Gentlemen, thank you for standing by, and welcome to Allegiance Bancshares conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would like to turn the conference over to your host, Mr. Justin Long. Please go ahead, sir.
Thank you, operator, and thank you to all who joined our call today. Welcome to the Allegiance and CBTX merger conference call. This morning's call will be led by Steve Retzloff, CEO of Allegiance Bancshares, Inc., Bob Franklin, Chairman, CEO, and President of CBTX, Inc., and Paul Egge, Executive Vice President and CFO. We provided an investor presentation on the investor relations page at allegiancebank.com and communitybankoftx.com. Although it is not being used as a guide for today's comments, it is available for review at this time. Before we begin, I want to remind everyone that some of the remarks made today by management teams of Allegiance and CBTX regarding future results or future financial performance may include 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 statement, except as may be required by law. Please review the forward-looking statement disclaimer and safe harbor language in today's press release and presentation, which is available on our respective websites for more information about risks, uncertainties, and other factors which may affect us and could cause actual results to differ from those discussed. Additional information about the merger can be found in the forthcoming registration statement and proxy statement. At the conclusion of our remarks, we will open up the line and allow time for questions.
I'd now like to turn the call over to Steve Retzloff, CEO of Allegiance, for opening remarks.
Thank you, Justin. Good morning, everyone. On behalf of both Allegiance and CBTX, we thank you for joining us for this discussion about which we are all very excited. This morning, we issued a joint press release to announce the merger of equals between Allegiance and CBTX. While our two companies already represent the two largest, and in my opinion, best community banks headquartered in Houston, this union will clearly elevate our combined status to being a premier Texas community bank franchise. We are excited to be able to accentuate our commitment to the East Texas communities that we both already serve and remain committed to, as well as to consider future furthering of our Texas reach that already includes a CommunityBank of Texas branch in Dallas.
This extraordinary merger of equals has been long in the making, which reflects the depth and detail, thought that both of us have committed to its prospects. Our combination will leverage the strength of both companies to create the foundation for a best-of-the-best bank that is positioned as a competitive standout. Consistent with what both organizations have always stood for, our combined culture and strategy will continue to emphasize our core differentiation of exemplary service to our customers, deep involvement in our communities, and a fulfilling experience for all of our dedicated employees. Importantly, this MOE represents an outstanding opportunity for the shareholders of both institutions. I have tremendous respect for Bob and the CBTX franchise. Together, we are confident that we are bringing the best of each organization to execute on a shared vision.
While the increased scale presents obvious benefits, the quality of the combined talent, leadership, and our commitment to excellent performance is what drives our enthusiasm. Bob and I have known one another for many years, and we've often thought that a potential combination could make sense under the right conditions. Over the past year, we became more serious about exploring the elements that would need to fall into place to make such a combination work. In this context, we've spent the time to get to know each other even better, and it soon became very clear just how similar our institutions truly are, both culturally and organizationally. As part of the process, we conducted a thorough due diligence process covering credit, operations, technology, et cetera, and we're very pleased with our findings.
As to integration, both leadership teams are experienced acquirers and are highly confident in the integration process. I will note that for Bob, this will be his second MOE, since CBTX itself is a product of such a transaction. I believe that ours is a true merger of equals. We will have equal representation from Allegiance and CBTX on the board of directors as well as the management team. I will serve as the Executive Chairman of the pro forma company, and I am extremely confident in the leadership lineup for the company. Bob, who is a well-respected and proven banker in our community, will be the pro forma CEO of the holding company, together with Ramon Vitulli, who will be the pro forma CEO of the bank, along with Paul Egge as CFO of the pro forma company and bank.
In the combined pro forma central and field leadership, we will deliver. Our board and I believe we have the premier management team in the Houston region, and I'm confident they will drive top-tier financial results and shareholder returns. This combination was very attractive to Allegiance for a number of reasons. As I have said many times in the past, culture alignment is a must for any partnership we would consider. Our common approach to serving all interested parties, including customers, employees, and shareholders, along with the passion for strengthening our communities, are fully present and evidenced through our successful collaborations to date. While both sides are fully aware of the work ahead, we are energized, ready, and confident that our alignment will lead to a successful execution. We will be driving toward top-tier performance directed at ensuring long-term shareholder value.
