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Edited Transcript of ABTX earnings conference call or presentation 24-Oct-17 2:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 Allegiance Bancshares Inc Earnings Call

HOUSTON Oct 24, 2017 (Thomson StreetEvents) -- Edited Transcript of Allegiance Bancshares Inc earnings conference call or presentation Tuesday, October 24, 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

* 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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* Bradley Jason Milsaps

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

* 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

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Q3 2017 Allegiance Bancshares Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to introduce your host for today, Ms. Courtney Theriot. Please go ahead.

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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.

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 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 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 [3]

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Thank you, Courtney, and we welcome all of you to this call. During the quarter, Houston experienced an unprecedented natural disaster when Hurricane Harvey struck our community. We share our heartfelt compassion for those in our area who were impacted by the devastating flooding. I would like to thank our hardworking staff for ensuring our customers and banking operations remained uninterrupted throughout the storm and thereafter. None of our bank office location was flooded, and most were open within days of the hurricane. 4% of our employees' homes flooded and we're doing what we can to support them and get them back in their homes swiftly.

On a more positive note, we recently celebrated Allegiance's 10th anniversary since our founding. We're very proud of our organization's accomplishments over the past 10 years as we started with just 1 office and have now expanded to 16 locations across Houston. We also have become Houston's largest community bank. We made a pledge in 2007 to provide Houston's small businesses with the resources, service and support that they deserve to grow and succeed, and we have done just that.

In turn, our customers have been tremendously loyal to us and we look forward to many more years of helping Houston businesses thrive as we execute on our strategic plan to become a $5 billion-plus asset bank by 2020.

The third quarter of 2017 featured notable accomplishments for Allegiance in terms of robust loan growth and strong margins. We had outstanding core loan growth of $663 million or 20.7% year-over-year and $77 million or 15.1% annualized during the third quarter. This growth is attributable to our excellent lending team.

Quarterly net interest income increased 15.3% year-over-year and 7.5% for the third quarter compared to the linked quarter, while we also saw the net interest margin increase to 4.37%. Although net income at approximately $3 million or $0.22 per share for the third quarter was below our expectations due to provisioning, pretax pre-provision earnings were solid at $10.8 million in the quarter versus $10.1 million in the second quarter of 2017, representing a 6.5% linked quarter increase.

The elevated provision during the quarter was primarily attributable to estimated losses related to Hurricane Harvey and the charge-off of $3.6 million for an energy-related loan relationship that we have been monitoring as they have been under stress for some time.

Now Steve will describe our third 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 third quarter conference call. Hurricane Harvey has been a lead story for Houston. I would describe our storm-related provision and a few Harvey statistics a little later in my comments.

We have hired 9 lenders so far in 2017, which keeps us on plan with this fundamental driver for our continued growth.

As George mentioned, our core loans, which we define as loans excluding our mortgage warehouse, increased during the third quarter by $76.8 million or 3.8% over core loans at June 30, 2017. This adds to a strong second quarter increase of $118.8 million or 6.2%. This growth is fully self originated and organic.

The annualized core loan growth rate was 15.1% in the third quarter and 21.5% year-to-date. Our period-end mortgage warehouse loans increased in the third quarter by $10.1 million, ending at $83.6 million. However, the third quarter average mortgage warehouse balance was down $6 million on a linked quarter basis to $60.3 million.

Our 12-month trailing total loan growth was $371 million or 20.3% for the period ending September 30, 2017.

During the third quarter, $209 million of new loans were completed that funded to a level of $125 million by September 30. This compares to the second quarter when $272 million of new loans were generated, which funded to a level of $163 million. The average size of the core loans generated during the third quarter was $379,000 committed and $239,000 funded, which reflects our continued focus on the small- to medium-sized business sector as being core to our super community bank strategy.

The weighted average interest rate charged on our new third quarter core loans was up 6 basis points to 5.24% on a linked quarter basis. As a result of this and loan mix, excluding fees or acquisition accounting, the period-end weighted average interest rate charged on our core loans increased slightly from 5.23% as of June 30 to 5.24% as of September 30, 2017.

Including mortgage warehouse, the period-end weighted rate on total loans increased from 5.17% to 5.18% linked quarter. Paul will discuss yields and margins in his report.

