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Edited Transcript of ABTX earnings conference call or presentation 25-Jul-17 2:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Allegiance Bancshares Inc Earnings Call

HOUSTON Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Allegiance Bancshares Inc earnings conference call or presentation Tuesday, July 25, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Courtney Theriot

* George Martinez

Allegiance Bancshares, Inc. - Chairman, CEO, CEO of Allegiance Bank and Director of Allegiance Bank

* Paul P. Egge

Allegiance Bancshares, Inc. - CFO, Executive VP, CFO of Allegiance Bank and Executive VP of Allegiance Bank

* Ramon A. Vitulli

Allegiance Bancshares, Inc. - EVP, Director, President of Allegiance Bank, COO of Allegiance Bank and Director of Allegiance Bank

* Steven F. Retzloff

Allegiance Bancshares, Inc. - President, Director and Chairman of Allegiance Bank

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Conference Call Participants

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* Brady Matthew Gailey

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Bryce Wells Rowe

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Matthew Covington Olney

Stephens Inc., Research Division - MD

* Peter Finley Ruiz

Sandler O'Neill + Partners, L.P., Research Division - VP, Equity Research

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Allegiance Bancshares Inc. Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to Courtney Theriot. Ma'am, you may begin.

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Courtney Theriot, [2]

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Thank you, operator. This morning's earnings call will be led by George Martinez, Chairman and CEO; Steve Retzloff, President; Ray Vitulli, Executive Vice President and President of Allegiance Bank; and Paul Egge, Executive Vice President and CFO. First, I would like to address the safe harbor provisions.

Some of the remarks made today will 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 will only be a reflection of management's beliefs at the time the statement is made. Management's beliefs relating to predictions are subject to change, and the company does not publicly update guidance. Reconciliations to non-GAAP financial measures that are discussed are presented in accordance to GAAP in our earnings release. Please see the last page of 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 earnings release slide presentation. 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 lines and allow time for questions. I will now turn the call over to our CEO, George Martinez.

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George Martinez, Allegiance Bancshares, Inc. - Chairman, CEO, CEO of Allegiance Bank and Director of Allegiance Bank [3]

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Thank you, Courtney, and we welcome all of you to this call. Allegiance is a super community bank. As the largest community bank that's exclusively serving the Houston MSA and being focused on providing a high level of personal service, we have gained significant market share. In the last 12 months, our lenders have grown quality core loans by over 20%. Allegiance is quickly becoming the bank of choice for owner-operated businesses in Houston. We are working on plans to grow Allegiance into a $5 billion-plus asset bank in just a few years. The second quarter of 2017 featured additional accomplishments for Allegiance in terms of robust loan growth, strong margins and consistent asset quality metrics.

We have record core loans -- core loan growth of $363 million or 21.6% year-over-year, and $119 million or 24.7% annualized for the second quarter compared to the linked quarter. This growth is attributed to our excellent lending team.

During the quarter, we crossed over $2 billion in total core loans ending the quarter with assets of over $2.7 billion. Quarterly net interest income increased 14.4% year-over-year and 4.1% quarter-over-quarter as net interest margin contracted only slightly to 4.29%. Quarterly net income was $5.4 million versus $5.3 million in the second quarter of 2016 and $6 million in the first quarter of 2017.

The quality of the loan portfolio, expressed as the ratio of nonperforming assets to total assets, was 73 basis points versus 77 basis points at the end of the first quarter. We remain very focused on addressing overall asset quality. We continue to make a significant investment in hiring experienced bankers, including lenders and operational staff, to position the bank for continued growth.

Now Steve will describe our second quarter 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.

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Steven F. Retzloff, Allegiance Bancshares, Inc. - President, Director and Chairman of Allegiance Bank [4]

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Thanks, George. I also welcome everyone to our second quarter conference call. The one take away that should result from a view -- a review of our second quarter progress is not simply that we produce phenomenal loan growth, which increased our net interest income and improved our efficiency ratio as expected, but that all of these achievements resulted from preconceived intentional strategies. We are executing what we believe is a well-conceived strategic growth plan to reach $5 billion in assets by 2020, which we term internally as 5 by '20. And like the bank, the plan is not static but one that requires continual mining for enhanced performance to lead and support our superior growth. Because of our disciplined approach, we believe we are well positioned for long-term operating leverage.

