Allegiance Bancshares, Inc. (ABTX) CEO Steve Retzloff on Q2 2022 Results - Earnings Call Transcript

Jul. 31, 2022 11:45 PM ETAllegiance Bancshares, Inc. (ABTX)
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Allegiance Bancshares, Inc. (NASDAQ:ABTX) Q2 2022 Earnings Conference Call July 29, 2022 10:00 AM ET

Company Participants

Courtney Theriot - Chief Accounting Officer

Steve Retzloff - Chief Executive Officer

Ray Vitulli - President and Chief Executive Officer, Allegiance Bank

Paul Egge - Executive Vice President and Chief Financial Officer, Allegiance Bank

Shanna Kuzdzal - Executive Vice President and General Counsel

Conference Call Participants

David Feaster - Raymond James

Brad Milsaps - Piper Sandler

Brady Gailey - KBW

Matt Olney - Stephens

Operator

Thank you for standing by and welcome to the Second Quarter Allegiance Bancshares, Inc. Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference call is being recorded. I would now like to turn the conference over to your host, Ms. Courtney Theriot, Chief Accounting Officer. Ma’am, please go ahead.

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 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 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 and such beliefs are subject to change. We disclaim any obligation to publicly update any forward-looking statements, except as maybe required by law. Please see the last page of the text in this morning’s earnings release, which is available on our website at allegiancebank.com for additional information about the risk factors associated with forward-looking statements. 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.

Steve Retzloff

Thank you, Courtney and good morning, everyone participating with us on today’s call. We thank you for your time and interest. We are quite pleased with our strong and steady progress, the higher core operating performance thus far in 2022 as we have established yet another record level of relationship-based loan originations while maintaining discipline on recurring non-interest expenses. Although our headline EPS for the second quarter was lower than the first quarter and the year ago quarter, our core operating performance improved on many levels, particularly after adjusting for the impact of PPP fee income and non-recurring items. Paul will expand on this in greater detail in his commentary, but the primary improvement driver was core loan growth.

Our second quarter core loan growth of $112 million represented a 10.7% annualized run-rate, which follows a 12.8% first quarter run-rate. This key growth metric reflects both the committed effort of our field and central booking partners, but also at the strength of the regional economy. Of the 20 largest MSAs in the U.S., Houston is among the 7, which have now fully replaced the job losses that resulted from the pandemic and now also includes job expansions in the energy sector. Texas overall continued to post very strong employment gains compared to the rest of the nation.

I will not belabor the point, but we will say that we are encouraged by the growth opportunity that is presented within our geographic footprint. Notwithstanding our overarching positive sentiment, today’s macro level volatility, reflective of inflation and the impact of higher interest rates on the overall economy, including both the degree of care and caution as it relates to establishing changes to near-term tactics and strategy.

The team has made manifold progress as it relates to our preparedness for the merger with Community Bank of Texas. As we have come together with our integration planning, our alignment to a fully unified strategy and culture have progressed to a level that further fosters our confidence that we will most certainly benefit to scale in a uniquely powerful market position in one of the best markets in the country. To that end, we have received shareholder approval from both sides and regulatory approval from the FDIC and the Texas Department of Banking. Once we get the nod from the Federal Reserve, we are prepared to schedule the merger close and get closer to operating as Stellar Bank. While briefed today, if by high degree of confidence about our current poster and my appreciation for the talent and committed efforts of our staff or to determine the length of my comments, I would go on for hours.

With that, I will turn it over to Ray for a more detailed review of our operational results followed by Paul, who will cover our financial results.

Ray Vitulli

Thanks, Steve. We are very pleased to report another quarter of solid loan growth as our lending team for the first time in the bank’s history, exceeded $0.5 billion in core loan origination. We have reported healthy pipelines over the past few quarters and it’s nice to see the flow from pipelines, to originations, to loan growth.