The mix of new loans based on third quarter funded level was represented by the following 4 commercial categories: nonowner-occupied commercial real estate, 8%; owner-occupied commercial real estate, 14.9%; commercial working capital, 7.9%; and commercial term loans, 15.5%. These 4 commercial categories represented 46.3% of the new funded production compared to 49.9% for the second quarter.

1-4 family residential real estate loans contributed 16.5% of the new funded core loans. Construction and development loans contributed 22.9%. And multifamily contributed 6.8% of the new funded core loans during the quarter.

Period-end securities investments were a little changed during the third quarter at $323 million at September 30, as our AOCI improved to $923,000 from $444,000 at June 30.

Total deposits increased in the quarter by $187.4 million, ending September 30 at $2.29 billion as we continue to pursue deposit growth initiatives. The core loans to deposit ratio decreased from 97.2% to 92.6%.

The noninterest-bearing deposits ratio remained quite strong, ending the quarter at 31.2% compared to 31.6% at June 30, 2017. The provision for loan losses was outsized for the quarter at $6.9 million. The larger provision was the cumulative result from 3 components. The first is the customary provision related to growth and non-Harvey-related reserve calculations of approximately $1.1 million. The second is the direct Harvey-related provision of approximately $2.6 million. The third relates to the previously unreserved portion of net charge-offs of $3.2 million, of which $2.8 million resulted from a single previously nonaccrual loan relationship from our midstream oil and gas portfolio. While the charge-off of this C&I loan is prudent at this time, we will continue to pursue our remaining avenues for recovery.

The bank's quarter end asset quality position is strong. Nonperforming assets decreased to 52 basis points of total assets at September 30 compared to 73 basis points at June 30. ORE and ORA remain minimal. Our classified loans as a percentage of total loans declined from 3.1% to 2.9% from June 30 to September 30. Criticized loans declined to 3.4% from 3.8% of total loans. And during the quarter, impaired loans declined to $30.3 million. The specific reserves for the impaired loans increased, however, from 10.6% to 12.7% as the net specific reserves of $442,000 were added and the denominator shrank.

Nonaccrual loans ended the quarter at $13.9 million, down from $19.3 million at June 30. These 37 loan relationships are all considered impaired. Of these, the largest relationship is $5.6 million, with an impairment reserve of $694,000. The collateral on this loan is primarily land and buildings with some equipment. The ratio of the unreserved loan to the value of the collateral in this loan is 76%.

The second largest nonaccrual loan is $1.1 million, also secured by land and buildings and presents an unreserved loan-to-value of 58%. Six of the nonaccrual loans totaling $1 million are SBA loans, where the unreserved amount equals the SBA guaranty amount.

Overall, there are 37 nonaccrual loan relationships with an unreserved loan to total collateral value of 67.5%.

In addition to the nonaccruals, we had 18 loan relationships at September 30, which were impaired but continued to accrue interest for a total funded amount of $17.2 million. The largest 10 of these represents 92% of the total. The largest relationship is an $8.4 million hotel loan, which is partially CD secured, had a cost of $14 million and had finished near term from the Hurricane Harvey. The other 9 of these larger relationships are collateralized predominantly by real estate, but also include equipment and inventory and have an unreserved loan-to-total value of 46%.

We believe that the collectibility of the unreserved loan amount on our nonaccrual loans and other impaired loans as of September 30 is quite manageable.

Oil prices have improved with WTI the low $50 range. The Texas rig count remains in the mid $400 range, and the U.S. rig count in the mid- to lower $900s. These are up significantly from a year ago, which has created a more stable outlook for that sector of the local economy. Although not a reserve-based lender, we do have loans that we consider to be industry participants or are sensitive to the market price of oil and gas. These oil price-sensitive loans ended the quarter down from $80.1 million at June 30 to $71.5 million at September 30 and now represent 3.2% of total loans compared to 3.8% as of June 30. As of September 30, the loss reserve associated with these loans decreased to 4% compared to 4.35% as of June 30, due in part to the aforementioned charge-off, other impairment adjustments and loan grade changes due to updated results and analysis.

Our oil bucket loans are 20.1% energy loans and 79.9% represent indirect exposure. Of the total, 4.9% are production related.

At September 30, 42% of these oil bucket loans were classified, which is down from 47% at June 30. 18% of our oil bucket loans were considered impaired, which represents a favorable decline although primarily the result of the large charge-off.

