Allegiance Bancshares, Inc.
Q2 2020 Earnings Call Transcript

Published: 2 Aug 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2020 Allegiance Bancshares, Inc. Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Courtney Theriot. Thank you. Please go ahead, ma'am.

[Courtney Theriot:]

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 a reflection of management's beliefs at the time the statement is made. Management's beliefs relating to predictions are subject to change, and we do not publicly update guidance. Please see the last page of the text in this morning's earnings release for additional information about the risk factors associated with forward-looking statements. If needed, a copy of the earnings release is available on our website at allegiancebank.com or by calling Heather Robert at 281-517-6422 and she will e-mail 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 now turn the call over to our CEO, Steve Retzloff.

[Steven Retzloff:]

Thank you, Courtney, and we welcome all of you to our second quarter earnings call. Three months ago, I led our call stating my aspiration that for all of our listeners, your personal and business interests were doing well, and that we would soon get the pandemic-related shutdown behind us. Unfortunately, I have to reiterate that comment, even doubling down on the sentiment, as our community and the country continue to grapple with the challenges. I'm not only proud of our bankers, but of the entire community banking industry, as so many other community banks like Allegiance have stepped up in a big and bold way right when they were needed. It is a united and collective effort from all of us that was needed and has been delivered. As Ray will report, Allegiance Bank has been one of the top performers as it relates to delivering on PPP, where our team rolled up our sleeves to produce an outsized level of service, not only to our existing customers, but to the community at large. We also stepped up in a big way to support the Houston region through the Houston Food Bank where, due to our significant donation and matching challenge, over 1 million meals will be provided to those in need. We're supplementing this with volunteer opportunities for our staff at their distribution center, which not only helps the food bank but builds upon our already strong culture and sense of team. We recently have been recognized by both the Better Business Bureau for their Excellence Award and also we're named one of the Top 100 Companies to Work for in Texas. So when I say Allegiance is leading in a big way, I have a lot of evidence to prove it. In addition to our PPP effort, our bankers have been in frequent contact with customers over the past month, providing any needed assistance and gaining insight into their real-time operational status. Obviously, there's uncertainty as to the timing of reopening of certain businesses, but even schools -- but the result of our outreach has been as favorable as it could be hoped under the circumstances. Ray will speak to some of the particulars and to the status of deferrals. Overall, though, we feel -- we continue to feel very good about the granularity, the loan-to-value and personal guarantees that are central to our portfolio of small commercial borrowers. We certainly believe that our management of concentrations as it relates to elevated COVID risk categories, such as hospitality, bar and restaurant and oil and gas was the right position for us to be in going into the pandemic and will be proved beneficial going forward. Paul will provide color on our record pre-provision earnings. I highlight our excellent NIM performance, our strong capital, particularly our risk-based capital ratio and our liquidity position. We also had solid deposit growth success during the quarter, which Ray will describe. Both our balance sheet mix and recent margin changes over the past several quarters position us to better face the uncertainties of the pandemic and our reserve build during the past quarter and year-to-date has been meaningful. We began paying dividends in 2020 and are able to continue that based on our strong position. We just opened a new office East of Downtown Houston, where we previously did not have a physical presence. We are very pleased with the opportunity to introduce our best-in-class service level in that surrounding area to the quality of that team who have been incubating within the bank for over a year. That said, we understand that we have experienced an increase in noncontact banking and similarly to a highly successful work-from-home status during the pandemic. What we know is that while our assets per branch is significantly on the high end of the scale, and while we do have additional geography for fill-in opportunities, there is an active discussion in the industry that suggests fewer branches will be needed to support future growth in asset. We also recognize that increased central space and staffing requirements to support growth will likely be diminishing. Our planning and evaluation will consider greater use of technology, improved workflows and the option for hybrids such as continued work-from-home, work-in-office approach. Amid so much talk of uncertainty, our commitment to the safety of our employees and customers has been a constant determinant, guiding our operation. Though sounding muffled as we emphasize the adroit usage of masks, our message of appreciation to our staff is both sincere and exceedingly well deserved. Next, Ray will describe our loan-to-deposit production results as well as an outlook on credit, followed by Paul, who will cover our financial results. We will then open the call for questions. Ray?

