Allegiance Bancshares (ABTX) Q2 2019 Earnings Call Transcript

Allegiance Bancshares (ABTX)
Q2 2019 Earnings Call
Jul 26, 2019, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the second-quarter 2019 Allegiance Bancshares earnings conference call. [Operator instructions] As a reminder, today's conference is being recorded. I'd now like to introduce your host for today's conference, Ms. Courtney Theriot.

You may begin.

Courtney Theriot -- Senior Vice President and Manager of Financial Reporting

Thank you, operator, and thank you for all who have joined our call today. This morning's earnings call will be led by George Martinez, chairman and CEO; Steve Retzloff, president; Ray Vitulli, executive vice president and president of Allegiance Bank; and Paul Egge, executive vice president and CFO. 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' beliefs at the time the statement is made. management's beliefs relating to predictions are subject to change, and we do not publicly update guidance. Please see the last page of the text in this morning's earnings release for additional information about the risk factors associated with forward-looking statements. If needed, a copy of the earnings release is available on our website at allegiancebank.com, or by calling Heather Robert at (281) 517-6422, and she will email you a copy.

We have also 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'll open the line and allow time for questions. I'll now turn the call over to our CEO, George Martinez.

George Martinez -- Chairman and Chief Executive Officer

Thank you, Courtney, and we welcome all of you to our second-quarter earnings call. The second quarter of 2019 was one of execution on our strategic initiatives that resulted in record earnings of $14.2 million. We were pleased to see solid operating metrics as we continue to build momentum during the quarter. Our net interest margins remained strong and even experienced growth over the first quarter, as a result of the dedication of our Allegiance bankers.

The higher-margin benefited from solid loan repricing as well as the ongoing optimization of our balance sheet. At Allegiance we're committed to revenue growth and achieving it by recruiting the best financial professionals in our market. We have enjoyed great hiring success year to date, as we added 10 revenue producers and a chief human resource officer as part of our investment in future organic and market share growth. Additionally, we bolstered our treasury management group, who collaborates with our 27 bank offices to deliver first-class service to our existing and prospective customers.

We have also made a strategy decision to exit the mortgage warehouse business line, which allows us to redirect operational resources to focus on our core lending. The consistent growth of the earnings capacity of the bank demonstrates our focus on the execution and the earnings power of Allegiance. We also continue to maintain strong capital levels that allow us to invest in opportunities to drive future performance and considerable return of excess capital to our shareholders. We completed our current share repurchase authorization of 1 million shares and are pleased to report that our board of directors has authorized another 1 million share repurchase which provides additional flexibility to optimize our capital structure.

We're pleased to see that our continued emphasis on overall asset quality has also proven to be strong as our experienced credit team has made significant progress toward the integration of one credit culture across Allegiance. In essence, our solid performance was driven by the fantastic job of our talented bankers, to create relationships with prospects, deepen relationships with existing customers within the communities that we serve and achieve great results for our shareholders. Next, Steve will describe our results in more detail followed by Paul, who will explain some of the numbers behind Steve's narrative, then will open the call for questions.

Steve Retzloff -- President

Thanks, George. I also welcome everyone to our second-quarter conference call. We continue to execute on our super-community bank strategy, where we offer not only strong technology but also a high level of local personalized service, particularly through independently on commercial businesses. We provide our customers with a relationship value that differentiates Allegiance Bank from an increasing array of out of territory and out of state competitors.

Our growing brand awareness and reputation as Houston's bank continues to lead the opportunities for sourcing great new bankers in addition to a reliable organic pipeline as we more broadly establish ourselves within the region. First, I will review our loan production metrics for the second quarter. Total core loans, which excludes the mortgage warehouse lines, ended the second quarter at $3.81 billion, an increase of $42.4 million, during the quarter, or an annualized growth rate of 4.5%. This compares to our organic growth rate of 7% in the first quarter after, excluding the first-quarter branch purchase.

Year to date, core loans growth has been $152 million or 8.3%, which reduces to organic growth rate of 5.8% after excluding that first-quarter branch purchase. During the second quarter, our staff and lending team booked a very strong $327 million of new loans that funded to a level of $222 million by June 30th. In the first quarter, $305 million of new loans were generated, which funded to a level of $200 million by the end of the first quarter. Paid off loans were a little higher at $175 million in the second quarter compared to $159 million in the first.