Each of our companies not only leapfrog our strategic growth plans by years, but will also feel even better positioned to continue making progress in the coming years. It is not a one-and-done proposition, but rather a new, more powerful beginning. As I said earlier, we combine for greater geographic coverage, resulting in the number one deposit share among community banks and number seven among all banks in the region. In terms of overall size, we will breach the $10 billion mark with a bigger capital base, enhanced infrastructure, which of course includes technology. I intentionally reemphasize a very experienced bench of talent. Finally, I would be remiss to not mention how powerfully and clearly our integration plan leads to increased pre-tax, pre-provision earnings power from improved operating leverage.
In summary, I'm excited about the announcement of what I believe will be the premier community bank in the Houston region, with a franchise stretching from Houston to Beaumont and Southeast Texas, and including a growing location in Dallas. With that, I'll turn it over to our pro forma CEO, Bob Franklin.
Thank you, Steve. I wanna begin by using one of your lines. With this transaction, we are endeavoring to create the bank that our communities deserve to call its own. I share your enthusiasm for this transaction. It feels like we've been on a parallel journey for years, knowing each other and respecting each organization from afar. Today, that journey joins us together as we begin to plot the exciting future of our combined organizations. Both organizations have focused on staying true to our shareholders, our communities, our customers, and our employees. As we have worked together on this transaction, it has been a pleasure to confirm what we have only seen from a distance. This combination will be a powerful statement to our communities on how committed we are to providing capital to our small businesses by gathering local deposits and redeploying those deposits back into our communities.
We are also building more opportunities to provide jobs and career paths for future bankers as we grow and expand our footprint. Because of our focus on these cultural mainstays, we will continue to build shareholder value by being better able to gain efficiencies through greater scale and product offerings. Obviously, we think it's strategically compelling. With the increased size and scale, we'll be able to invest in improving technology, explore additional revenue-generating areas, continue to recruit and develop high-performing talent, all while we seek to deepen our existing relationships with our customers. Our earnings profile will certainly be enhanced. There are cost saves that are achievable that will improve our pre-provision earnings power.
Paul will share the details, but we see tremendous value in getting to $11 billion in scale and growing, with prospects for growth in EPS and tangible book value per share. We have a great banking footprint stretching along the Gulf Coast from the Golden Triangle to Houston, Texas. We have an experienced banking team ready and able to carry the load for the bright future ahead. We will be unifying under a new name that we hope will engender the essence of the culture of both banks together. The last couple of months have proven how many of the same goals and aspirations we share. I believe our future is bright and look forward to sharing this journey with the great folks at Allegiance Bank.
I will now pass the call over to Paul Egge, the CFO of Allegiance Bancshares and the pro forma company CFO, who will comment on the financial impact of the transaction.
Thank you, Bob, and good morning, everyone. This merger of equals starts an exciting new chapter for our respective companies. Combining our region's two best community bank franchises really represents a strategic game changer. I'm very pleased to report that the financial rationale is just as compelling as the strategic rationale, with perhaps even more potential upside to execute upon. I'll briefly walk through some key structural considerations and merger assumptions while touching on certain diligence items as well. We consider this a true merger of equals, though technically speaking, CBTX will be the legal acquirer issuing shares to Allegiance Bancshares shareholders in the transaction, and Allegiance will be the accounting acquirer. Last, CBTX's CommunityBank of Texas subsidiary will merge into Allegiance's Allegiance Bank subsidiary, making the pro forma bank subsidiary a Texas-chartered bank.
A good summary of the key merger assumptions is on page 16 of the merger presentation. Key to the merger will be expected run rate cost savings of 15% of the combined base, or approximately $35.5 million, which we see as very achievable in 2023. How the cost savings phase in during 2022 will be a function of when we close, and we are focused on pushing for a close as early as possible, which will likely be in the second quarter of 2022. While we expect potential for revenue synergies from this combination, we are not assuming any revenue synergies in our projections.
We estimate merger-related restructuring expenses to total $45 million pre-tax and an estimated total credit marks of $26.1 million on CBTX loans at close, consisting of $9.5 million on PCD loans and $16.6 million on non-PCD loans. The day two allowance is assumed to be $16.6 million. Credit marks in day two allowance assumptions were guided by third-party credit diligence in addition to management diligence. I should also note that the outlined loan rate marks in core deposit and tangible estimates were guided by preliminary third-party valuation analysis and diligence, but will ultimately be driven by market conditions at close.