When looking at the composition of the originations, we continue to see expansion of our existing customer base, coupled with loans to new customers. Our bankers are focused on providing outstanding service, which has set us apart in a market that is dominated by out-of-state banks. I recently received an e-mail with a subject line, a note from a happy customer. The e-mail described how we responded quickly to solve the problem. After referencing our team of bankers that helped during this matter, the customer ended the e-mail with, at Allegiance, relationships with your clients really do come first. As we approach our 15-year anniversary, it never gets old to share these stories and to thank our bankers and customers for what has been created over the years and what is certain to continue as we complete our merger to become Stellar Bank.

Moving now to our production results, our staff and lending team booked a new record of $565 million of new core loans that funded to a level of $366 million by June 30. Compared to the first quarter, with $469 million of new core loans were generated, which funded to a level of $307 million. The weighted average interest rate charge on the new second quarter core loans was 4.92% compared to the weighted average rate charge on the new first quarter core loans of 4.55%. Paid off core loans were $276 million in the second quarter compared to $214 million in the first quarter. The $276 million of paid off core loans during the quarter had a weighted average rate of 4.85%. Carried core loans experienced advances of $143 million at a weighted average rate of 5.10% and pay downs of $124 million, which were at a weighted average rate of 4.93%. All-in, the overall period-end weighted average rate charge on our funded core loans increased 13 basis points ending the second quarter at 4.93% compared to 4.80% as of March 31. With strong core loan growth of $112 million for the quarter, we are pleased to report core funded loans of just over $4.3 billion, setting another record for the bank.

Turning to asset quality, non-performing assets ended the second quarter at 42 basis points of total assets, up slightly from 37 basis points in the first quarter. Non-accrual loans ended the second quarter at $28.2 million, up $1.9 million from the first quarter. This increase was due to $7.3 million in addition partially offset by $2.7 million in upgrades placed back on accrual, $1.3 million in payoffs, $725,000 in payments and $697,000 in charge-off balances.

In terms of our broader watch list, our classified loans as a percentage of total loans decreased to 3.29% of total loans as of June 30 compared to 3.80% as of March 31. Criticized loans decreased to 3.97% at June 30 from 5.01% at March 31. In aggregate, our asset quality at quarter end remained in a manageable position with single-digit charge-offs for the quarter.

On the deposit front, total deposits decreased $282 million in the second quarter compared to the first quarter and increased $447 million over the year ago quarter. The decrease in the second quarter was primarily due to continued strategic optimization, which included the runoff of brokered deposits as well as the de-emphasis on certain historically high beta deposits, particularly within our CD book. We continue to see growth in non-interest-bearing deposits, primarily as a result of net new accounts that were opened during the quarter. With that, our non-interest-bearing deposits to total deposit ratio was 40.7% for June 30 compared to 38.2% from March 31 and 36.3% for the year ago quarter.

In closing and the most recent issue of the Greater Houston Partnership economic update, the metro Houston population is reported at 7.3 million people. As Steve mentioned, the region has recovered all the job losses from the pandemic and there are a number of trends that placed the region in a position for future growth from housing costs at nearly 20% below the national average to being one of the most ethnically diverse populations in the country. As we work towards the closing of our merger, we see even more opportunity for growth and market share gains as the go-to bank for small to medium-sized businesses in this dynamic region.

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

Paul Egge

Thanks, Ray. We are happy to report solid results with another quarter of meaningful loan growth and healthy earnings. Net income for the second quarter was $16.4 million or $0.80 per diluted share as compared to $18.7 million or $0.91 per diluted share in the first quarter and $22.9 million or $1.12 per diluted share in the second quarter of 2021. Notwithstanding lower headline earnings, we are really pleased with our second quarter results, particularly when you consider the significantly lower PPP fee revenue, the more normalized provisioning and the significant non-recurring expense noise we had this quarter versus comparison quarter.