We've added 5 lenders to our lending team so far in 2017. In addition, our central operations are even better supplied with the talent needed to provide the core proficiencies to support our internal 5 by '20 growth initiative.

Our core loans, which we define as HFI loans excluding mortgage warehouse, include -- increased during this second quarter by $118.8 million or 6.2% over core loans at March 31. From a linked perspective, this adds to an already strong first quarter increase of $97.7 million or 5.4%. Our continued growth is fully self-originated and organic. The annualized core loan growth rate was 24.7% in the second quarter and 23.7% year-to-date. Our mortgage warehouse loans increased in the second quarter by $9.4 million, ending at $73.5 million. The second quarter average mortgage warehouse balance was up from $46 million in the first quarter to $66.3 million.

Due to this year's strong start, our 12-month trailing total loan growth increased from 12.5% for the year ending December 31, 2016, to 20.6% for the 12-month period ending June 30, 2017. The total loan increase over the past 12 months was $361 million.

During the second quarter, new loans for $272 million were completed that funded to a level of $163 million by June 30. On a linked basis, this compares to the first quarter when $263 million of new loans were generated, which also funded to a level of $163 million. This continued new loan production retains the characteristics of our strategic focus on being primarily a commercial institution with quality, granularity and rate set in accordance with our pricing model discipline. The average size of the core loans produced during the second quarter was $369,000 committed and $240,000 funded, which was essentially in line with the average funded size in the portfolio of $311,000. Our focus on the small to medium-size business sector is core to our differentiated market strategy and remains unchanged.

The weighted average interest rate on a -- charged on our new core loans in the second quarter was 5.18%. As a result of this and the mix of core loans, excluding acquisition accounting adjustments, the period-end weighted average interest rate charged on our core loans increased slightly from 5.21% as of March 31 to 5.23% as of June 30, 2017. Including mortgage warehouse, the period-end weighted rate on total loans increased from 5.15% to 5.17% in the linked quarter. Paul will provide color on portfolio yields in his remarks.

The mix of new loans based on second quarter funded levels was nonowner-occupied commercial real estate at 19.6%, owner-occupied commercial real estate at 13.5%, commercial working capital at 2.9% and commercial term loans at 13.8%. These 4 commercial categories represented 49.9% of the new funded production compared to 63.7% for the first quarter. 1-4 family residential loans contributed 20.3% of the new funded core loans. Construction and development loans contributed 18.1% and multifamily contributed 3.4% of the new funded core loans during the quarter.

Notably, and consistent with prior production, the average size of the commercial construction loans was $542,000. 46% of construction loans were vacant lots with an average size of 357,000. Owner-occupied commercial real estate loans were 25.2% of total loans or 52.8% of CRE at June 30. Mortgage warehouse loans increased slightly to 3.5% of funded loans on a linked-quarter basis.

Period-end securities and investments were unchanged during the second quarter at $321 million at June 30, as our accumulated other comprehensive income shifted back into positive territory.

Total deposits increased in the quarter by $86.7 million, ending June 30 at $2.1 billion as the core loans to deposit ratio increased slightly from 95.5% to 97.2%.

The noninterest-bearing deposits ratio remained quite strong, increasing slightly during the quarter ending at 31.6% compared to 30.6% at March 31, 2017.

Asset quality remains very strong and well managed. Nonperforming assets decreased to 73 basis points of total assets at June 30 compared to 77 basis points at March 31. Other real estate and other repossessed assets remain minimal.

Our classified loans as a percentage of total loans were steady at 3.2% on March 31 and 3.1% on June 30. Criticized loans remained at 3.8% of total loans. During the quarter, impaired loans remain flat at $31.8 million. However, the specific reserves for the impaired loans increased to 10.6% from 7.3% as the net specific reserve of $1.06 million were added.