Otherwise, I must highlight that we did layer in additional assumptions relating to crossing the $10 billion threshold, including the expected impact of the Durbin Amendment, which is modest for us since neither company has particularly significant interchange income. We also included an expectation of additional regulatory expenses relating to crossing that $10 billion threshold. The net result is an approximate $11 billion in assets pro forma company positioned to earn around 1.3% in ROA in 2023, with an efficiency ratio of about 52% and an expected ROATCE of 12%. This is before taking into account the potential for significant capital optimization through share repurchases or revenue synergies. We see this as a great base from which to pursue our top-tier performance aspirations.
While we really like how the math works out, this transaction is about more than merger math. It's about combining our companies into one organization that is optimally positioned to deliver for all of our stakeholders. We see the combined company as a great foundation from which to continue to build upon, with the long-term objective of driving shareholder value through growing earnings and tangible book value over time. Strategically, the pro forma company is going to be uniquely positioned as our region's only local bank of scale in a market otherwise dominated by large and mostly out-of-state competitors. Local decision-making and service represent the foundation of our value proposition to our customers, so we just see a tremendous opportunity to out local and out service the competition to consolidate market share.
In summary, we have great conviction that our combined company is going to be a great stock to own. Underpinned by first, such a unique and scarce franchise positioned for growth in one of the largest and most dynamic markets in the country. A great base of scale to grow from at over $11 billion in pro forma assets. Significantly enhanced EPS efficiency and performance profile driven by achievable expense synergies. A strong capital position to support future M&A, balance sheet growth, dividend growth, and share repurchases, and meaningfully higher liquidity for shareholders due to increased market capitalization inflow. We see extraordinary potential in the pro forma company, and we are eager to create the premier community banking franchise in Texas through this merger of equals. With that, I'll turn the call back to Bob.
Paul, thank you. I get more excited about what we are building here each time I hear the story. It's strategically compelling and really creates a bank that doesn't exist in this region today. I'm excited to work with Steve and the team we are building. The complementary strengths that we've highlighted here, along with the size and scale, will allow us to invest in the things that will accelerate our organization and shareholder value that we are creating. This is a robust financial merger with strong cultural compatibility between the organizations and an experienced management team that has already began to work towards getting all this done. We are excited and ready to deliver. Steve?
Thank you, Bob. With that, I would like to say that I hope you can hear in our comments today just how excited we are about this merger. I will now turn the call over to the operator to open the line for questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes from the line of David Feaster from Raymond James. Your line is open.
Hey, good morning, everybody.
Good morning, David.
Congrats on the deal. You know, maybe just starting at a high level on the cultural side. You know, it's kinda become somewhat cliché in MOEs talking about the cultural overlap, but it seems real in this deal. I just wanted to get a sense of what gives you confidence from a cultural standpoint. What you're most excited about that each bank brings to the table? And then just, you know, whether there's what guardrails or strategies that you've put in place to retain top talent and ensure a seamless integration of the two banks?
David, let me just start, and then you know, Bob can follow up. You know, it's not just being compatible. If we were exactly the same, we wouldn't get the benefit of these two organizations. There are differences. They're subtle, but they're very powerful. Bob has got a pragmatism that I think is gonna be very helpful. We've got a cultural focus that has really driven value for our employees and our customers over the years. They've got the same service focus. These subtle differences in some of the ways that we've done the things that we do that are the same are gonna be really important as we kind of build this kinda new potential going forward.
You know, again, it's not just the sameness, it's the things that one of us has greater strength at than the other that are things that we've noted in our conversations to date. Bob, make a comment.
Yeah, Steve, I think, you know, I would say we're similar, we're not the same. The banks fit very well together. I think the Allegiance folks have spent a lot of time on customer relationships and making sure that they're very sticky, as have we. Those are very strong similarities. I think Allegiance Bank has spent a lot of time on sort of a little more granular portfolio with some smaller loans that are spread out that spread the risk a bit, but a little higher yield and also a greater growth rate than possibly we have. Our loans are maybe a little bit larger, but it's nice.