The average size of the new organic core loans generated during the second quarter was $350,000 committed and $221,000 funded, which once again reflects our continued focus of building a diverse and granular loan portfolio. Regarding interest rates on loans, based on total loan amount, the weighted average interest rate charged on our new second-quarter core loans was 5.74%, which is in line with the first-quarter weighted average rate of 5.75%. The $175 million of paid off loans during the quarter had a weighted average rate of 5.71%. Carried loans experienced advances of $122 million at a weighted rate of 5.75% and paydowns of $118 million at a weighted rate of 5.44%.

Thus the overall period in weighted average rate charge on our funded core loans, excluding fee and acquisition accounting increased 1 basis point during the quarter, ending the quarter at 5.53%, ended at 6 basis points since December 31, 2018. Paul will discuss the resulting portfolio yields and margins in his report. The mix of new loan production based on second-quarter funded levels was represented by the following four commercial categories. Owner-occupied commercial real estate 17.7%; non-owner occupied commercial real estate 13.8%; commercial term loans 11%; and commercial working capital of 5.5%.

These four commercial categories represented 48% of the new funded production compared to 59.8% for the first quarter and 52.1% for the fourth quarter of 2018, which indicates our ongoing commercial concentration. Loans secured by one-four family residential real estate contributed 27.3% of the new funded core loans. Construction and development, including land loans contributed 17.9% and multifamily contributed 3.9% of the new funded core loans during the quarter. The overall loan mix was little changed on a linked-quarter basis.

A slide deck posted on our website provides added color regarding our overall mix of loans. I note that the average funded loan size ended the quarter was unchanged at $337,000. At the asset quality which at quarter end remains in a solid position, a headline metric is level of net charge-offs experienced during the quarter, which was once again very modest at $590,000 for an annualized rate of 6 basis points. Half of the second-quarter charge-off number was due to a single one-four family residential loan, where the collateral was sold during the quarter.

So far, 2019 year-to-date net charge-offs has been at a rate of 4 basis points as compared to 6 basis points for all of 2018. Non-performing assets, including both non-approval loans and ORE ended the quarter up slightly from the first quarter increasing from 71 to 79 basis points of total assets. But as I will explain, both are well covered by specific reserves, collateral and in some cases SBA guarantee. Non-approval loans actually decreased by $1.3 million.

Of course, the change was a net effect of the increases and decreases. The decreases were primarily from two relationships totaling $7 million. One was a $5.8 million commercial real estate relationship, which by foreclosure was moved to ORE. The other was a one-four family residential property, which was foreclosed and sold during the quarter, which had been $1.2 million.

The increases were five relationships totaling approximately $5.9 million. Of those, the three largest were $1.8 million loan within an appraised value of $2.6 million, a $1.75 million loan which is currently under contract to be sold and $900,000 loan within an appraised collateral value of approximately $1.2 million. The nonaccrual loan ended the second quarter at $31.4 million, down from $32.7 million at March 31st. The combination of specific reserves and SBA guarantees equals approximately 31% of that outstanding balance, with the remainder well covered by underlying collateral.

Just to provide adequate color, our ORE consisted only two properties. The first is the aforementioned $5.8 million CRE loan, which has a recent appraised value of $6.5 million and is being marketed. The second was a $575,000 loan for a home in an upscale gated community with a very competitive asking price of $635,000. Any listeners planning a near-term move to Houston, should give us a call.

Overall, we believe our non-performing assets are well collateralized and manageable. In terms of our broader watch list, our classified loans as a percentage of total loans, once again, declined slightly in 2.02% of total loans as of June 30th compared to 2.08% at March 31st or 2.15% at December 31st of '18, or 2.26% at September 30th, 2018. Criticized loans also decreased to 2.91% at June 30th, compared to 3% at March 31st. This specific reserves was impaired loans increased ending the quarter at 20.4% from 18.5% at March 31st.