To put some numbers behind these items, during the second quarter and year-to-date in 2022, we only recognized net PPP fee revenue interest income of $1.4 million and $4 million respectively compared to $6.4 million and $13.3 million respectively for the same periods in 2021. We made up for the PPP revenue gap with lower interest expenses, increased securities revenue and the broader Allegiance team has done an extraordinary job of increasing core loan revenue through excellent core loan growth.

Next, we saw more normalized provision story in 2022 due to the core loan growth as compared to a recapture provision for credit losses during the comparable periods in 2021. Last, our elevated expenses in the second quarter were primarily driven by $3.9 million of what we consider to be non-recurring items, which included $1.7 million in M&A-related expenses and a $2.2 million operating loss during the quarter. Adjusting the way the volatility of provisioning, our pre-tax pre-provision income for the second quarter was $22.3 million as compared to $24.7 million in the first quarter, which of course, featured $1.3 million of extra SBIC income and $25.3 million for the year ago quarter. Now if we were to add back the $3.9 million in non-recurring M&A expenses and net operating loss, an adjusted measure for pre-tax provision income for the second quarter would have been approximately $26.2 million, which we feel reflects meaningful progress.

On to the details. Net interest income was $57.5 million for the second quarter, up from $55.2 million in the first quarter, primarily due to the effects of core loan growth, a more favorable rate environment, partially offset by a $1.1 million decrease in PPP fee revenue recognized in interest income and only slightly higher interest expense. Net interest income was also up from $56.6 million for the second quarter of 2021, primarily due to lower interest expenses and increased income from securities, partially offset by decreased PPP net fee income. Recall that net fee revenue related to PPP loans recognized into interest income during the second quarter was only $1.4 million compared to $2.5 million in the first quarter and $6.4 million for the second quarter of 2021, interest expense increased by $227,000 during the second quarter compared to the first quarter and decreased by $878,000 when you compare it to the prior year quarter.

Before moving on, I should note, that we only had approximately $934,000 of net deferred PPP fees remaining at midyear. Reflecting on PPP revenue, it was great while lasted and we now feel very well positioned going forward as PPP revenue loses this impact. Yield on loans is unchanged at 5.02% for the second quarter compared to 5.02% for the first quarter and this decreased from 5.09% in the year ago quarter. When you exclude PPP loans and related revenue, yield on loans would have been 4.93% in the second quarter, 4.87% in the first quarter and 5.07% in the year ago quarter. Total yield on interesting assets was 3.81% for the second quarter, up from 3.56% for the first quarter and down from 4.41% for the year ago quarter. These trends are primarily reflective of changes in interest rates and the mix shift in our earning asset base, which we are really pleased to see inflect towards a higher proportion of core loan.

With respect to interest expense, our cost of interest-bearing liabilities increased slightly to 56 basis points from 51 basis points for the first quarter and down from the year ago quarter cost of 67 basis points, driven principally by deposit repricing and lower borrowings. The overall cost of funds for the second quarter increased slightly to 34 basis points versus 32 basis points in the first quarter. We are working really hard to preserve our optimized deposit positioning as we manage expected changes in interest rates throughout 2022 and beyond.

As we look at our tax equivalent net interest margin over the last year, lower PPP net fee income recognition and mix shifts in the completion of our earning assets drive the story, resulting in a margin of 3.53% for the second quarter as compared to 3.3% in the first quarter and 4.02% in the year ago quarter. Excluding PPP loan balances and related revenue, the net interest margin would have been 3.46% for the second quarter from 3.14% in the first quarter and 3.88% for the year ago quarter. After so many quarters of the structural downtrend in core NIMs due to what was a more diluted earning asset mix, it is very gratifying to see such meaningful inflection in our core NIM profile. From here, we like the prospects of loan growth driving increased core loans as a percentage of overall earning assets, which should set us up very well for both NIM and net interest income growth.