It fits on a nice layer cake as you start to layer in sort of the strong, very close to the customer type arrangement that both banks have that provide for really sticky relationships. That's what creates shareholder value at the end of the day, are these sticky relationships. I think we provide a really strong low-cost deposit base that's really important and has been important to us for over the years. I think there's some things that we can do to help on the Allegiance side to maybe harvest some more of those deposits that are out there. I think there's some things that we can do to help in that regard, and I think they can help us with some higher yielding loans and some additional growth.
There's a lot of synergies to be had between the two banks, and I think we're looking to add to that. We've spent a lot of time on the front end of this thing, looking at people and making sure that we retain the talent that we need to retain. We understand the biggest part of what creates value for shareholders is not only the sticky nature of the customers, but also the sticky nature of the people that work for us. Both banks have long-tenured employees, strong relationships with their employees, and it's something that I think will combine well together. If you look at the portfolios, not necessarily size or exactly the same industries, but pretty similar, and overlay those pie charts, they're very similar in nature.
To combine these cultures together is a lot less problematic than, say, some of the others that maybe we've seen in the past. We're excited about it. I think, you know, we're gonna use the similarities that we have, probably create some new ones and sort of move forward on that basis. It's an exciting proposition and probably less problematic around execution than maybe some others.
That's helpful. Maybe just following up on some of those comments on the growth side. I guess how do you think about the organic growth potential of the combined entity? I mean, Steve, we've talked about moving more upstream, just given the increased scale in a really strong economic backdrop. Just curious how you think about growth, where you see the most opportunities and just kind of a pro forma organic growth rate going forward.
I mean, other people can chime in on this, but, you know, the fact is, we're not gonna be 2.6 and a 4 anymore. We're gonna be an 11. As an $11 billion bank, we'll need to address a little broader market, and that includes going to emphasize a little bit on the larger loan size. Our core, that kind of granular loan customer that has really kind of brought us to the dance, so to speak, we're gonna continue to serve them like no other. There's an underserved market out there of those kind of small to medium-sized customers that a bank like this in combination can really do an exceptional job for. You know, we think there's great growth opportunity there.
Houston's a great growing market. East Texas is solid and stable. Growing into other regions of Texas that this scale gives us the opportunity to do is something we're certainly gonna take a closer look at and execute on as well. There are non-interest income opportunities for us that the scale provides some economies for us to be able to get into as well. I mean, there's just so many opportunities, but I know our pipelines are strong, and I think the timing of this is just crazy, exceptional. As we're coming out of this pandemic, the economy's poised to potentially grow. You know, all those things that are behind us are gone. Of course, there'll be challenges in the future that are unforeseen, you know.
I think this is a great time for these two banks to join together and look at a growth strategy and enhance that.
You know, I'll let Paul speak to the numbers a little bit in a second. I think the combination of these two banks really sets us apart, and I think it's going to be exciting to new young people coming into the market and joining the banking industry. We intend to emphasize and continue to emphasize small business lending, and that's something that we're gonna continue to focus on. I think we will be attractive to anyone that wants to come into the business and also existing guys out there that are looking for a new home. We're gonna provide good resources for folks, a platform that they can do any loan they really want to do, that makes sense.
It can provide career paths for people that maybe we didn't have necessarily at our past size. There's a lot of career paths that can be exciting to folks. I want Ray to speak to that a bit too.
Yeah. I mean, hey, David. Absolutely. I mean, we've already said earlier in the call about the complementary talent and our ability to continue to attract talent, especially on the lending side and on the central side as well, is gonna be key as we go forward. We've talked about this kind of premier powerhouse community bank serving this region. I know we're gonna attract more talent and we'll be able to leverage that and back to your original question, to get more growth, as we move forward. I do wanna add too on this, we're gonna be extremely thoughtful about branch optimization, but also footprint does matter to some extent in that when you look at three years ago, we had no presence in Sugar Land.
We now have a flagship office there with some scale. The complement not only the complementary talent, but some of the complementary footprint, areas where we're not, such as northeastern Tomball or on the community bank, we're out in West Houston, that's gonna provide growth too, because there are business owners that want to bank in their footprint, and we'll be able to just really leverage that.