Oil prices have spent much of the past quarter well below $50 per barrel but have recently shown resiliency with WTI at $46.34 as of July 24, and the Texas rig count has increased to 460 as of June 30, while the Baker Hughes U.S. rig count indicates 952 rigs operating in the U.S., an increase of 505 over the past 12 months. This is good news for the local economy. That said, we continue to have a low direct exposure to this sector, and we reiterate that we still do not participate in reserve-based lending.

Our direct and indirect oil price-sensitive loans ended the quarter at $80.1 million or 3.8% of total loans compared to 3.7% as of March 31. We now categorize 158 loans in the current quarter's oil and gas bucket, an increase of 6 from 152 as of March 31.

As of June 30, the loss reserve associated with these loans increased to 4.35% compared to 3.98% as of March 31 as we adjusted impairments and loan grades due to updated results and analysis. Our oil bucket loans are at 21% direct energy loans, and 79% with indirect industry exposure.

At June 30, 47% of oil bucket loans were classified. Of those, 46% or 22% of all oil bucket loans were considered impaired, which was a decline of impaired loans of $2 million. The decrease was primarily the result of a charge down and a principal payment on one-loan relationship. Our impairment analysis increased the oil and gas-related specific loss reserve from $1.52 million to $1.74 million during the quarter.

The slide deck provides added color regarding our overall mix of loans. The mix was little changed during the quarter, in terms of concentrations or average size. Based on the Texas Workforce Commission data, the Greater Houston Partnership report indicates that over the 12 months ending May 2017, the Houston MSA gained 45,300 jobs, which is a significant improvement from the 18,000 jobs gained in 2016. The Houston real estate markets remain in roughly the same condition as last quarter, with office vacancy continuing to weaken with negative absorption and vacancy in the high teens. The city's industrial markets are doing well at 95% occupancy and positive absorption, with most new construction being build-to-suit.

Multifamily occupancy is edging up, with 7,300 units added during the first half of 2017 and 11,600 units being absorbed. Overall vacancy is 11% in multifamily. Finally, the retail market is a solid performer at 94.2% occupancy.

Also, on a positive note, the May 2017 Purchasing Managers Index for Houston continues to be in the expansion range at 54.1%, and the June 2017 home sales and prices set records with 8,414 home sales in the month at a medium price of $239,000. The 2017 year-to-date volume for single-family homes exceeds 2016 by 7.4%.

In closing, in less than 10 years, we were recently recognized as the largest Houston area community bank. We attribute our success to not only being exclusively focused on the Houston market, but also that our staff is experienced and aligned to a clear vision of providing quality service to an ever-present and growing small commercial business sector. I will now turn it over to our CFO, Paul. Thank you.

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Paul P. Egge, Allegiance Bancshares, Inc. - CFO, Executive VP, CFO of Allegiance Bank and Executive VP of Allegiance Bank [5]

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Thanks, Steve. Second quarter net income was $5.4 million or $0.40 per diluted share as compared to first quarter earnings of $6 million or $0.45 per diluted share. The earnings story for the quarter can be summarized by robust linked quarter efficiency and pretax pre-provision earnings gains, mitigated by an increased provision for loan losses in the quarter, with the provision being driven by both significant loan growth and previously identified credit.

Second quarter net interest income increased $979,000 on a linked-quarter basis to $25.1 million from $24.1 million in the first quarter, representing 4.1% linked quarter growth. Net interest income for the 6 months ended June 30, 2017, increased $6.2 million to $49.2 million compared to $43 million for the 6 months ended June 30, 2016, representing a 14.4% year-over-year growth. Net interest income gains were driven by growth in earning assets.

The tax equivalent net interest margin for the second quarter was 4.29% compared to 4.38% in the first quarter, as cost on interest-bearing liabilities increased while the yields on interest-earning assets decreased slightly.