Pivoting to non-interest items. Non-interest income decreased to $2.7 million for the second quarter from $4 million in the first quarter, primarily due to the fact that the first quarter included $1.3 million of extraordinary income from SBIC investment. Total non-interest expense increased in the second quarter to $37.9 million compared to the $34.5 million in the first quarter. This was largely due to the aforementioned operating loss along with merger-related expenses recorded in the quarter. Aside from these items, which we consider to be one-off, we are very pleased to be holding the line on expenses as non-interest expenses would have been about $34 million if you were to exclude these items.

Our efficiency ratio for the second quarter increased to 62.96% compared to 58.32% from the first quarter of 2022, reflective of that increase in non-recurring noise. If you were to exclude non-recurring items, specifically M&A expenses in both Q1 and Q2 that SBIC gain in Q1 and the aforementioned operating loss in Q2, the adjusted efficiency ratio for the first and second quarters were 58.5% and 56.54%, respectively, which we view as good progress on a core basis.

Moving on to credit. We recorded a provision for credit losses of $2.1 million during the quarter, which is primarily reflective of the strong core loan growth during the period. Our allowance for credit losses on loans ended the quarter at $50.2 million, representing 116 basis points of total loss. The bottom line, our second quarter ROAA and ROATCE metrics came to 0.94% and 13%, respectively, representing what we feel are solid results, all things considered. Quarter intend book value per share was $23.25, which represents a meaningful decrease since year end, notwithstanding solid earnings. This decrease is reflective of the AOCI impact of the significant shift in interest rates on the value of our available-for-sale securities portfolio. We went from an $18.2 million gain position in AOCI at year-end to $115.5 million loss position at June 30. We view this as transitory.

We continue to feel very well positioned on capital. The company declared a dividend of $0.14 per share and we were active repurchasing shares during the second quarter, buying back 217,000 shares at a weighted average share price of $39.24. In closing, we are extremely excited and looking forward to the closing of our pending merger with CBTX as soon as possible since we have such great conviction in the strategic and financial benefits of the merger. We can’t wait to form seller base.

I will now turn the call back over to Steve.

Steve Retzloff

Thank you, Paul. And with that, I will turn it over to the operator to open the line for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from David Feaster of Raymond James. Your line is open.

David Feaster

Hey, good morning everybody.

Steve Retzloff

Good morning, David.

Ray Vitulli

Good morning.

David Feaster

Maybe just starting on growth, I was hoping you could talk through some of the puts and takes here. You talked about record originations. Just curious whether you think there might be some dynamic of a pull forward of demand there and how much maybe just driven by the strength of the economic backdrop in Texas, which we all know is obviously really strong and then just any commentary on the pulse of your economies and how the pipeline is trending and expectations for growth as we look forward?

Ray Vitulli

Sure, David. This is Ray. On those originations, yes, we set a record and everything about it is it really what we like. I mean, you had granularity, average loan size was about $586,000 in there. So still granular. The mix looks like our regular portfolio and 46% of it was floating. So we’re really excited about that. And that was – we reported a pipeline or a pipeline that we felt would generate kind of a nice solid originations and that pipeline, which is fresh start going into the third quarter, at this time looks about the same. So we feel pretty good about at least as we look out a quarter, and maybe Steve might want to talk about something on the economy.

Steve Retzloff

Yes, it just continues to do well. Obviously, we had good population growth in Houston. Our cost of housing is still below the national average. So that’s a positive. Probably average home prices being sold are still 20% below comparable other areas of the country, the average. We’ve got a positive Purchasing Managements Index in Houston. Port of Houston is doing great. The refining industry is doing well. There is just a lot of positives in the area, and we still have that affordability index, there is little – it’s not as wide as it once was, but it’s still there. And Houston’s recovered all those jobs from the pandemic. So we’re actually seeing a little bit of growth in energy-related jobs. So we’ve seen hotels perform better than, obviously, through the pandemic. There is still probably a few sub industries, maybe event centers, something like that, some kind of small business things that we keep a close eye on. But overall, we’re very, very pleased with being in the kind of the Houston region I wouldn’t want to be anywhere else.