You know, we're not just the local guys when it comes to decision-making on loans. We'll be local guys when it comes to attracting talent. You know, they'll be able to come to us, meet us, talk to our team, and they know that, you know, the decision makers are right here, right where they live. I think that's an important aspect as well.
That's great color. Just last one from me. Looking at the pro forma capital, obviously the bank's gonna be extremely well capitalized. Seems to make some sense as to maybe why you haven't repurchased more stock of late. You touched a bit on it in the prepared remarks, but just curious how you think about the pro forma bank, utilizing excess capital and maybe optimizing the capital stack, over time and repurchases and dividends and all that.
Well, obviously, we've got to focus on our plate ahead of us. The best thing we can do right now is execute. We're gonna execute on this. As we do that and are able to lift our heads and look to the future, again, which I don't think is that far off, we've already established a location in Dallas, but it's just a branch. As we look across the state of Texas and sort of the major metropolitan areas, we will look to expand our footprint over time. We're always looking inside our footprint, but I think there are some things that we can do from an acquisition standpoint or even a talent acquisition standpoint in those markets.
As far as new markets go, I don't think we would explore those unless we knew that we had a way to see our way to sort of a major presence there. We've already started in Dallas. It's a tremendous market. We should be a player there. I think that would be our sort of next idea, is to start to try to expand a little bit in Dallas.
I might add, the beauty of the pro forma company and its capitalization is we've got plenty of capital to support growth, plenty of capital to support M&A. We're extremely well positioned for growth. Last, we maintain really high growth aspirations. Last, we have extremely strong capital base and strong profitability, which will give us opportunities to look at capital optimization down the road.
Okay. Thanks, everybody.
You bet. Thank you.
Thank you. Next up, we have Matt Olney from Stephens. Your line is open.
Yeah, thanks for taking the question and congratulations on the announcement. Looks like a nice deal for all parties involved.
Matt. Thanks, Matt.
Yeah. In the slide deck, you guys disclose management's internal forecast for EPS for 2022 and 2023 for both banks, and this gives us a lot to think about. I guess, help us appreciate what you're assuming in some of those estimates. On the Allegiance side, it looks like those estimates, the internal estimates are very similar to consensus forecasts. On the CBTX side, it looks like the internal forecasts are materially higher than consensus. So any color you guys can give us on the delta there? Thanks.
Good job noting that, Matt. Yes, the projections used in our analysis are distinct from consensus and represent internal projections. Now up to this point, both companies have maintained a practice of not giving guidance to the street, but we're making an exception here because we feel like it's really important to provide to the street the same numbers that supported the analysis that underpinned our respective board approvals. This merger is extremely accretive on consensus projections and would bring you to the same conclusions. Really, we thought it was important to utilize our internal projections.
Highlighting the CommunityBank of Texas' projections, it really speaks to an increase in putting money to work in the securities market, deployment of liquidity, loan growth, but more so than anything, layering in expectations relating to the dot plot on potential rate hikes in 2022, 2023 and beyond, ended up creating a little bit more out year uptick, reflective of their meaningfully more asset sensitive position relative to us. There is liquidity deployment and flexibility that they have that drove a little of the near term as well.
Okay. That's helpful, Paul. I guess I'll go back and look at some of the most recent dot plots from the Fed to get the details maybe behind some of the rate assumptions. As far as the liquidity deployment, I guess help us appreciate kind of what a normalized level looks like for the combined bank.
For the combined bank, we don't want to be carrying what we're currently carrying, and that is, in some cases, I know for us, over 10% of our assets in cash. Ideally, you know, our highest and best use of our balance sheet is deploying it into loans. But absent meaningful net loan growth, we need to be thoughtful of other investment options, and that's where the securities market comes into play. We're extremely appreciative of, you know, relatively recent changes in the yield curve that make that juice a little bit more worth the squeeze, investing excess liquidity. But we have to be really thoughtful because this liquidity we feel is here to stay. That's why the thoughtful deployment and strategy around that is important.
At the very minimum, we want to try to maintain it seems crazy to say less than 10% of our assets in cash and continue to maintain good interest rate risk positions, particularly with the expectation of upgrades. We don't want to make the mistake of deploying too much duration in our securities portfolio in the near term.