Yields on loans during second quarter was 5.25% versus 5.31% in the first quarter. The first quarter yields included approximately 3 basis points resulting from interest collections on previously nonaccrual loans paid off in the quarter that are nonrecurring in nature. The remainder of the loan yield differential is a function of 1 basis point less purchase accounting accretion, lower loan fees during the second quarter and loan mix due to growth in mortgage warehouse [flicks]. Notwithstanding this yield differential, interest income grew by $1.5 million or 21.4% annualized from $27.5 million in the first quarter to $29 million in the second quarter, driven principally by loan growth.

Increased interest income was offset by the increase in interest paid on the interest-bearing liabilities of $496,000, reflecting the effect of an approximate $78 million increase in average interest-bearing liabilities at an incremental 7 basis points higher cost, mostly due to higher costs associated with FHLB borrowings.

Note, we had a reclassification from long-term borrowings to short-term borrowings due to term FHLB advances expiring in less than a year this quarter.

Deposits increased $86.7 million compared to the first quarter of 2017 to $2.1 billion. During the quarter, we decreased our broker deposits from $81 million in the first quarter to $73 million at June 30. Cost of interest-bearing deposits in the second quarter were 84 basis points versus 81 basis points in the first quarter due to slightly -- slight deposit rate increases and shifts in our deposits.

Within the quarter, purchase accounting accretion increased net interest income by $145,000 versus $266,000 last quarter. The overall effect of accretion is dwindling and becoming increasingly less impactful. Total noninterest income increased slightly to $1.5 million for the second quarter from $1.3 million for the first quarter. Total noninterest expense was $16.46 million, down slightly from $16.55 million in the first quarter. Salaries and benefits decreased slightly during the quarter, while professional fees remained relatively high as we continued our focus on enhancing the platform to support continued growth initiatives. We do expect professional fees to normalize during the back half of 2017.

The efficiency ratio for the second quarter did improve to 61.9% from approximately 65% from the first quarter. The provision for loan losses is $3 million in the second quarter. As previously mentioned, the provision was driven mostly by core loan growth as well as impairments relating to a few previously identified nonperforming credit relationships. Net charge-offs for the quarter were $684,000 or an annualized 13 basis points on average loans during the quarter.

The ending allowance at $21 million is 99 basis points of total loans. Excluding the $73 million in mortgage warehouse loans, the ending allowance was approximately 103 basis points of total loans. The end result was that the allowance coverage ratio to nonperforming loans ended the quarter at 109%, up from 0.97% -- 97%, pardon me, at March 31.

Pretax pre-provision earnings were $10.1 million in the second quarter, representing a 13.5% pick up from $8.9 million for the first quarter. The effective tax rate for the second quarter was 24.2%, primarily due to higher-than-normal stock option exercises.

So bottom line, our second quarter produced a return on average assets of 81 basis points -- of 0.81% and a return on average tangible common equity of 8.57%. At quarter end, book value per share was $22.69. Tangible book value per share was $19.42, a 6.5% increase from December 31, 2016.

I will now turn the call back over to George.

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George Martinez, Allegiance Bancshares, Inc. - Chairman, CEO, CEO of Allegiance Bank and Director of Allegiance Bank [6]

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Now we will open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Bryce Rowe of Baird.

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Bryce Wells Rowe, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

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Paul, I appreciate some of the commentary on the operating expenses here for the quarter and that you expect the professional fees to normalize in the back half of the year. What do you expect that to look like from a quantification perspective as we get into the second half of the year? And then a follow-up to that, do you expect to be able to contain the salary and personnel expense here at these levels or should we see an increase there?