The slide deck provides added color regarding our overall mix of loans. The mix was a 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 August 2017, the Houston MSA gained 53,500 jobs. Recent key economic indicators reflect Harvey-related effects such as the Purchasing Manager Index now at 46.5%, which indicates contraction and that home sales fell in August, which is the first year-over-year decline in 11 months.

Given that the major economic base for Houston includes -- including energy, the Houston ship channel, chemicals and refining and health care were largely unscathed by the storm, we agree with the Greater Houston Partnership assertion that Harvey will have no lasting impact on long-term population and economic growth. The latest report from the Greater Houston Partnership includes the following summary points: losses include $87 billion of property and $10 billion of economic impact; 538 businesses suffered major damage; 97,000 single-family homes were damaged or destroyed; 15,500 apartment units and 215 properties were damaged; approximately 300,000 vehicles were lost with a value of $2.4 billion. Temporarily, unemployment increased but is expected to recover by November according to this source.

In response to Harvey, Allegiance bankers contacted our customers both in an effort to render assistance and to build our own data file designed to assess the impact to the bank. After connecting with over 92% of our loan dollars, what we determined were the following approximations: customers representing $105 million of loans experienced some degree of direct flood impact, of which 24% were residential and 73% commercial real estate and C&I; of the $105 million, 60% had flood insurance. Loans for which we have identified increased default risk have been downgraded or additionally impaired. $885,000 of increased impairment reserves can be attributed to the Harvey flood impact. In addition to the impairment, our overall risk assessment resulted in a $1.76 million provision as a result of the storm.

A full recovery from Harvey is obviously ongoing, which calls for our continued monitoring. As I transition to Paul, let me add a note that after 10 years, Allegiance continues to be recognized for our local leadership. This past quarter, we were once again named as one of the best places to work by the Houston Business Journal and also received a Corporate Philanthropy Award from the Houston Business Journal based on employee community volunteer hours. We believe that Allegiance is the premier community bank for the Houston area, and we are well positioned for excellent performance for both our customers and shareholders as we complete 2017 and begin our second decade. I'll now turn it over to our CFO, Paul.

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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. Third quarter net income was $3 million or $0.22 per diluted share as compared to second quarter earnings of $5.4 million or $0.40 per diluted share. The earnings story for the quarter can be summarized by robust pretax pre-provision earnings gains, mitigated by significant provision for loan losses.

Third quarter net interest income increased $1.9 million to $27 million from $25.1 million in the second quarter, representing 7.5% linked quarter growth. Net interest income for the 9 months ended September 30 increased $9.8 million to $76.2 million from $66.4 million for the 9 months ended September 30, 2016. This represents 14.7% year-over-year growth.

Net interest income gains were driven by growth in average earning assets at 4.2% in the third quarter compared to the second quarter and 16.5% for the 9 months ended September 30 compared to the same period in '16.

The tax equivalent net interest margin for the third quarter was 4.37% compared to 4.29% in the second quarter as the yield on interest-earning assets increased 6 basis points, while the cost on interest-bearing liabilities increased 3 basis points.

Yield on loans in the third quarter was 5.3% versus 5.25% in the second quarter. Interest income grew $1.9 million or 6.6% from $29 million in the second quarter to $30.9 million in the third quarter, driven by a combination of loan growth and enhanced asset yields. Increased interest income was partially offset by the slight increase in interest paid on interest-bearing liabilities of $24,000 as we were able to decrease our FHLB borrowings during the quarter due to deposit gains.

Deposits increased $187.4 million during the third quarter to $2.29 billion. We were able to slightly decrease broker deposits from $73 million at June 30 to $67 million at September 30. The cost of interest-bearing deposits in the third quarter was 86 basis points versus 84 basis points in the second quarter.

While we are pleased with the progress of our deposit initiatives in the third quarter, generating solid core deposit growth continues to be a focus as we have seen an increase in the cost of wholesale funding alternatives, not to mention we operate in a very competitive deposit market.

During the third quarter, total purchase accounting accretion increased net interest income by $102,000 versus $145,000 last quarter. The overall effect of accretion is dwindling and becoming less -- increasingly less impactful. Noninterest income decreased slightly to $1.46 million for the third quarter from $1.48 million for the second quarter. Total noninterest expense was $17.7 million, up from $16.5 million in the second quarter. Most of this increase is in the salaries and benefits line as second quarter salaries and benefits were particularly low due to low incentive accruals in the quarter. The third quarter also featured the full quarter impact of the increased headcount we've added since the first quarter. Note, we had 341 FTEs at the end of the first quarter, 357 FTEs at the end of the second quarter, mostly back-end weighted, and 364 FTEs at the end of the third quarter. Last, we're pleased to see professional fees starting to decrease in the quarter, as expected. So the resulting efficiency ratio for the third quarter of 62.1% was roughly similar to the 61.9% we posted for the second quarter.