On the deposit front, we're pleased by organic deposit growth in the quarter. Total deposits increased in the second quarter by $80.6 million, while also repricing broker deposits by approximately $18.5 million of core deposits. Thus core deposit increased by $99 million during the quarter. Non-interest-bearing deposit declined slightly by $8.5 million with the non-interest-bearing deposit ratio ending the quarter at 30.4% compared to 31.2% at March 31, 2019.

So we continue to focus the entire Allegiance team on our core deposit growth initiatives from both borrowing and nonborrowing customers. I'll make a few notes related to the local economy first, touching briefly on oil prices which have recently softened to a trading range in the $50 to $60 per barrel over the past month, more recently near the mid-50s. While this softness is generally unwelcome, U.S. oil production continues to be projected to further increase from current high levels through 2020, according to the Energy Administration's recent forecasts.

As said, Allegiance continues to not focus on this sector with no reserve base lending and only 3.2% of our existing loans having a direct or indirect dependency on the industry, which is a decline from 3.4% at March 31. A wider view of our local economic data remains broadly positive. According to the recently revised U.S. Bureau of Labor Statistics, the Houston MSA gained 79,8000 jobs during the 12-month period ending May 2019, and currently has a record level of non-farm payroll jobs at 3,164,000 jobs.

Unemployment for the MSA registers at 3.2% compared to 4.1% a year ago. For May of 2019, 8,346 homes were sold in the area, an increase over a year earlier. Year-to-date vehicle sales remained strong at 25,000, up 2.7% from last year. The Houston area Purchasing Managers Index ended May at 52.7, further indicating expansion.

The Houston MSA has grown by over 1 million people since 2010, and the trend is expected to continue both due to net migrations and due to natural population increases. As it relates to Allegiance Bank branch footprint, the data shows that the recent population growth over the past eight years has been at a faster rate in suburban county as compared to the larger Harris County, where the city of Houston is located. Our expanded branch footprint from the recent post Oak and Larry branch acquisitions overlay that trend perfectly, with incremental offices, including two in Fort Bend County, two in Montgomery County, two in Liberty County, one in Chambers County and one in Jefferson County which is in Beaumont. Several of the new lenders additions have been in those markets, which we anticipate bolsters our opportunity for further market share gains.

These and other indicators present a positive outlook for the region and for our commercial customers. As I conclude it, I would note that so far in 2019, we've added 10 new lenders, as we continue to hire opportunistically and selectively, and notwithstanding the performance of our acquired and legacy producers, we highlight that these new additions and other recent lender hires provide substantial growth capacity going forward. During the second quarter, we also completed the selection and began implementation of a robust new loan origination system, which will provide operational improvements and efficiencies going forward. Acknowledging though, the importance of generating further efficiency improvements, we hired a high-level chief human resource officer who has hit the ground running, being tasked with developing and implementing enhanced organizationwide disciplines for KPI-based performance reviews, workflow balancing, training, compensation design, and enhance business case analysis for all staffing decisions.

With that, I will now turn it over to our CFO, Paul.

Paul Egge -- Executive Vice President and Chief Financial Officer

Thanks, Steve. Second-quarter net income was $14.2 million or $0.66 per diluted share, as compared to first-quarter earnings of $12.7 million or $0.58 per diluted share. Second-quarter performance benefited from certain one-time items, most notably $846,000 gain from the sale of securities. Accelerated purchase accounting accretion due to payoff totaling $576,000 and $214,000 of SBIC income.

Second-quarter net interest income increased to $45.6 million from $44.6 million in the first quarter, primarily due to increased yields on assets and growth in average earning assets in the second quarter versus the first quarter, partially offset by the increase in funding cost on interest-bearing liabilities. Note that in the second quarter, purchase accounting accretion increased net interest income by $2.8 million compared to $3 million in the first quarter. Within the second quarter, acquisition accounting accretion increased loan income by $2.5 million and reduced CD expense by $213,000 for a total positive effect on net interest income of $2.8 million. This quarter's accretion leaves $9.1 million in loan mark and $848,000 in CD mark.