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Paul P. Egge, Allegiance Bancshares, Inc. - CFO, Executive VP, CFO of Allegiance Bank and Executive VP of Allegiance Bank [3]

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Certainly. I'd estimate that approximately 50% of our noninterest -- or professional fees in the first half of the year were nonrecurring in nature. We still have a little bit more nonrecurring professional fee expenses that will bleed over into the third quarter, but we expect it to normalize to what we think the normalized level should be more like about half of what it is currently. The mitigating factors would be projects that would come up, currently working on a revamp of our website, and we'll -- we won't -- not invest in the right types of projects in order to keep that number down, but we do expect it to normalize. And on the salaries and benefits line, we -- the decrease from the first quarter to second quarter is predominantly attributed to -- we've actually hired, but in the second -- we've got greater headcount in the second quarter than we did in the first quarter. But I'd note, our -- by virtue of the provision, we had a lower level of profit sharing and incentive bonus accrual due to the second quarter's provision. And that's what drove the differential -- or real lack of differential between the first quarter and the second quarter.

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Bryce Wells Rowe, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4]

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Great. And then maybe one question about the tax rate, Paul. What do you see for the back half of the year?

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Paul P. Egge, Allegiance Bancshares, Inc. - CFO, Executive VP, CFO of Allegiance Bank and Executive VP of Allegiance Bank [5]

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It's hard. We were not in a position to predict the pace of stock option exercises. But it -- absent stock option exercises, we're running at really a normalized level. This is taking into account our BOLI and muni portfolio. We're running at a normalized -- our normalized tax rate should be 28% or 29%.

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Operator [6]

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Our next question comes from the line of Matt Olney of Stephens.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [7]

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On the credit piece, you guys -- you gave some great details in prepared remarks. I was curious about the specific reserves that increased this quarter? Can you give us some more details as to why the specific reserve increased? How many loans show deterioration? And were these energy loans or nonenergy loans? Or what else can you tell us about this?

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George Martinez, Allegiance Bancshares, Inc. - Chairman, CEO, CEO of Allegiance Bank and Director of Allegiance Bank [8]

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It really was only a few loans that we had previously identified. They were already on the watch list as classified loans, but one loan, in particular, probably led to most of that. And it was just a loan that's -- we're kind of working through -- already identified the risks. Obviously, you do, from time to time, update your numbers. And so this is basically oil and gas related. So -- and that's this big win, another loan that we'd thought that just prudently was nonoil and gas that we thought we would impair a little bit based on an appraisal. So really it wasn't anything systemic at all. It's just the identification of a couple of updates from previously well-performed impairment analysis. But unfortunately, sometimes the data changes.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [9]

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Okay....

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Paul P. Egge, Allegiance Bancshares, Inc. - CFO, Executive VP, CFO of Allegiance Bank and Executive VP of Allegiance Bank [10]

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So it's spread -- the more significant impairments are spread over a handful of loans, but really only, I'd say 2 are more significant.

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George Martinez, Allegiance Bancshares, Inc. - Chairman, CEO, CEO of Allegiance Bank and Director of Allegiance Bank [11]

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Yes, right.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [12]

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Would you guys say this is a -- somewhat of a timing issue? In other words, were you required to get new appraisals this quarter on a number of loans and that's why -- I'm trying to figure out why the [timing of] now?

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George Martinez, Allegiance Bancshares, Inc. - Chairman, CEO, CEO of Allegiance Bank and Director of Allegiance Bank [13]

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Really just one. No, it's just one of those kind of a periodic reviews of loans where you look for an appraisal, and there was really just one loan that was appraisal-related. The other one is just being worked out. It's kind of a workout process. And previously, we had estimated appraisals based on some values of the assets. And as we're liquidating the assets, in some cases, we're not getting what we expected previously. So we've reevaluated and had to take additional impairment on that.

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Paul P. Egge, Allegiance Bancshares, Inc. - CFO, Executive VP, CFO of Allegiance Bank and Executive VP of Allegiance Bank [14]

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On just those 2 loans.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [15]

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Okay. And then shifting over to loan growth. Obviously, very impressive numbers in the second quarter. Within the loan growth more recently, I'm curious what you're seeing as far as market share gains versus just growth from your legacy customers.