Matt, I will say also on the CBTX side, now that we understand what our future looks like over the next year or so, I think we have the ability to now position our balance sheet for what that looks like. We'll be working together and trying to understand kind of how we want to strategically set this thing up. You'll see some more action on our part.
Bob, on that last point, as far as some action on the balance sheet, is that something we should anticipate more near term or once the deal closes in the second quarter of next year?
No, I think we're certainly able to communicate. We're all sitting in the same room right now, and we're going to start talking about what we want that looks like, what we want that to look like. Now that we can form our own strategic strategies around, you know, deploying this liquidity on both sides, Allegiance has some nice liquidity also. I think we can be more strategic around what we're doing now that we understand that this combination, what this combination is going to create and what we want to set up for loan growth, future loan growth, et cetera, and then how we want to deploy into the bond portfolio and not overstep each other and try to make sure that we do the right things as we buy bonds.
Got it. Okay. That's helpful. Just lastly, as a follow-up to that last point, the operating expenses at CBTX have been a little bit elevated over the last year or two with professional fees, other miscellaneous fees. Any thoughts on the expense run right here at CBTX, as we look into 2023?
Well, it's, you know, those fees are coming down and we're getting to the end of the spend on those excess consulting fees and the attorneys' fees. So, our hope is by the end of this quarter, we're done with that and we're back to a more normalized run rate.
Okay. That's all for me. Congrats again. Thank you.
Thanks, Matt.
Thanks.
Thank you. Next up we have Brady Gailey from KBW. Your line is open.
Hey, thanks. Good morning, guys, and congrats on the combination.
All right. Thanks, Brady.
Thanks, Brady. I wanted to circle back just to the kind of standalone 2023 estimate for CBTX. You guys are pointing to pre-merger $1.89. You know, I think the street was at $1.48, so that's, you know, 28% higher than consensus. You know, Paul, I heard you on maybe you guys have a couple extra rate hikes in there that we didn't. But was there anything else notable that drove that higher number? Is it loan growth or margin or was there anything that was notable where consensus was off?
I think, first and foremost, probably the liquidity deployment, but the loan growth and margin are really, the key points, especially as you get out into 2023 and you get the more fuller effects of, the expectations coming through the dot plot.
Okay. Paul, from a pro forma point of view, you know, as people are starting to think about higher rate y ou know, what do you consider the pro forma asset sensitivity? I feel like ABTX was historically a little more neutral and CBTX was a little more asset sensitive. When you put them together, how would you characterize the asset sensitivity of the combined company?
On a pro forma basis, we're going to have a considerably asset-sensitive, definitely more so than Allegiance standalone. We like that stance in the current market. Granted, the pro forma company is gonna have a pro forma ALCO committee. We definitely feel like there's good synergy in the nature of CBTX's balance sheet and ours. In particular, just a phenomenal deposit base from which to build on and actually one that helps us optimize our own funding mix as we kind of bring in some of that the disciplines that have served CBTX extremely well up to this point. That value of those core cheap deposits is gonna be really meaningful to the extent we have increasing rates.
We value that big time. I think it supports an asset-sensitive lean pro forma.
All right. I know y'all have been asked about the buyback a couple times, but you know, the stock is you know, roughly 11 times 2023. It's 1.5 times pro forma tangible book value. It's pretty attractive, and you have excess capital. Should we think about you guys executing on the buyback in the near term? Or is that something that you know, is kind of on the back burner and you're really focused more on getting this merger closed and integrated, and you'll think about the buyback at some future date?
There's a lot of red tape around buybacks when a deal is pending. It's definitely something that we wanna consider, because we're gonna have a really strong balance sheet, and we'll have flexibility to think about these things. Naturally, Allegiance, if not for this merger, which we're extremely excited about, we might have been a heck of a lot more active on that front. I can't speak for CBTX, but we both have really strong capital positions, and on a pro forma basis, we'll be in a great spot. I think Bob highlighted it well. The highest and best use of our capital is loan growth. Secondarily, we're gonna value the financial flexibility and profitability that we'll have to also support inorganic growth opportunities as well.
Yeah, I think the same for us, Brady, in that, as you can imagine, we've been working on this thing for a while and been considerable blackout period, where we've both been asked about why we weren't buying our stock back.
It's out in the open now.
Maybe people will understand a little bit more. It's not that we didn't want to buy back.