We continue to see progress on core asset yields, as the yields on loans in the second quarter was 5.88% versus 5.86% in the first quarter, and 5.52% for the year-ago quarter. Adjusting for the acquisition accretion, recorded in the second quarter of 2019, yield on loans would have been 5.62% in the second quarter versus 5.57% in the first quarter. Total yield on interest-earning assets is 5.58% for the second quarter, 5.5% for the first quarter and 5.12% for the year-ago quarter. Adjusting for the acquisition accretion, total yield on earning assets would have been 5.34% compared to an adjusted total yield on earning assets of 5.24% for the first quarter.

A portion of the increase in asset yields came from a strategically positioning of securities portfolio out of municipal securities and into taxable securities, which is also the source of the significant gain on sale income in the quarter. The total cost of interest-bearing liabilities is 186 basis points in the second quarter, compared to 178 basis points for the first quarter, and 137 basis points in the year-ago quarter. The overall cost of funds for the second quarter was 132 basis points versus 127 basis points in the first quarter and 98 basis points in the year-ago quarter. Excluding acquisition and accounting adjustments in the second quarter, the total cost of interest-bearing liabilities would have been 189 basis points and the overall cost of funds would have been 134 basis points.

Taxable net interest margin for the second quarter was 4.33% compared to 4.31% in the first quarter. When you adjust to the acquisition accounting accretion, net interest margin increased to 4.07% for the second quarter compared to 4.03% for the first quarter. Non-interest income increased to $3.8 million for the second quarter from $3.3 million in the first quarter, primarily due to the sale of securities, which netted gain on sale of $846,000 and $214,000 of lumpy SBIC income. Total non-interest expense for the second quarter was $30.1 million compared to $31.1 million in the first quarter.

Note that we incurred $1.2 million of merger-related expenses during the first quarter related to the Post Oak integration and systems conversion. Q2 non-interest expense came in slightly higher than expectation due to continued investments, strategic hires and other non-recurring items totaling over $500,000. So the efficiency ratio for the second quarter improved to 61.93% from 64.97% posted for the first quarter and 67.05% from the prior-year quarter. Excluding merger-related expenses, the efficiency ratio for the first quarter of 2019 would have been 62.52%.

Provision for loan losses was $1.4 million for the second quarter, and the ending allowance at $27.9 million is 72 basis points of total loans. If you were to include the $9.1 million in loan mark remaining on acquired loans, the ending allowance plus loan mark total loans is 96 basis points and 97 basis points on core loans. This compares to 102 basis points for total loans and 103 basis points to core loans at March 31st. Our effective tax rate for the second quarter was 20.51% compared to 19.6% for the fourth quarter, as municipal securities and increasingly smaller portions of revenue mix, more so this quarter, due to the securities portfolio repositioning.

The bottom line, our second quarter of 2019 produced record results as we saw return on average assets of 1.9% and return on tangible equity of 12.52%. On a pre-tax pre-provision basis, our ROA during the quarter was 1.62%. And excluding the onetime items, previously discussed, would have been 1.55%. Now as previously mentioned, during the second quarter, we did complete the share repurchase program by repurchasing just over 444,000 shares at a weighted average price of $35.63 per share during the quarter.

We're very comfortable with our capital position and we're pleased to have board approval for another 1 million shares repurchase authorization until July 31, 2020. I will now turn the call back over to George.

George Martinez -- Chairman and Chief Executive Officer

Thank you, Paul. Operator, we would now like to open the line for questions.

Questions & Answers:

Operator

[Operator instructions] And our first question comes from Brad Milsaps with Sandler O'Neill. Your line is open.

Brad Milsaps -- Sandler O'Neill + Partners, L.P. -- Analyst

Hey, guys. Good morning.

George Martinez -- Chairman and Chief Executive Officer

Good morning.

Paul Egge -- Executive Vice President and Chief Financial Officer

Good morning, Bryan.

Brad Milsaps -- Sandler O'Neill + Partners, L.P. -- Analyst

Certainly, appreciate all the color on all the different dynamics. I was just curious, Paul could you talk a little bit about your main outlook, if the Fed decide to go ahead and cut rates next week, it looks like you're getting good pricing on loans, but still some creep on deposit costs, maybe those can start to go the other way for you, just kind of curious how you're positioning for potentially lower short-term rates would affect the NIM?