David Feaster

Yes. That’s terrific. And maybe just touching on some of the deposit dynamics, you talked about the optimization of the book and it was great to see the continued non-interest-bearing growth. I mean, that’s tremendous and a testament to what you are doing. But just curious how you think about deposit growth going forward, trends that you’re seeing. Whether you’re seeing any migration within the book and just how you think about your ability to continue to drive core deposit growth? And any commentary on deposit betas, just given these recent two 35 basis point hikes?

Paul Egge

Absolutely. It’s been a good almost 2 years of optimization that we’ve been working on with respect to our deposit book. And we’re really pleased with where we stand kind of going forward, as we said, standalone and in particular, as we put these two companies together to form Stellar Bancorp, especially given the great strength of CBTX is deposit book. So both companies are extremely focused on the core relationship deposits. And there – that’s going to be really where we earn our paychecks and – that focus is going to be non-interest-bearing as well as the interest-bearing relationship deposits. So what you see in our financials is the deemphasis towards CDs. We still are going to have CDs as part of our deposit book, but we look at the deposit composition of our partners at CBTX and understand that a more optimized book is going to be somewhere in between theirs and ours as it relates to composition with a great focus on the non-interest-bearing, which we focused on getting with our loans as well as that interest-bearing relationship. So as long as we – we’re in the customer acquisition business, and we’re really pleased with not only the – our ability and our track record of adding and retaining customers but what our potential will be together at Stellar Bancorp. So we’re pretty bullish. As Steve said, we’re in one of the best markets out there. And we’re positioned to get more than our fair share of the growth that’s out there.

David Feaster

That’s extremely helpful. And then last thing, just maybe at a high level, touching on asset quality, you talked about, Steve, maintaining a degree of care and caution just given the environment. We always maintained a very conservative approach to credit, but there is some real challenges in the economy, but obviously, Texas is relatively insulated, always better positioned. But maybe at a high level, just curious your thoughts on the credit outlook from your standpoint, the pulse of your clients, whether that started to shift at all? And then as you look out, are there any segments that you’re maybe more cautious on or watching more closely?

Steve Retzloff

We are really pleased with kind of the year-to-date progress on all of our asset quality metrics, whether it’s charge-offs or criticized assets, they all seem to be getting back to that kind of more normal level that we’re used to. We’ve had most of those sectors that we kind of watch really closely and maybe even receive deferral payments during the pandemic, they are all back non-deferrals, or they are performing better. So at this point, up to now, we’re seeing improvement. Obviously, we’re like everybody else. The world has volatile interest rates, the discussions that you see around possible recession. And so we just – why make that comment about being cautious, we’re just always cautious. We continue to underwrite closely. We look for guarantees. We look for great underwriting on our credit. So we’re just going to be careful. There are some macro trends out there that you want to always be aware of and whether it’s electric cars or just changes in our social fabric of the country that we cause you concern about one credit here or one credit there. But generally speaking, we love our granularity. Nice thing about that is everybody would know and recognize that if something did happen to one, it’s a small one, right? So we really like that approach. And it also is that sector that really appreciates the relationship and the higher service that we can provide due to our setup. So again, Ray, I don’t know if you have any comments to add?

Ray Vitulli

I’ll add just a couple what we might keep in the future really is too much different than what we do now, probably lodging. And then on the macro – Steve mentioned on a macro level, probably keep an eye on office. But again, our granularity, we’re not planning in a large office building. So yes, that’s what I would add.

David Feaster

That makes sense. Thanks, guys. Great quarter.

Steve Retzloff

Thank you.

Operator

Thank you. Our next question comes from Brad Milsaps, Piper Sandler. Your line is open. Mr. Milsaps, your line is open.

Brad Milsaps

Hi, good morning, guys.

Steve Retzloff

Good morning, Brad.