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Ramon A. Vitulli, Allegiance Bancshares, Inc. - EVP, Director, President of Allegiance Bank, COO of Allegiance Bank and Director of Allegiance Bank [16]

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So Matt, we track the loan originations into new and existing. And as Steve mentioned, we originated $272 million of new loans in the quarter and that was mixed about 54% to existing customers and 46% to new. So the -- we're starting to get back to that 50-50 ratio that we like. The lenders that were hired in 2016, that -- the growth in that portfolio of those lenders has gone from an average portfolio size at the end of '16 of $4.8 million to where they ended June 30 with an average portfolio size of $12.5 million. So you can almost attribute that -- the delta there to market share gains because those lenders came from other institutions. And then our existing lenders or legacy lenders also increased their portfolio size over the same period, which was nice to see from about $31 million to $33 million from the same -- year-end '16 to June of '17. So the total number is less than that because of the new hires in '17. But for those 70 lenders, the 12 plus the 58, we had a good mix of market share gains and expansion of the existing customer base.

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Operator [17]

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Our next question comes from the line Brad Milsaps of Sandler O'Neill.

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Peter Finley Ruiz, Sandler O'Neill + Partners, L.P., Research Division - VP, Equity Research [18]

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This is Peter Ruiz on for Brad. Just wanted to follow up on your comments of adding 5 lenders year-to-date versus the 12 for total in 2016. Do you guys think that -- what's the pipeline look like in the back half of the year? You think you kind of match the 2016 level? Or what does it look like?

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Ramon A. Vitulli, Allegiance Bancshares, Inc. - EVP, Director, President of Allegiance Bank, COO of Allegiance Bank and Director of Allegiance Bank [19]

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Pipeline looks very good. I would expect it to look very similar to '16. The hires that were made in the first 2 quarters of this year were mostly back ended to the second quarter and even late in the second quarter. So -- but we'll still be able to give probably next quarter some feedback on how those hires are doing.

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Peter Finley Ruiz, Sandler O'Neill + Partners, L.P., Research Division - VP, Equity Research [20]

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Okay, that's great. And maybe -- you guys gave a lot of great color on both the loan and deposit pricing. But can you maybe just give a little color on what changes have been made over the last quarter or so, in terms of demand from consumers? And what -- are there any meaningful changes in terms of pricing?

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Ramon A. Vitulli, Allegiance Bancshares, Inc. - EVP, Director, President of Allegiance Bank, COO of Allegiance Bank and Director of Allegiance Bank [21]

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I wouldn't say meaningful changes. We're seeing -- there has been a little uptick. It hasn't gone down on the -- as far as new loan originations on the pricing. But we remain disciplined to our pricing model and we've adjusted it for the recent increases in the Fed. It's still competitive out there, but we had a good quarter as far as loan originations, priced to our -- acceptable pricing to us.

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Steven F. Retzloff, Allegiance Bancshares, Inc. - President, Director and Chairman of Allegiance Bank [22]

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Yes, Peter, if you go back to 1 year, 1.5 years, you've seen some significant -- you were seeing some significant compression of the rates, reducing down from the 5.85% range down to where we are today, but actually now -- in the recent quarters it seems to have leveled and it's starting to actually maybe perhaps go up a little. So we're -- we've got a disciplined pricing model that includes the current yield curve in it and we price according to that.

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Peter Finley Ruiz, Sandler O'Neill + Partners, L.P., Research Division - VP, Equity Research [23]

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Okay. And in terms of deposit pricing, have you guys changed you stated rates? And is it -- if you have, is it just entirely competitive-driven and kind of what are some of your competitors doing?