Paul Egge -- Executive Vice President and Chief Financial Officer

Absolutely. I'd like to note, expansion to the NIM during the quarter is a real credit to our broader team, working really diligently to reprice our loan portfolio over the past year, and it has been of real good help relative to the creep of cost of funds. Also there is good execution on the deposit side that let us to be able to reduce certain levels of borrowings and broker deposits to a cumulative total of close to $100 million during the quarter. So that helped as well.

From a NIM positioning standpoint and a downgrade scenario, we're as neutral as we kind of ever been, as it relates to kind of the absolute value of our interest rate modeling in any given shock. So traditionally, we've always tried to manage to a neutral stance on interest rate risk, and more often than not, we've either been slightly liability sensitive or slightly asset sensitive, but right now, we're really as neutral as we've ever been. So I think that bodes well. There could be a little bit of lag as it relates to the timing as to where we're going to get meaningful progress on the cost of funds.

But we're very bullish and we're looking forward to the opportunity of repricing the liability side of our balance sheet and have been taking the opportunities to do so, when certain broker funds and other things have come due. So we feel like we're very well positioned to entering into the third quarter, but it's hard to project significant change, given the cost of funds situation as it currently stands.

Brad Milsaps -- Sandler O'Neill + Partners, L.P. -- Analyst

No, that's helpful. Can you or Ray remind us what percentage of loans would kind of reprice with prime or LIBOR? And what success have you had in maybe putting loan floors in at this point where some of the new loans you've been putting on?

Ray Vitulli -- Executive Vice President and President

Sure. Yeah, So on the floating portfolio, it's about $1 billion, about $1 billion on loans that are floating. And almost -- except for the SBA, most of those have floors. There is a portion that will, with the floor, that's lets say, not at 5.5, so there might be a little bit decline in the rate, if we get a rate cut.

But we would have floors in almost all variable rate loans with the exception of the SBA loans.

Brad Milsaps -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. So roughly 25% of the book is floating?

Ray Vitulli -- Executive Vice President and President

Correct. Or there's another significant percentage that sticks within -- that is fixed with one year or less maturity.

Brad Milsaps -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. And then just kind of a final...

Ray Vitulli -- Executive Vice President and President

We look at that a little bit like floating, so we had the floating plus the one-year fix, you get to a little higher number.

Brad Milsaps -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. Got it. And then just one final question from me, and I'll hop back in the queue. Paul, if I understood correctly, the $576,000 of additional purchase accounting that was embedded in fee income this quarter along with a couple of hundred thousand in small business fund gains as well?

Paul Egge -- Executive Vice President and Chief Financial Officer

No. The $576,000 in accelerated purchase accounting accretion came through in yields.

Brad Milsaps -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. That was part of the 2.8?

Paul Egge -- Executive Vice President and Chief Financial Officer

Precisely.

Brad Milsaps -- Sandler O'Neill + Partners, L.P. -- Analyst

Perfect.

Paul Egge -- Executive Vice President and Chief Financial Officer

The portions that hit the non-interest income, we had that lumpy piece of a SBIC fee income, totaling a little over $200,000 and then, of course, we had the gains on sale of securities.

Brad Milsaps -- Sandler O'Neill + Partners, L.P. -- Analyst

Got it. Thanks for that clarity.

Operator

Thank you. And our next question comes from Matt Olney with Stephens. Your line is open.

Matt Olney -- Stephens Inc. -- Analyst

Hey, thanks. Good morning, guys.

George Martinez -- Chairman and Chief Executive Officer

Good morning.

Matt Olney -- Stephens Inc. -- Analyst

I want to circle back on the core margin. It sounds like the bank is relatively neutral with interest rate, so I guess, the Fed impact shouldn't have much of an impact on your core margin. Any more color you can give us on the margin outlook? For you guys It seems like deposit costs continue to be challenging, but any more commentary? Thanks.

George Martinez -- Chairman and Chief Executive Officer

When we've been able to hit on all cylinders as it relates to execution in the quarter, you tend to see an effect on margin. This quarter was a great quarter as it relates to the positioning of our funding mix and as a result, we saw a nice pickup in NIM. We also, obviously, got a little bit of benefit coming from securities portfolio repositioning, where we increased the taxable equivalent yields by about 20 basis points. That is relatively meaningful.