[Ramon Vitulli:]

Thanks, Steve. As we progressed through the second quarter, we knew our bankers were working extremely hard, putting in long hours, many while working remotely with the sharing of resources through an all-hands-on-deck approach to take care of whatever needed to get done. But now that we look back on what was accomplished during the quarter, it poses the question, how did we do it? In a single quarter, we originated $234 million and renewed another $335 million of core loans, originated $697 million of PPP loans, opened over 2,000 new deposit accounts, including setting a record with the onboarding of new treasury management customers, process loan deferrals, kept our bank offices open to serve our customers and designed our PPP loan forgiveness process in the midst of ongoing legislative changes. The answer to how we did it is teamwork, dedication and the genuine desire to serve others. So similar to last quarter, I will provide details on our business continuity effort, bank office operations and PPP stats, followed by our normal reporting of second quarter results. We continue to be pleased with all aspects of the execution of our business continuity plan, whether working remotely or working in shifts or teams, we have handled the business of the bank as if we were working entirely on-premise. While we have served customers via our drive-throughs and by appointment since COVID was declared a pandemic, we have slowly reopened a number of bank offices to full lobby service and continue to do so when appropriate, following state and county guidelines. As Steve mentioned, we are very excited to announce the opening of our 28th bank office located in the historic East End of Houston. This de novo, known as the East End Office, serves an area of Houston that is both rich in history and experiencing a resurgence of business and residential growth. For example, the city of Houston recently approved $24 million in funding to develop a new high-tech Maker Hub located near our new bank office to support manufacturing and fabrication job training for companies located in the East End community. Our bankers already have strong relationships in the East End area and will attract many more now that we have a permanent presence in the community. In conjunction with the opening of the new East End office, we are closing the loan production office located in the Palm Center of Houston. Several members of the East End office lending team incubated at the Palm Center LPO, where we will continue to have a presence via our deposit taking ATM. We are also extremely pleased with our PPP loan results and the impact of our efforts on the Houston region. As of June 30, we funded more than 5,800 loans totaling $695 million, affecting more than 60,000 jobs. Since quarter end, we have funded an additional 181 PPP loans of approximately $8 million. Our approach to provide PPP loans to both existing customers and new customers has further strengthened our market presence. For some perspective on the PPP loans, the $695 million in aggregate fundings represents 1.69% market share of all approvals in Texas compared to our deposit market share of 0.49% in Texas, meaning our PPP results were nearly 3.5x what would be expected for a bank of our size. And we're continuing to process additional applications as a result of the program extension to August 8. I will now go over our second 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. Total core loans, which excludes PPP loans and mortgage warehouse lines, ended the quarter at $3.89 billion, a decrease of $66.6 million during the quarter. In addition, early in the quarter, we successfully completed the full exit of the mortgage warehouse business. During the second quarter, our staff and lending team booked $234 million of new core loans that funded to a level of $148 million by June 30 compared to the first quarter when $294 million of new loans were generated, which funded to a level of $202 million by March 31. Paid off loans were $171 million in the second quarter compared to $204 million in the first quarter and $182 million in the fourth quarter 2019. The average size of the new organic core loans generated during the second quarter was $320,000, with an average funded balance of $202,000, which once again reflects our continued focus on building a diverse and granular loan portfolio. The average size of all core 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 second quarter core loans was 4.87%, which is below the first quarter 2020 weighted average rate of 5.08% and the fourth quarter 2019 weighted average rate of 5.39%. The $171 million of paid off core loans during the quarter had a weighted average rate of 5.16%. Carried core loans experienced advances of $101 million at a weighted average rate of 5.31% and paydowns of $124 million, which had a weighted average rate of 5.14%. All in, the overall period end weighted average rate charge on our funded core loans decreased 5 basis points, ending the quarter at 5.24% compared to 5.29% as of March 31, 2020. The mix of new loan production based on second quarter funded levels was represented by the following 4 commercial categories. Owner-occupied CRE, nonowner-occupied CRE, commercial term loans, commercial working capital loans. These 4 commercial categories represented 56% of the new funded production for the second quarter compared to 58% for the first quarter 2020, indicating our ongoing commercial concentration. I would now like to provide some additional information on 3 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 regional bank, our overall exposure to oil and gas is largely