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Paul P. Egge, Allegiance Bancshares, Inc. - CFO, Executive VP, CFO of Allegiance Bank and Executive VP of Allegiance Bank [24]

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Certainly, I can take that. So year-to-date, we have tweaks -- what I'll call our kind of CD rate, curve rate sheet to some extent, but really, only here and there. I'd say year-to-date, the differentials on our stated rates aren't really more than 10 to 15 basis points depending on where we are in the curve. It's just kind of on our CD pricing broadly. We guide that -- we guide our CD pricing a lot as a byproduct of what's going on in the market. And obviously, we're very focused on trying to grow our funding base. We've got a lot of deposit initiatives ongoing. But we've been more disciplined as it relates to the non-CD pricing where really the competition hasn't moved much, so we've -- we haven't moved much. But we focus -- since we do want to have our funding keep pace with our strong loan growth, we do focus on trying to be competitive in the marketplace.

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Operator [25]

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(Operator Instructions) Our next question comes from the line of Brady Gailey with KBW.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [26]

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So if you look at the loan growth, you've really kind of taken a step up here. Last year, you were running in the mid-teens, now you're running in the low 20% range. How should we think of kind of the forward pace of loan growth from here? Do you think this 20%-plus of growth level is sustainable?

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Steven F. Retzloff, Allegiance Bancshares, Inc. - President, Director and Chairman of Allegiance Bank [27]

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This is Steve. Brady, it's a combination of a variety of factors. If you look at this past quarter, we had a similar new production this quarter. We had a little bit more loan growth on a funded level this quarter than last quarter. And that was really due to some advances on some previously existing loans that exceeded the paydowns. So with our new lender hires that we had last year and as Ray said, I mean, those guys were doing just what we thought they do. At the end of the year, they were at $4 million; at the end of first quarter, they were at -- on an average lender, they were at $8 million; and now they are at $12 million. Those guys continue the class -- what we call that the class of 2016. We've got a class of '17. Those guys are coming on, so we feel good about it. I don't -- I couldn't tell you the number in terms of going forward. I project loan growth, but not necessarily in the 20% to 25% range, but it certainly feels like it -- the pipeline is there, the lenders are on the street, and I see no reason why we won't continue to grow nicely. But what that -- just couldn't provide guidance on the 20% number. I don't know, Ray, if you had any other call on that.

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Ramon A. Vitulli, Allegiance Bancshares, Inc. - EVP, Director, President of Allegiance Bank, COO of Allegiance Bank and Director of Allegiance Bank [28]

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No, it's good.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [29]

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All right. And then on the margin, we saw it slip a little bit this quarter. Loan yields were down a little bit, deposit costs were up a little bit. But how do you think about the margin going forward? Do you think it's roughly stable from here? Do you think we continue to see a little slippage?

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Paul P. Egge, Allegiance Bancshares, Inc. - CFO, Executive VP, CFO of Allegiance Bank and Executive VP of Allegiance Bank [30]

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I think it's roughly stable from here. I think there's always risk for slippage on the funding cost side, in particular, as it pertains to the FHLB advances. We do have a decent amount of those on our books. And those -- they're -- all of ours are actually variable rate in nature. So we're seeing kind of that high beta on that piece of our liability mix. So that piece is where we kind of see the most potential for really compressing our margins. But we're really excited about what we're doing on -- from a deposit initiative standpoint to reduce our reliance on what we call more wholesale-oriented funding. So we're working hard really to fund the core loans with more of a core funding mix. And that is what we hope will mitigate the risk that comes from having FHLBs on our books right now.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [31]

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Okay. And then finally for me, I think last quarter, commercial real estate to capital was around 270%. Did that change much linked quarter?

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Ramon A. Vitulli, Allegiance Bancshares, Inc. - EVP, Director, President of Allegiance Bank, COO of Allegiance Bank and Director of Allegiance Bank [32]

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It is -- it bumped up a little bit closer to 288% through construction loans, right, funding of right -- due to some funding of construction loans.

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Operator [33]

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I'm showing no further questions at this time. I would like to turn the conference back over to George Martinez, Chairman and CEO, for closing remarks.

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George Martinez, Allegiance Bancshares, Inc. - Chairman, CEO, CEO of Allegiance Bank and Director of Allegiance Bank [34]

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Thank you. I want to thank all of you for being on the call, and we look forward to being with you next quarter.

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Operator [35]

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Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.