Brad Milsaps

Thanks for taking my question. Just wanted to maybe start with the margin, Ray, I think your loan yields, maybe pre-pandemic reached a high of 5.50% or 5.60%. It sounds like you had some good improvement on new funded loans this quarter. I’m just kind of curious with these last few rate hikes. In your mind, how quickly can you get back there? Just kind of want to think about kind of what your stand-alone margin could be given some of the repricing characteristics of your loan book?

Ray Vitulli

Sure. The – we saw – we’ve seen nice improvement with the bump we got in June. So we reported that the new loan production, we reported that the rate on that was $4.92 and intra quarter June had a $5 handle. So we’re pretty pleased about that. So that trajectory picked up nicely. So I mean, as far as like when might we get back there, I think with this rate bump that we just got, I mean, I think with the $5 handles on our new production. And if we’re able to maintain this kind of pace of $0.5 billion a quarter, we can do the math and figure out when we get there, but we feel good about getting back in the 5s. And Paul, we might get there this quarter, but on the new production, but we’re happy with $4.92.

Paul Egge

Yes. And I might add about third or a little over third of our loans are variable rates. And a quarter ago, only a little over half or two-third of those were above floors with this most recent rate hike. Really, it’s all above floors, and it positions us really well and that all of our variable is truly variable from here on in, with probably only a few exceptions. And then an extra, call it, 20% to 25% of our portfolio is the type that matures in the next 24 months. So they are in life, I think some potential for repricing in addition to the great kind of core origination that’s going on, mix shifting to a higher overall yield.

Brad Milsaps

Thanks, Paul. That’s helpful. And just as you think about funding, I know you had some nice improvement in your deposit mix this quarter, and this is a little complicated because you’re coming together with CBTX. But it looks like your liquidity is down to a fairly low level. For here, Paul, would it be that you guys would need to be out raising deposits to fund your growth or do you have enough cash flow coming out of the bond portfolio to sort of cover your liquidity needs to fund the growth that you do have?

Paul Egge

There is a good amount of cash flows coming off the securities portfolio, and it’s a high-class problem to get to if we find ourselves having to go race to be more commercial as it relates to raising our deposit funding. But we do fully acknowledge the extent to which we need to be competitive. And with this most recent rate hike, it does make sense for us to be chinning the bar for our clients a little more than we have thus far in the rate hike cycle. So we’re working on ensuring that we’re providing the right value proposition to our deposit customers and the goal is to be measured and find with our partners at CBTX, we put these companies together to form Stellar to kind of get – have the right mix of discipline as we seek to kind of get everything we’re trying to accomplish out of the transaction, which is better operating leverage and an overall strong value proposition for all of our stakeholders.

Brad Milsaps

Thanks, Paul. And just final one for me. Just on expenses, recognizing the couple of things that you guys pointed out in the release, your personnel costs were still down linked quarter. Is it – would it be possible that we’re already seeing some of the expense savings from the deal sort of showing up in the run rate and we should maybe kind of adjust what we were thinking about in terms of expense savings when the companies come together? Or is there a different way we should be thinking about it?

Paul Egge

There is definitely a pull-through of the expected cost saves. I mean, we’re in an environment where there is meaningful non-interest expense pressure. And notwithstanding that, our ability to hold the line is definitely a function of some pull-through of those expenses, both on the personnel side and otherwise, it all really kind of puts us in a good position on a pro forma basis. Really, we want to close our merger as soon as practicable and there are people working day and night, and we’re probably – arguably a hair thin as a function of how we’re trying to operate here in the interim.

Brad Milsaps

Okay, great. I will hop back into queue. Thank you, guys.

Steve Retzloff

Alright. Thanks.

Operator

Thank you. Our next question comes from Brady Gailey of KBW. Your line is open.

Brady Gailey

Hi, thank you. Good morning, guys.

Steve Retzloff

Good morning, Brady.