We'll get benefits from that kind of on a go-forward basis. But really, in contrast to the first quarter, where we lost on non-interest-bearing balances and saw a kind of an unfavorable mix shift in the portfolio in the funding mix, that's ultimately going to be what drives our NIM story. We will continue to execute the way we did in the second quarter. We feel good about being able to see the stable NIM and potentially even see some upside.

Matt Olney -- Stephens Inc. -- Analyst

And Paul, it looks like the interest-bearing deposit cost increased about 12 bps this quarter. How much confidence do you have that those have peaked, and we could see a decline in the third quarter?

Paul Egge -- Executive Vice President and Chief Financial Officer

No. Not huge confidence at the peaks such that you will see a decline in the third quarter. But I feel pretty comfortable that the peak is likely to hit in the third quarter and that we've got the potential for benefit deeper into the year that will manifest more clearly in our cost of funds story deeper into the year. So it's definitely a position where we look forward to repricing opportunities, but we don't want to put the cart before the horse here.

Matt Olney -- Stephens Inc. -- Analyst

OK. And then going back to strategically positioning of securities portfolio, can you give us some more details around that? At what point of the quarter did you execute this? And what types of securities were you buying at what yields?

Paul Egge -- Executive Vice President and Chief Financial Officer

Certainly. Well, it was generally rotation out of municipal securities into mortgage-backed securities and really, what you saw was the allocation of munies or tax-free securities in our portfolio go from about 51% to 24%. And for the portion that was sold about $148 million of municipal sold. We were able to get a pickup of, in tax equivalent yields of, just over 20 basis points.

And really decreased the credit risk profile of the securities portfolio, because we went into some agency securities and the overall risk weighting of the securities portfolio went down as well. So kind of one of those rare opportunities where you could achieve increased tax equivalent yields, decrease the risk weighting of your securities portfolio, expose yourself to less credit risk and take a nice stand. So it happened predominantly in April, but we had little bit in May and June.

Matt Olney -- Stephens Inc. -- Analyst

And I assume you also shortened up the duration of the book, what was the duration before and after the trade?

Paul Egge -- Executive Vice President and Chief Financial Officer

We only slightly decreased the duration. So it was -- the goal wasn't to meaningfully change our interest rate risk profile, so I believe the duration of what was sold was at foreign change and what was bought was foreign change but slightly lower.

Matt Olney -- Stephens Inc. -- Analyst

OK. Thanks for the color. I'll hop back in the queue. 

Operator

[Operator instructions] And our next question comes from Daniel Mannix with Raymond James. Your line is open.

Daniel Mannix -- Raymond James -- Analyst

Thanks. Hey, guys. Good morning. 

Ray Vitulli -- Executive Vice President and President

Hey, Daniel.

George Martinez -- Chairman and Chief Executive Officer

Good morning.

Daniel Mannix -- Raymond James -- Analyst

Good morning. First, I wanted to dive a little deeper into the impacts of exiting the mortgage warehouse business. Can you give us a little more color around how that's going to impact the efficiency ratio, what does that to the margin? And I guess, how much capital that frees up. And then, what the plans are to do with that capital? Thank you. 

George Martinez -- Chairman and Chief Executive Officer

Certainly. So unfortunately, the mortgage warehouse business had the footings that kind of waned. So it really made sense for us to send such a scale-oriented business to exit. Secondarily, there's never core business for us.

And the yield profile is significantly lower than our core business. So as you can imagine, that's going to have the potential to be accretive to our yield profile and the capital associated with that is the type of capital that we can feel comfortable buying back under the new share repurchase authorization and really focusing on optimizing our return profile. So we feel good about a lot of the dynamics going into that strategic decision.

Daniel Mannix -- Raymond James -- Analyst

OK. Great. My other question was just generally looking at the CRE markets in Houston, we've heard a couple of other banks complaining about some stretching in underwriting standards, let's say, and elevated paydown. So I want to get your perspective on what you're seeing in the market?

Ray Vitulli -- Executive Vice President and President

Yes. So, I probably can't speak to whether this is a more lenient underwriting, but we did have an outsize payoffs in loans for the second quarter. And I would attribute that to probably a maybe a lower rate offering from some of our competitors in Houston CRE out of the banks. So we did see that.