indirect as we do not have any reserve base loans, but we have defined this category to be any borrower that operates in or directly supports the upstream, midstream or downstream segments of the industry. At June 30, this category is approximately 1.6% of our funded loans or $74.8 million, of which $27 million was commercial real estate and $47.8 million was C&I. Of the $27 million in CRE, the weighted average LTV for the portfolio was 53.7%. A 20% stress testing of the most recent appraised value plus 6% marketing expenses resulted in an overall collateral deficiency of approximately $128,000, and the 30% stress testing plus 6% marketing expenses resulted in an overall collateral deficiency of approximately $712,000. Regarding our hotel portfolio, at June 30, we had $134 million of hotel loans, of which $125.1 million was commercial real estate, $6.1 million was C&D, and $2.9 million was in C&I. Of the $125.1 million in CRE, the weighted average LTV for the portfolio was 60.2%. A 20% stress testing of the most recent appraised value plus 6% in marketing resulted in an overall collateral deficiency of approximately $392,000, and a 30% stress testing plus 6% in marketing resulted in an overall collateral deficiency of approximately $3.1 million. And regarding our restaurant and bar portfolio, at June 30, we had $111.3 million of restaurant and bar loans, of which $80.6 million was commercial real estate, $2.7 million was C&D and $28 million was C&I. For the $80.6 million in CRE, the weighted average LTV for the portfolio was 69.4%. A 20% stress testing of the most recent appraised value plus 6% in marketing resulted in an overall collateral deficiency of approximately $4.8 million, and the 30% stress testing plus 6% in marketing resulted in overall collateral deficiency of approximately $7.7 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 $538,000 or an annualized rate of 5 basis points. Nonperforming assets, including both nonaccrual loans and ORE ended the second quarter up from the first quarter, increasing from 68 to 77 basis points of total assets. Nonaccrual loans increased a net of $11.6 million during the quarter, from $21.6 million to $33.2 million, primarily due to $15.2 million in new nonaccrual loan, including a $7.1 million hotel relationship that had been on nonaccrual in prior periods, which is now experiencing occupancy issues due to the current economic environment. The additional $8.1 million increase in nonaccruals was from 19 relationships, 3 of which totaled $4.1 million and the remaining $4 million was from 16 smaller relationships. These downgrades were partially offset by $2.8 million in payoffs and payments, $633,000 in charge-offs and $225,000 in foreclosures. Our ORE consists of 6 properties totaling $11.8 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 $576,000 residential property. The remainder are 3 smaller properties, 1 northwest of Houston, 1 West of Houston and 1 in Beaumont. These 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 2.06% of total loans as of June 30 compared to 2.04% as of March 31. Criticized loans increased to 3.20% at June 30 from 2.85% at March 31. The specific reserves for the impaired loans ended the quarter at 12.1% compared to 9% at March 31. On the deposit front, we saw an increase in total deposits in the second quarter by $747.1 million from the first quarter and up $840.1 million over the year ago quarter. The increase was primarily in the noninterest-bearing deposit category as a result of new accounts associated with PPP customers as well as higher balances in our carried accounts. Noninterest-bearing deposits increased $536.6 million during the second quarter and were up $580.7 million over the year ago quarter. With that, our noninterest-bearing deposits to total deposit ratio was 37.3% for June 30, 2020, compared to 30.8% from March 31, 2020, and 30.3% at June 30, 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 90-day payment deferrals to eligible borrowers. As of June 30, first time deferrals were granted on 2,111 loans with an aggregate loan balance of $1.19 billion or 30% of core loans. As of July 24, second deferrals were granted on 129 loans with an aggregate loan balance of $100.1 million or 8% of first-time deferrals, while approximately $564 million in loans or 48% of the first-time deferrals had made a regularly scheduled payment, leaving approximately $494 million or 44% still on the first deferral. Not included in the $1.19 billion of loans that received the first-time deferral are approximately $20 million in loans that have paid off in full. The deferrals as of June 30 in some key categories by loan type are as follows. I will provide 2 numbers in each category. The first number will be the percentage with respect to total deferrals, and the second will be the percentage with respect to total loans within a given loan type category. Retail, 17% of total deferrals with 53% of all retail deferred; C-store, 11% of total deferrals with 41% of all C-store deferred; hotel, 10% of total deferrals with 85% of all hotel deferred; office, 7% of total deferrals with 8% of all office deferred; restaurant and bar, 7% of total deferrals with 72% of all restaurant and bar deferred; rental and investment property, 6% of total deferrals with 28% of all rental and investment property deferred; 1-4 family, 6% of total deferrals with 18% of all 1-4 family deferred; and oil and gas, 2% of all deferrals with 25% of all oil and gas deferred. As previously mentioned, we funded $695 million of PPP loans. A breakdown of PPP loans made to our high-risk loan categories as a percentage of our total PPP loans is as follows