As Steve previously outlined, provision for loan losses was $6.9 million for the third quarter. Net charge-offs for the quarter were $4.2 million or an annualized 78 basis points on average loans during the third quarter, of which, $1 million had previously been reserved for 2 specific impairments. The ending allowance at $23.7 million is 108 basis points of total loans, an increase from 99 basis points at the end of the second quarter.

Excluding the $84 million in mortgage warehouse loans, the ending allowance to total core loans would be approximately 112 basis points. As a result, the allowance coverage ratio to nonperforming loans ended the quarter at 171%, up significantly from 109% at June 30. Pretax pre-provision earnings were $10.8 million in the third quarter, which represents a 6.5% pickup from $10.1 million in the second quarter. The effective tax rate for the third quarter was 22.9%, driven largely by tax-exempt interest being very large relative to pretax income in the quarter. Bottom line, our third quarter net income of $3 million at $0.22 per diluted share produced a return on average assets of 0.43% and a return on average tangible equity of 4.55%. Year-to-date, our return on average assets was 0.73% and the return on average tangible equity is 7.67%. At quarter end, book value per share was $22.98, and tangible book value per share was $19.73, an 8.2% increase from 2016 year-end. Now I will turn the call back over to George.

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George Martinez, Allegiance Bancshares, Inc. - Chairman & CEO [6]

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Operator, we would now like to open the lines 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 Matt Olney with Stephens.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [2]

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I want to start on deposit growth. Pretty impressive numbers in 3Q and pretty low overall cost. Any commentary you can provide as far as kind of how you're doing this in the third 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 [3]

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Matt, this is Ray. We're pleased with the deposit growth for the quarter. We gained some traction for some of our deposit initiatives and got some wins in that. As Paul mentioned, the market remains competitive and we continue to elevate the deposit gathering conversation so that we can keep up with the solid loan growth. The -- I said a leading indicator in that is our new account openings because those deposits, once we get them opened, they obviously fluctuate. So we're encouraged that we continue to have positive growth in that -- on the new account side.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [4]

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Okay. That's helpful, Ray. And then maybe, Paul, can you kind of chime in and talk about the margin outlook from here?

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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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Sure. Well, continued success on the deposit front is going to be a huge driver for our margin outlook, going forward. We feel really good about our asset yields, but we're clearly in a expected to be rising interest rate environment, and the big unknown around the banking industry is clearly how that's going to manifest itself on our funding costs. We do look at our loan pricing in a cost-plus dynamic, where we take into account our funding cost as we evaluate our lending opportunities. So we keep a very close eye on that, so we are working hard to try and continue to produce really strong stable margins. We're not trying to take interest rate risk as we position the balance sheet, and we'd really just want to monetize our growth at stable margin if possible. So funding, the nature of the funding and the quality of our funding is going to be a large driver of our execution there.

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George Martinez, Allegiance Bancshares, Inc. - Chairman & CEO [6]

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Agree.

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

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Okay. That's helpful. And then going back to the operating expenses. I think it was mentioned in the prepared remarks that 2Q was a little bit unusually light, but 3Q fully accounts to the additional headcount. So are we saying that these 3Q numbers are pretty good run rate, going forward?

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Paul P. Egge, Allegiance Bancshares, Inc. - CFO, Executive VP, CFO of Allegiance Bank and Executive VP of Allegiance Bank [8]

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Yes, I think so.

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George Martinez, Allegiance Bancshares, Inc. - Chairman & CEO [9]

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Yes. That's much more resembling the -- I guess, the fourth quarter will resemble the third more so than the second. So yes.

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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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Exactly.

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Operator [11]

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And our next question comes from the line of Bryce Rowe with Baird.

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Bryce Wells Rowe, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [12]

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Just wanted to follow up maybe on Matt's 2 questions there. Number one, on the deposit side, Ray and Paul, can you attribute any of the growth to insurance proceeds rolling in related to Harvey, or is that all kind of organic, new account-type opening driven?

