I wouldn't expect 50%. It would be -- maybe 25% to 50%, not more.

Steve Retzloff -- Chief Executive Officer

Call it a third.

Ray Vitulli -- President of the Company and Chief Executive Officer of Allegiance Bank

Yes. Maybe a third of that level, Brady, in the second round.

Brady Gailey -- KBW -- Analyst

OK. All right. So about $200 million or so. And then what would have the CECL impact had been if you had adopted -- I know in the case, you talk about, I think, the reserves going up 25% to 50% with CECL.

What would that January 1 adjustment have been with CECL?

Paul Egge -- Executive Vice President and Chief Financial Officer

I think you can probably take the midpoint of that range and be around there if I were to be estimating. But -- and that represents predominantly the effect of both purchase -- the adjustment on purchase accounting and then reserve for unfunded commitment. When we try to roll forward, we did run CECL side by side, obviously not audited or anything along those lines. But it's -- after the day one, you'll -- you would have seen an overall provisioning story that would line up relatively well to our provisioning story under the current incurred model that we reported under today.

Brady Gailey -- KBW -- Analyst

OK. All right. Thank you, guys.

Operator

Thank you. And our next question comes from the line of David Feaster with Raymond James.

David Feaster -- Raymond James -- Analyst

Hey, good morning, everybody.

Steve Retzloff -- Chief Executive Officer

Good morning, David.

David Feaster -- Raymond James -- Analyst

Just following up on the PPP questions. I guess how are you looking at this program? Are you focused on existing customers only? Or are you using this as an opportunity to acquire customers and gain share? And I guess, how has that translated into maybe any deposit growth, thus far, in the second quarter?

Steve Retzloff -- Chief Executive Officer

I'll answer -- Okan and I will both answer that one. So on the way we've approached it, David, is you -- as you know, we've had a market share strategy approach for a long time. So we have in the last -- for '19 and '20, we have 13 producers hired in '19 and four more in '20. So this has been more of as a catalyst to those folks that are here that are going to get those customers that they've had for a long time.

So there's definitely going to be a market share piece to how we handle PPP. We also were extremely focused on handling our customers. So I wouldn't refer to as customers -- I'd say customers and new customers is how we've approached it. And I don't know, Okan, do you have anything?

Okan Akin -- Executive Vice President and Chief Risk Officer of the Company and President of Allegiance Bank

Yes. I agree. So we've opened our program to both customers, noncustomers, and there's been a demand from both sides, actually, in opening additional accounts with our new technology. We were able to open a number of new accounts at the bank remote electronically.

And so there's a market gain share that's occurring through the program, and we're able to start the community, at large, and it's not just our customer base.

Ray Vitulli -- President of the Company and Chief Executive Officer of Allegiance Bank

And we're getting an awful lot of people sending us nice cards and letters, too, that, obviously, they got served well. And kind of the gist of the letters are we never knew how important it was to have a relationship with a bank, like you guys, and the importance of that is really strong. And it's also coming from new. So I -- we think that there's an opportunity for some new customer pickup out of this.

But the benefit to our customers to receive the assistance from PPP is hard to measure but something we really think is a strength and one of the reasons why we've done it in as a stronger a way as we possibly could.

David Feaster -- Raymond James -- Analyst

That's helpful. And I guess, kind of along those same lines, I guess, has the way that you performed and the strength of your balance sheet and your -- just your overall culture, given the disruption in the market, has that created additional hiring opportunity for you or any other kind of opportunities?

Steve Retzloff -- Chief Executive Officer

We've had some folks on our radar for a long time. This -- how we've handled this may be able to attract those and now see how we performed. But it's been probably quiet on the hiring side during the PPP. And even if we did, the onboarding would be difficult doing it remotely to get someone set up.

Ray Vitulli -- President of the Company and Chief Executive Officer of Allegiance Bank

Yes. We've been pretty much head down for the last month or so. But you're right, it's a small community. People that we've talked to that are in other community banks, smaller banks, they're all working hard, too, right now.

So those things will probably show up in the next quarter or two.

David Feaster -- Raymond James -- Analyst

OK. That's fair. And then last one for me. Just wanted to follow up on the core NIM.

I mean, I guess, in light of the seemingly limited downside on loan yields and pretty substantial opportunity on the funding side as you optimize and reduce costs, I mean, I guess, do you think -- exclusive of the PPP program, are you thinking that you can continue to see core NIM expansion or maybe just more modest compression?

Paul Egge -- Executive Vice President and Chief Financial Officer

We think there's -- depending on the nature of our execution, there is potential to expand, but it's hard to model that as it currently stands, particularly given competitive dynamics that are shifting. We do know the opportunity for repricing liabilities from here on in. It's going to be a little bit more gradual since it's going to manifest itself predominantly in repricings in the CD book. But we're still working things down and optimizing our funding mix.

Some of the broader NIM story is also going to be a function of what we do on the asset side, and it will be dependent upon the path our earning asset take in whether loan growth is as stout or weak as a function of certain uncertainties related to COVID. And not to mention, we're in an election here. So many moving parts, but we're focused on optimizing both sides of the balance sheet.

David Feaster -- Raymond James -- Analyst

OK. That's great. Thank you.

Operator

Thank you [Operator instructions] And I'm showing no further questions. So with that, I'll turn the call back over to Steve Retzloff, CEO, for closing remarks.

Steve Retzloff -- Chief Executive Officer

Well, I think we had a great conversation today, and I thank everybody for -- and appreciate your time and interest in Allegiance. We look forward to speaking to you again in next quarter and in the future, so thank you all very much for your participation.

Operator

[Operator signoff]

Duration: 52 minutes

Call participants:

Courtney Theriot -- Chief Accounting Officer

Steve Retzloff -- Chief Executive Officer

Ray Vitulli -- President of the Company and Chief Executive Officer of Allegiance Bank

Paul Egge -- Executive Vice President and Chief Financial Officer

Brad Milsaps -- Piper Sandler -- Analyst

Matt Olney -- Stephens Inc. -- Analyst

Brady Gailey -- KBW -- Analyst

David Feaster -- Raymond James -- Analyst

Okan Akin -- Executive Vice President and Chief Risk Officer of the Company and President of Allegiance Bank

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