[Paul Egge:]

Thanks, Ray. As previously referenced, and much like in the first quarter, our bottom line results were significantly impacted by $10.7 million in provision expense due to COVID-related risks and economic uncertainty. The net income came to $9.9 million or $0.48 per diluted share in the second quarter, which is up from $3.5 million or $0.17 per diluted share in the first quarter and down relative to the $14.2 million or $0.66 per diluted share posted in the second quarter of 2019. While we are disappointed with the bottom line results, we are very pleased with many of our underlying operating trends. On the back of record net interest income, we posted record pretax pre-provision results in the second quarter. Pretax pre-provision income for the second quarter was $22.6 million compared to $15.3 million in the first quarter and $19.4 million in the year ago quarter. Recall that the first quarter featured nonrecurring items that decreased pretax pre-provision earnings by $2.1 million. Adjusting for nonrecurring items, such as gains and losses and OREO write-downs, pretax pre-provision income for the second quarter would have been $22.8 million versus an adjusted $17.4 million for the first quarter and $18.7 million in the year ago quarter. Record net interest income was a key driver to our increase in pretax pre-provision earnings power in the second quarter. Net interest income increased $5.8 million or 12.9% to $50.8 million from $45 million in the first quarter. Key drivers on the asset side were the impact of interest on nearly $500 million in average loan balances due to SBA PPP loans and additional income from our larger securities portfolio in the quarter, which is partially offset by lower purchase accounting accretion. Similarly impressive was the liability side, where we improved our cost of funds significantly. So total interest income increased by $3 million, while total interest expense decreased by $2.8 million, all while acquisition accounting accretion decreased by $585,000 compared to the first quarter. The impact of acquisition accounting accretion continued to decrease in the second quarter. Accretion increased loan income by $566,000 and reduced CD expense by $103,000 for a total positive effect on net interest income of $669,000 during the second quarter as compared to a total positive effect of $1.3 million in the first quarter and $2.8 million in the year ago quarter. This quarter's accretion leaves $3.5 million in the loan mark and $363,000 in the CD mark. Yield on loans in the second quarter was 5.13%, impacted by both PPP balances and lower purchasing accounting accretion as compared to 5.59% in the first quarter and 5.88% for the year ago quarter. Adjusting for the acquisition accretion, yield on loans would have been 5.08% in the second quarter, 5.47% in the first quarter and 5.62% in the year ago quarter. Now if you were to exclude the PPP loans, yield on loans would have been 5.44% in the second quarter. Total yield on interest-earning assets was 4.83% for the second quarter, which was down from 5.28% for the first quarter and 5.58% for the year ago quarter, reflecting the aforementioned effect of PPP balances and lower accretion income as well as higher average security balances in the earning asset mix. If you were to exclude the PPP loans, the total yield on earning assets would have been 5.07% for the second quarter. Our cost of interest-bearing liabilities decreased dramatically in the second quarter to 119 basis points versus 168 basis points in the first quarter and 186 basis points for the year ago quarter. The overall cost of funds for the second quarter was 79 basis points versus 130 basis points in the first quarter, thanks in part to significantly higher balances of noninterest-bearing deposits. The second quarter's improvement in cost of funds reflects the first full quarter impact of non-maturity deposit repricing after Fed actions in March, and a significant decrease in the cost of borrowed funds. We expect continued improvements in our cost of funds going forward, but it won't be as dramatic, and it will be driven more by the gradual repricing of our CD portfolio over time. Notwithstanding such a significant average balance mix shift towards lower-yielding PPP loans and securities, we are really proud to have maintained a very strong taxable equivalent net interest margin of 4.10% in the second quarter as compared to 4.15% in the first quarter and 4.33% in the year ago quarter. On what we define as core or adjusted NIM, excluding the impact of purchase accounting accretion, we saw our taxable equivalent net interest margin gain a basis point to 4.05% in the second quarter from 4.04% in the first quarter and remained relatively stable relative to the 4.07% we saw in the year ago quarter. Excluding PPP loans and related revenue, net interest margin would have actually increased to 4.28% for the second quarter. Going forward, we feel well positioned to maintain a strong net interest margin as we manage our funding mix and maintain discipline on loan pricing. Noninterest income decreased to $1.6 million for the second quarter from $2.7 million for the first quarter, primarily due to the loss on the sale of ORE of $306,000 during the second quarter and lower correspondent bank rebates, deposit fees and lower gains on the sale of securities in the quarter. Total noninterest expense for the second quarter was $29.7 million compared to $32.4 million in the first quarter. Recall that the first quarter featured $2.2 million of write-downs on other real estate owned recognized in that quarter. Notable in the second quarter expenses was deferred costs related to PPP loans recorded in the quarter, which lowered the salary employee benefits line by $1.6 million. These decreases were partially offset by an increase in overtime expenses related to the PPP loan booking process. While on the topic of PPP loans and income statement impacts, we should note that we expect to recognize approximately $25 million in aggregate origination fee income and the approximately $1.6 million in aggregate deferred origination costs we just mentioned into yield over the life of the individual PPP loans. Upon SBA forgiveness or early payoff on individual loans, the recognition of remaining origination fee income and costs will be accelerated. Our improved revenue and expense profiles drove efficiency improvement in the second quarter, decreasing our efficiency ratio to 56.92% compared to the 68.13% we posted for the first quarter and the 61.93% for the prior year quarter. Note that if you were to adjust the first quarter's efficiency ratio for the OREO write-down, it would have been 63.48%. The provision for loan losses was $10.7 million for the second quarter, which is slightly lower than the provision we took in the first quarter of $11 million. This brings our allowance for loan losses to $47.6 million, representing 104 basis points of total loans. If you were to include the $3.5 million in the loan mark remaining on acquired loans and exclude the PPP loan balances, the ending allowance plus loan mark to core loans would be 132 basis points. As we mentioned in the first quarter call, 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. And since the COVID-19 situation is fluid with significant economic uncertainty, 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 during the second quarter significantly impacted our bottom line ROAA and ROATCE metrics for the quarter, which came to 0.71% and 8.32%, respectively. Quarter end tangible book value per share was $24.09, an increase of approximately 6% from the first quarter, partially driven by unrealized gains in our securities book. Notwithstanding current economic uncertainties, we are buoyed by our strong margins, which drive a solid recurring pretax pre-provision earnings stream. And that's before the significant beneficial revenue impact we expect from PPP loan forgiveness. We are also fortunate to be at or near all-time high levels of capital on a consolidated basis and at our Allegiance Bank subsidiary. All in all, we feel well positioned as we navigate the current economic environment, and we feel confident about our ability to maintain a strong capital position and our modest dividend. To that end, our Board of Directors declared a $0.10 dividend on July 23. I will now turn the call back over to Steve.