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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 [13]

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Bryce, it's probably too early to tell on -- if we'll -- well, for this quarter, no, we do not think that's attributable to the Harvey impact. Going forward, it's still a little too early to tell if we'll get some deposit growth from that, but these are more initiatives for -- we do a good job on that, obtaining the deposits from our borrowing customers and these are initiatives related to the treasury-only, non-borrowing customers.

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Bryce Wells Rowe, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [14]

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Great. That's helpful, Ray. And then, Paul, just to be clear on third quarter expenses here, understand the FTE build and first and second quarter being more back-end weighted. But it sounded like incentive accrual was a little light in the second quarter. Would you say there was some level of catch-up in the third quarter from an incentive accrual perspective?

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Steven F. Retzloff, Allegiance Bancshares, Inc. - President, Director and Chairman of Allegiance Bank [15]

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Let me address that. This is Steve. The second quarter was kind of normal, and we had a pretty good provision in the second quarter. When we got to the end of the second quarter after completing that, we did some discussions internally. And obviously, we knew that there was going to be this charge-off, but at some point in the third quarter, we got to that realization and we knew that, that would have an impact on the incentives. But we're recognizing the great performance of our entire team and building this earnings power that's being built at this bank. And our compensation committees decided that it was just not going to be possible to get to the end of the year, or preferrable, let's say, to get to the end of the year and not have much of a bonus pool to distribute and provide that incentive for future growth. So we made some adjustments and we continued on that path through the end of the year. So again, the expense burn rate, I guess, if you call it that, with regard to incentives that we saw in the third quarter, we'll probably be -- mirror that for the fourth quarter.

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Paul P. Egge, Allegiance Bancshares, Inc. - CFO, Executive VP, CFO of Allegiance Bank and Executive VP of Allegiance Bank [16]

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And a common theme, just broadly speaking, relative to our noninterest expenses base, it's very consistent with past quarters. And, really, our history as a public company, we're continuing to invest in forward growth and positioning the company for future growth, so that's a common theme. It feels like we've been talking a lot about Harvey here. We do seek to extract efficiencies as we grow, but we aren't going to stop investing in future growth.

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Operator [17]

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And 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 [18]

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I had a couple of questions about the provision. Maybe we'll start with the, kind of larger one-off energy-related net charge-off. Can you just give us a little more color on what happened with that credit?

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Steven F. Retzloff, Allegiance Bancshares, Inc. - President, Director and Chairman of Allegiance Bank [19]

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I kind of mentioned in the opening comments, it was -- we've identified it in prior quarter earlier in the year as that kind of business ceased operations, but it was a C&I loan in that -- kind of that midstream. We had both equipment and receivables as our primary collateral. And as we were working through that collection process the first half of the year, one thing happened was the customer began selling equipment, but he sold them at auction prices, which didn't quite tune the bar of our third-party appraisal. So we had that adjustment. And then the larger impact, though, was that, that customer's oil industry receivables, which were probably predominantly from larger corporate customers, were really discovered in the third quarter to be basically uncollectible. And we realized that and then we also had some intellectual property that the company had, but we had a buyer. That buyer kind of drifted away during the third quarter, so it kind of led to a perfect storm for this one customer. And unfortunate as it was, the -- we knew our collection efforts would be now directed more towards guarantors and possibly other strategies on the intellectual property. So we felt that a charge-off was warranted, although we continue to seek recoveries.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [20]

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Okay. All right. That's helpful. And then on the piece of your provision that's directly related to Harvey, I thought I heard at one point in your prepared comments, talk about that impact being $2.6 million. And then another point I thought I heard $1.76 million. So just to clarify, how much of the provision was directly related to Harvey?

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Steven F. Retzloff, Allegiance Bancshares, Inc. - President, Director and Chairman of Allegiance Bank [21]

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Well, the $1.76 million was the impact from the storm in kind of a general sense. And then we had $885,000 of impairments that we gave to specific customers. If you add those 2 together, you'd get the $2.6 million.

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Operator [22]

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(Operator Instructions) Our next question comes from the line of Brad Milsaps with Sandler O'Neill.

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Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [23]

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You guys continued to have really great growth, and I know, previously, you've kind of described your business model or how you built the bank. Is it some point there will be sort of this hockey stick up in performance? Steve, as you kind of think about it, are we getting closer to sort of that inflection point? Or do you think you feel like you're still sort of in build-out of infrastructure mode? I'm kind of looking, I guess, pre-provision earnings are probably up 10% year-over-year; year-to-date, 10% or 11%. EPS is kind of flattish. Obviously, the provision has a fair amount to do with that. But just kind of curious kind of where you are in your whole -- the build-out of the company and kind of where you think that inflection point is coming.