Brady Gailey

I know a lot has changed over the last 9 months in between when you all announced the merger and today, like the interest rate backdrop is a lot higher. But you outlined $265 million of pro forma 2023 EPS accretion. Any – I mean, I’m guessing that it’s probably going to be better than $265 million now. But any updates on how you think about kind of the combined earnings power next year for Stellar?

Paul Egge

Yes. You nailed it. We feel really – we felt good about the numbers that we presented when we announced the transaction. We’ve got no reason to have anything but even more conviction around our prospects of hitting and potentially outperforming that. The market has come to us to a degree. If you recall, there were some embedded rate hikes in the scenarios that we look forward to get to that number. But we have outpaced. The rate hike, schedule has outpaced those expectations. And separately, we’ve had wind at our backs as it relates to the nature of each company’s respective loan growth. So we feel great.

Steve Retzloff

Nothing we’ve identified that would tell us there is something material to change that.

Brady Gailey

Right. And then on the topic of loan growth, I think you guys normally point to high single digits, CDTX points to 5% to 8%. So if you think about the pro forma loan growth of Stellar, is it somewhere around 8% or 9%, is probably the right way to think about it?

Steve Retzloff

I think that’s probably good. There is long-term and short-term, there is going to be quarters where things are a little warmer than others and they are big quarters when they are not. But I think a good solid high single digit for the combined companies. This is a powerful business combination to build this – put together this $12 billion regional presence. I think you’re going to see good things in terms of market response to what we’re putting together. So I feel confident in those numbers being in that kind of high single-digit region on a go forward.

Brady Gailey

Okay. And then finally, for me, the $2.2 million operational loss that you’re kind of backing out of the expenses, what happened there? What is that? That’s not a merger charge? Or is it? What is that $2.2 million operational loss?

Steve Retzloff

The $2.2 million operational loss is related to a possible fraud. The recent event is still under a pretty deep investigation. As such, we’re really not able to comment on the specifics around that.

Brady Gailey

Perfect. Alright. Great. Thanks, guys.

Steve Retzloff

Thanks.

Operator

Thank you. [Operator Instructions] Our next question comes from Matt Olney of Stephens. Your line is open.

Matt Olney

Hi, guys. Good morning. Can you hear me?

Steve Retzloff

Yes, Matt.

Matt Olney

Hey, most of my questions have been addressed. I just want to clarify the funding topic and make sure I appreciate the plan for the third quarter. It sounds like there could be some more runoff of some of the higher-cost CDs that we saw in 2Q, and it looks like some of the loan growth is going to be funded by either securities cash flow or overnight liquidity? Is that more or less kind of the short-term plan for funding growth in 3Q?

Paul Egge

I’d say so. I don’t expect that much more by way of rather kind of feel like our – at least our more planned and deliberate efforts of optimization are pretty close to complete although we are going to strategically not be extremely competitive for that funding class, CDs. But you’re right. We – in the pro forma, we’ve got plenty of liquidity and on standalone basis we have plenty of liquidity. So ultimately, we are – until we use up our existing liquidity, we’re going to be focused on continued optimization. But we’re also focused on customer acquisition on the funding side of the book and really tying funding to our lending relationships and because really that’s the optimal dynamic as it relates to driving profitability that we want and the business mix that we want.

Matt Olney

Got it. Okay, thanks for that, Paul. I think the rest of my questions have already been addressed. So, thank you.

Paul Egge

Alright. Thanks, Matt.

Operator

Thank you. I’d like to turn the call over to Mr. Steve Retzloff for any closing remarks.

Steve Retzloff

Very good ones. Again, we appreciate everyone’s time and interest in the bank. And I just want to comment one more time that we’re very appreciative of our staff and all those from our merger partners who have really performed at an exceptional level as we prepare to become Stellar Bank. So again, thank you, and we look forward to speaking to you again – with you again in the future. Thank you very much.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you all for participating. You may now disconnect. Have a great day.

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