[Steven Retzloff:]

Thank you, Paul, and thank you, Ray. With that, I will now turn the call over to the operator to open the line for questions.

[Operator:]

[Operator Instructions]. Our first question comes from David Feaster with Raymond James.

[David Feaster:]

I just wanted to start out on the core margin. I mean what you guys have been able to do is tremendous. And Paul, just -- I appreciate your commentary. So if I'm doing the math right, it sounds like a core NIM, ex PPP and ex accretion, was like 421. I guess, just how do you think about the core NIM going forward, I guess, as you have some opportunity to further reduce deposit costs and leverage the improved earning asset mix? Just any thought on the core NIM going forward is very impressive.

[Paul Egge:]

Certainly. Well, we're going to be working our hardest to protect that. And the bull case for our NIM is clearly the ability for us to continue to decrease our cost of funds. And as I mentioned in the prepared remarks, it's likely to be a little bit more gradual in the third quarter than it was going from the first quarter to the second quarter. But we do see a meaningful ability to continue that momentum, so to speak, into the third quarter from the standpoint of our cost of funds. On the asset side, there certainly will be some headwind, particularly as it relates to excess liquidity on the balance sheet and the relative unknown as it relates to our ability to continue to book loans and try to push for some level of stability and/or growth on the loan side of the balance sheet. To the extent we have excess levels of liquidity and our earning asset mix shifts to a degree, that's going to have an impact on our overall asset yield. But we still feel pretty good about our ability to maintain our -- to at least maintain really strong levels of margin into the back half of the year.