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Steven F. Retzloff, Allegiance Bancshares, Inc. - President, Director and Chairman of Allegiance Bank [24]

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Sure. Thanks. The old saying, slow and steady wins the race. So we're kind of thinking that way a little bit. We continued, like Paul said, to invest in the future as both central and producing officers and staff. Again, as I mentioned earlier, that we have already added 9 new lenders this year. We added 12 last year. I would point out that those 12 that we hired last year are really producing -- at the end of this 2016, those, what we call the class of 2016, had $4 million in loans on average per person. At the end of the first quarter, they had $8 million. At the end of the second quarter, they had $12 million. And at the end of the third quarter, those folks had $16 million. So they continue to produce, that group that we hired last year, and we've hired the 9 this year, and they're beginning to produce as well. So we'll begin to report on them later. But that's, again, an investment that does create some overhead for the company, going forward, so you kind of give a little bit up on your efficiency gains as you hire new blood that doesn't bring revenue day 1, and of course, the support staff for those folks. But I don't know if there will be a sharp inflection point as you would describe in a hockey stick, but I think it's going to be steadily, I'm anticipating, personally, in my opinion, is that we'll do better in the future when it comes to efficiencies. But I don't think it's going to be all in 1 quarter or 2. But steady as she goes. I don't know, Paul, do you have any other...

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Paul P. Egge, Allegiance Bancshares, Inc. - CFO, Executive VP, CFO of Allegiance Bank and Executive VP of Allegiance Bank [25]

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I think I'd point to the efficiency gains being more gradual. We've had a little bit of noise of late, but we expect to continue to see core efficiency gains as -- in the fourth quarter and then -- and kind of as we continue to grow the business. So as I'd said, the efficiency gains are going to be a function of scale and achieving that scale. We're doing it through growth. It's a little bit more pushing the rock up a hill as opposed to pulling back a slingshot.

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Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [26]

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Sure. And kind of how does all that -- kind of planning your capital plans. I mean, right now, you're -- it seems like you have plenty of capital, a little bit of excess, but you're growing at 20% a year. If I take away the noise around the provision, you're probably generating right around at 10% ROTE or so. What does your crystal ball say in terms of balancing that growth with how you think about capital looking out of the next say, 4 to 8 quarters?

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Paul P. Egge, Allegiance Bancshares, Inc. - CFO, Executive VP, CFO of Allegiance Bank and Executive VP of Allegiance Bank [27]

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We feel very good about our equity capital position. We think, in particular, that's compared quite favorably to peers. We do keep a close eye on our total risk-based capital ratio. So really, that has been trending a little bit lower as we've been growing. So as we grow, we keep an eye on that. And if we were to address capital to support our growth, we'd like to target Tier 2 capital as opposed to common.

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George Martinez, Allegiance Bancshares, Inc. - Chairman & CEO [28]

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Very good. Accurate.

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Operator [29]

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And our next question is from the line of Bryce Rowe with Baird.

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Bryce Wells Rowe, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [30]

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Just one quick follow-up and kind of related to the capital question. Paul, is there a particular sort of risk-based capital ratio that you're kind of looking at in terms of queuing up potential Tier 2 raise?

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Paul P. Egge, Allegiance Bancshares, Inc. - CFO, Executive VP, CFO of Allegiance Bank and Executive VP of Allegiance Bank [31]

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Not a specific. I mean, we think in terms of ranges and we feel like we're kind of getting close to a lower bound in terms of what we're comfortable with. We want to provide ourselves an optimal level of financial flexibility as we kind of view our growth horizon and flexibility for strategic alternatives, which is M&A. So that's kind of the broader outlook that we kind of keep in mind as we evaluate our total risk-based capital position, going forward.

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Operator [32]

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And I'm showing no further questions at this time. So with that, I'd like to turn the call back over to Chairman and CEO, Mr. George Martinez, for closing remarks.

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George Martinez, Allegiance Bancshares, Inc. - Chairman & CEO [33]

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Well, we would like to thank you for your interest in Allegiance and for attending our call today, and look forward to speaking with you next quarter.

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Operator [34]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.