It was probably a high watermark as far as the payoff. We did have really strong originations, but we did see payoffs spike compared to previous quarters.

Daniel Mannix -- Raymond James -- Analyst

All right. Thank you. That's it for me. Thanks, gentlemen.

Operator

Thank you. We have a follow-up from Matt Olney with Stephens. Your line is open.

Matt Olney -- Stephens Inc. -- Analyst

Yeah, thanks. I just want to follow-up and ask more about the loan growth for the balance of the year. I think we're running so far this year, HFI growth around 8% annualized growth, can I get a bit better idea of the outlook for the back half of the year? And especially as Ray mentioned the paydown, are those expected to subside at the back half of the year?

Ray Vitulli -- Executive Vice President and President

Matt, so we talk about the leader indicator being the loans originated and we're pleased with the origin nation we're seen in the first two quarters. So both quarters had originations in excess of $300 million. That's a pretty healthy number for us. But we did like we talked about these payoffs, does the -- will the payoffs at this level continue, I'm not -- I'm really not sure.

I think that we probably are entering may be a norm -- a new norm maybe of slightly increased payoffs. We're also looking at the, as far as our relationships, to making sure, we really to do have the kind of relationship that we need with our borrowing customers. So some of that payoff could be a function of where we're not really obtaining the entire relationship and have actually strategically let some of that, there is a portion of that in those payoffs. But with competitors if we are still seeing some long-term fixed rates out there, we'll probably still see some payoffs elevated in the CRE portion.

We're really not doing 10-year fixed-type products.

Matt Olney -- Stephens Inc. -- Analyst

So I guess, kind of combining all that, is the right way to think about loan growth for you guys it will be similar between high single, low double-digit to pay upon the overall level of paydowns?

Ray Vitulli -- Executive Vice President and President

That's probably fair. Again, we'd like to see this loan originations in excess of 300. That is really the -- what happens with the waterfall after that will happen, but we're really focused on the top line of getting the originations that we need to generate that type of growth.

Paul Egge -- Executive Vice President and Chief Financial Officer

And I might add that, the organizations we are getting are really high-quality originations where we've been successful in repricing to the positive.

George Martinez -- Chairman and Chief Executive Officer

We've got -- the added team that we brought in this year plus last year's team that gives us a lot of capacity to bring on new loans as well as deposits.

Matt Olney -- Stephens Inc. -- Analyst

And then on the operating expense side, if I exclude some of the non-recurring charges this quarter, it looks likes the operating expenses were a little heavier than you're expecting. Any color you can give us as far as what drove that in 2Q? And then kind of looking forward from here, the back half of the year, what would you point us toward as far as a good run rate for operating expenses?

George Martinez -- Chairman and Chief Executive Officer

When we circle around the different items on the NIE, we identify about $0.5 million in expenses that wouldn't be just continuing quarter to quarter. So -- and really newly tightened, I guess, if you want to call it that or something of that nature in terms of managing that NIE, really tightly. Given the growth rate and the payoffs that we've had year to date, it's just by increases. Something in that same ballpark without those extra expenses would be probably where we are lining up the rest of the year.

With a real -- just a real disciplined approach to any increases at all, if any.

Matt Olney -- Stephens Inc. -- Analyst

OK. That's all for me. Thank you guys.

Operator

Thank you. And I'm showing no further questions in the queue. I'd like to turn the call back to Mr. George Martinez, for any closing remarks.

George Martinez -- Chairman and Chief Executive Officer

Once again, we appreciate your time and interest in Allegiance. We look forward to speaking to you, again, in the future. Thank you very much.

Operator

[Operator signoff]

Duration: 42 minutes

Call participants:

Courtney Theriot -- Senior Vice President and Manager of Financial Reporting

George Martinez -- Chairman and Chief Executive Officer

Steve Retzloff -- President

Paul Egge -- Executive Vice President and Chief Financial Officer

Brad Milsaps -- Sandler O'Neill + Partners, L.P. -- Analyst

Ray Vitulli -- Executive Vice President and President

Matt Olney -- Stephens Inc. -- Analyst

Daniel Mannix -- Raymond James -- Analyst

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