[David Feaster:]

So if I'm reading between the lines, at least flattish, if not some potential for additional margin expansion?

[Paul Egge:]

I think flattish is the way to probably set expectations, and we'll be trying our hardest to ensure that we deliver that. And who knows, maybe a little more.

[David Feaster:]

Terrific. And then Ray, I appreciate all the commentary on the redeferral rates. And I guess just how -- I mean if I'm doing the math right, it's like a 15% to 20% redeferral rate, I guess, through the data that you've got through the 24th of July. I guess how do you think -- is that sustainable as we look to the -- like the remaining deferrals? I guess just how do you think about redeferral rates going forward and how your conversations are going?

[Ramon Vitulli:]

Sure. I think that the -- it's probably a pretty good benchmark. I think if you look at our higher risk categories, they're a little bit higher than that on the total portfolio. But overall, it's -- the velocity that we're seeing is -- that was from July 24 is the date that we're giving that just a few days ago. So I think the velocity -- the first deferral velocity, obviously, was tempered after what we reported as of April -- in April with the big bulk of those deferrals that were granted at the end of March. And so that has slowed down. And second deferrals, it's probably still early, but I think -- I still feel pretty good about that level. Okan wants to chime in.

[Okan Akin:]

Yes. The other aspect of the second deferrals is we have more stringent requirements as to what it takes for the second deferments to be granted, much more robust documentation from the customer base. If the first deferments were done in an effort to accommodate in the short term the needs of our customers while we were working on their PPP loans at the same time, second deferrals really are granted as we get comfortable that there is a plan behind what the customer is working on to get to a better place in terms of their revenue and their ability to make their payments. So that impacts the velocity of the second deferment significantly.

[David Feaster:]

Okay. Okay. That's helpful color. And then just last one from me. Just thoughts on organic growth. Obviously, the PPP program and the deferral activity was a huge distraction. And then just as I look at the loan balances, it looks like C&I utilization may have come down. Just curious, your thoughts on origination activity and organic growth going forward as maybe you bring some of the new accounts over from the PPP program and your lenders can get back to originations and just thoughts on organic growth and ex PPP going forward?

[Ramon Vitulli:]

Yes. So the originations in the second quarter definitely took a dip from what we've normally experienced and there may be a little bit of pent-up pipeline that we may see in the third quarter. I think it's still too early to say what may happen as far as net growth but we do have some pipeline that will turn into originations in the third quarter and the fourth quarter. And we're still experiencing what we -- what looked to be no longer elevated levels of payoffs that just is -- has become the kind of run rate of payoffs. So what the net growth is, David, I'm really not sure, but I do expect originations to pick up a little bit from what you saw in the first quarter -- I mean in the second quarter.

[Operator:]

Our next question comes from Brad Milsaps with Piper Sandler.

[Brad Milsaps:]

I just wanted to follow-up on the deferral discussion. The $500-or-so million that you guys are still waiting to hear from there on first deferral. Ray, would you say that -- this is maybe hard to calculate, but that remaining piece, do you think it's more in your higher risk categories? In other words, have you have some of those deferrals cured in some of the areas that would be less viewed as less risky, and you still got more of a high risk bucket of deferrals out there, if that makes sense?

[Ramon Vitulli:]

Yes, that's a good question. No, I would think what's left on deferral looks like the rest of the portfolio. It's really a function of when the deferrals were granted. And we -- again, a bulk, $800-something-50 million of the $1.2 billion was granted prior -- as of April 26. So it's a function of the timing, I believe, and not necessarily the industry.

[Brad Milsaps:]

Got it. So it will look kind of like the rest of the book. It's not like you've heard from your customers already, and you've got [indiscernible] in hotels left or whatever?

[Ramon Vitulli:]

Sure. I think the second deferral rate will -- would -- I mean based on what we've seen, the second deferral rate should look similar as those come due -- as those come out of the first deferral.

[Brad Milsaps:]

Got it. And just maybe for my own clarity, the -- I know you guys benefited a lot from SBA lending, how much does that program where the government will make payments on behalf of customers? Do you expect to have that -- a big impact on you guys? My understanding is that will pick up once the deferral periods over. Just kind of curious how you think about that sort of secondary or tertiary source of repayment over the next 6 months?

[Ramon Vitulli:]

Sure. So yes, we have been receiving those payments, the 6 months of payments. It's really not a deferral. The customer experiences a deferral, but the money is actually coming on those SBA loans. And our SBA portfolio, non-PPP is around $175 million, $180 million. So those -- we have been receiving those every month. And we keep a close eye on those SBA loans to see how they're doing. A number of those are in the risk area of hotel, restaurant and you got day care and that kind of thing in there.

[Paul Egge:]

It's a huge benefit to the underlying customer.

[Brad Milsaps:]

Sure. Yes, yes, that's kind of what I was getting at. And then, Paul, just to kind of follow up, just to make sure I have all my numbers correct on the PPP piece. I think you said right around $500 million on average. Can you give us how much interest income you recognized in the quarter in dollars? And then how much in fees you have left to be recognized as you kind of move through the program?

[Paul Egge:]

Sure. I don't have the detail here. But ultimately, we had just under $2 million in both fee and interest income recognized in the quarter. And of course, since -- due to the timing of the booking, the average footings, so to speak, was only $500 million. So when you look forward to the second quarter -- pardon me, to the third quarter, you're going to really have that fully loaded average level of footings to drive the interest income story, interest and fee income story, I should say, going forward. And we don't expect really meaningful levels of forgiveness in the third quarter. When push comes to shove, we're still on the front end of that process. I got a feeling that the fourth quarter and going into maybe the first part of -- first quarter of 2021 is where we're really going to be seeing the bulk of, hopefully, a high level of forgiveness.

[Operator:]

Our next question comes from Matt Olney with Stephens Inc.

[Matthew Olney:]

Great. I wanted to ask about the operating expenses. It sounds like some of the increased overtime costs in 2Q were offset by some of the deferred costs from the PPP. Is this $30 million level, is this a good run rate to assume for the third quarter? Or are there other considerations for us to think about?

[Paul Egge:]

I'd say it's a solid line of demarcation for us to shoot, to do better than, but that's kind of what I look at as to a run rate.

[Matthew Olney:]

Okay. Great. And then on the credit side, your high risk categories that you mentioned, the hotel, the restaurant, bar, oil and gas, can you talk about what your greatest concern is here within these portfolios? And then some of your peers are also including retail CRE in the categories they're focused on. I think for you guys, it's around 7% or 8% of total loans. Can you talk more about your retail portfolio and why you decided not to include that in terms of the categories you're both concerned about?

[Ramon Vitulli:]

Sure, Matt. Let me talk about retail, then I'll turn it over to Okan and Steve on the other items. So retail, that loan type that we show is about something about around half is what we would call loans that are dependent upon third-party rent. So the other half is single-tenant-type properties where we haven't seen a whole lot of deterioration in those. So I think we probably didn't include it as far as one of the categories to give additional color on, mostly because how we underwrite those going in on the front end with our LTV, our debt coverage ratio, personal guarantees. These are not big docks anchored centers. And those -- the deferral rate looks similar to the rest of the portfolio in that grouping. And the other part of that bucket is also there's owner-occupied in there as well. So as a broad retail, you really got to look at it and what is that kind of dependent upon third-party rent, and it's not that entire amount. So I'll turn it over to Okan or Steve about the other category.

[Okan Akin:]

Yes. I'm happy -- this is Okan. I happy to speak about hotels, restaurant, bars and oil and gas a little bit and how we think of derisking those portfolios. So all 3 of those buckets naturally benefited from the deferments that we talked about earlier as well as the PPP loans that have supported those customers. When you look at the nature of the portfolio for our hotel and restaurant and bar, the vast majority of it is going to be in CRE secured by commercial real estate. Our weighted average LTV on CRE for hotel loans is at 60%. Restaurant, bars are at 70%. Ray discussed the impact of the stress testing that we did at 20% plus 6%, and the 30% plus 6% expenses for both categories. And you can see that the potential losses in the worst-case scenarios or in those scenarios are absorbable losses to the bank. You have to keep in mind that our underwriting standards are very conservative going into these loans. Typically, debt service coverage, no less than 125 personal guarantee. In a number of instances, we have SBA guarantees as well. And when we look at the past year history, hotel and restaurant, very, very minimal. In fact, no past due at the end of the quarter for the hotels and a very small amount for restaurants. So as it stands at the end of June for hotels and restaurants, I'd say that the potential impact of COVID in those industries have not yet been very powerfully felt in our portfolio. It's not to say that we may not see some deterioration in future months. And we keep a close eye on these 2 areas. In fact, we had a significant customer outreach effort in the second quarter where all these industries were covered, and we touched base with all of these borrowers to understand where they are, appropriately risk rate based on the information available each one of the loans. And so at this time, we remain cautious with these areas, optimistic to the fact that we're not seeing significant weakness yet. But the key is going to be for us to stay in front of these customers and really if we see deterioration to quickly act on it. In regards to the oil and gas, about 65% of that portfolio is C&I, 35% CRE, weighted average LTV on the CRE is 54%. The stress test on the CRE is, again, very manageable, $127,000 for 26% and $712,000 or 30% -- 36%. Again, personal guarantees on every single one of them. No past fees at the end of the quarter. No charge-offs at the end of the quarter in that category. So it's another area that we're closely watching and again, we've been in touch with our customer base. The statistical anecdotal information we get is that they are experiencing relatively slower pay from the big outfits. And that business, for the most part, is still slow in that industry. They're working towards income diversification opportunities, expense control, in that the PPP and deferments have really helped them a lot during the second quarter. And that's what we hear in the industry for oil and gas. And again, name of the game is to stay very close to these customers and figure out what's going on and appropriately risk rate as things develop.

[Steven Retzloff:]

Yes. Matt, I would just add -- this is Steve. We -- obviously, you know we're on the incurred loss model and so we look at those things. We reached out -- we kind of exercised our outreach muscle, and we're feeling the burn from the last quarter. We're going to continue to exercise that muscle as we go forward. We really stay close to these customers. We -- the hotel is probably the most risk rated of those categories. And it's really all about duration. How long is this going to continue? And when will the economy start to kind of come out of this? A lot of uncertainty out there. Obviously, with an incurred loss model, you really kind of look at where things are. And we will stay very close in touch with those customers. We feel good about our hotel operators, they're experienced. These people are top-notch with good branded hotels. And so they're -- some are doing better than others, obviously, but duration is probably going to be the key.

[Matthew Olney:]

Okay. That's helpful commentary. I appreciate that. And just finally, I know you're still in the incurred loss method and you're delaying the CECL implementation. Can you remind us what the estimated day 1 impact would be under CECL once that is implemented?

[Paul Egge:]

Yes. We covered it, I think, in our first quarter call. But high single digits in millions of dollars was what our Jan -- around the range you can think about for what our Jan 1, 2020, CECL adjustment would have been.

[Operator:]

[Operator Instructions]. Our next question comes from Brady Gailey with KBW.

[Brady Gailey:]

Any additional growth in the bond book expected from here?

[Paul Egge:]

No. Not really -- nothing as meaningful as what we've done year-to-date. So we will -- and we are likely to reinvest cash flows into the bond market and potentially make some incremental purchases. But really, it's not going to be as meaningful as the pretty significant pivot we made year-to-date, and most of that was actually in the first quarter when there still was value in the bond market. It's a little tougher now. But to the extent we have meaningful liquidity, we will look to get incrementally invested. It's just I don't think it's going to be as quite as meaningful.

[Brady Gailey:]

And then lastly for me, just the tax rate seemed a little low, 17%. Was there anything onetime in nature there? And I think we talked about going forward, that tax rate being around 21%. Is that still the right way to think about it for you guys?

[Paul Egge:]

That's still the right way to think about it.

[Brady Gailey:]

And nothing abnormal in 2Q's tax rate of 17%?

[Paul Egge:]

Those are timing differentials that ultimately are driven there. So I'd expect more in that high teens, 20% overall effective tax rate on a quarterly basis.

[Operator:]

And I'm currently showing no further questions at this time. I'd like to turn the call back over to Steve Retzloff for closing remarks.

[Steven Retzloff:]

Well, thank you, operator. And once again, we appreciate all of your time and interest in Allegiance Bank. We look forward to speaking to you again in the future. And we have no other comments. So thank you all very much, and have a great third quarter.