Yeah.
Yep. Just finally for me, just on the revenue synergy side, I know there's not any revenue synergies baked into this math yet, but it feels like there is the opportunity to have some. I think y'all mentioned some on the fee income side. What do you think are the biggest possible revenue synergies going forward from this combined company?
Well, the biggest one is just to continue what we're doing and continue to hire additional lenders, hire new people in, continue on the same program that we've all been on. At a $10 billion-plus platform, we feel like there's considerable fee income generating activities that we're not involved in today. I know Steve has some ideas around that, and I'll let you talk.
Yeah, well, just one of them straight up is we were in the process of building out a little bit of a long-term mortgage origination team and just kind of gotten started with that. CBTX already has that. When you add our potential customer base to the potential for that, I think we could execute even more so on mortgage. It's just one thing. We've got a factoring division that is small and just got kind of started and acquired, and we could add that service to the playbook for the CBTX side. You know, there are things where we are doing ever so slightly different income generators that we're gonna share now going forward.
I know Steve's focused on non-interest income, but we've just delved into the process of expanding loan relationships and pursuing a little bit larger loans, a world that CBTX has occupied for many years. Ultimately, as we expand into having our sales force effectively expand into making larger loans, having the credit experience and profile that CBTX brings, it can help expand our ability to deploy more liquidity into loans.
One of the other things that we had at CBTX is a SBA department, but we didn't do very much of it. I think Allegiance does a little bit more than that. Combined, I think we can explore expanding our SBA presence quite a bit. We're gonna explore a lot of things to work on getting some additional fee income into the bank. I think probably the biggest weakness for both banks today is the lack of fee income. I think that's something that we're gonna think about quite a bit as we combine the banks together.
Okay, great. Thanks, guys.
Thank you.
Your next question comes from the line of Brad Milsaps from Piper Sandler. Your line is open.
Hey, good morning, guys.
Good morning, Brad.
Brad.
You guys have addressed most everything. Maybe just to ask the CBTX 2023 EPS estimate another way. Paul, of the $0.40 or so difference between what, you know, you guys are estimating and the Street, how much of that $0.40 would be related to rates, you know, specifically rates versus, you know, loan growth or other things we might be missing?
I don't have that detail at my fingertips right now. There is a meaningful piece relating to deployment of the securities portfolio, normal expected loan growth, and then the rate base. Actually, when you wrap your head around the rate dynamics, seeing CBTX's interest rate risk profile in their 10-Q related to an overlay with the dot plot would be helpful to kind of help fully appreciate some of these dynamics.
Okay. You guys, I mean, essentially, I mean, CBTX earned $1.89 or so in 2018, so you're basically kind of making some assumptions that they can get back to there.
Absolutely.
Just out of curiosity, I mean, I know both companies, you know, maybe of late, you know, loan growth hasn't maybe been, you know, as strong as you'd hoped. Do you feel because you guys have been working behind the scenes, you guys haven't maybe been as aggressive as in putting loans on? I mean, you talked about the bond side of it, the buyback side of it, but do you think this has slowed down standalone growth at either company?
I think we can speak for Allegiance to say the third quarter was far and away our best quarter ever for loan originations. Really, and I'm sure Bob could speak to the CBTX side. What's affecting our ability to turn those originations into net loan growth is the historically high level of pay downs. That's a function of a lot of things, including the liquidity that our clients currently have. We don't think that this has necessarily taken our eye off the proverbial ball. It's just we have a very unique macro backdrop from which to operate in.
Yeah, we're seeing the same thing. I mean, we're starting to overtake at this point. I think the fourth quarter is looking better, and I think as we get to the first and second quarter of next year, it'll be even better. The pipelines are good. I think both banks have good, strong pipelines. Our pipeline's as high as it's been in the last couple of years. We feel good about where loan growth is going, and we just need to continue along that line.
Got it. In the back, one of the last slides, you guys talk about pro forma loan yields. It looks like you exclude the PPP balances but leave the income in. Any other adjustments in there that are driving those yield numbers? Just kind of curious, you know, kind of where, you know, historically maybe Allegiance has been a little bit higher due to kind of their mix, you know, CBTX lower due to maybe doing larger loans. Can you kind of give us a sense kind of where you kind of see that headed from a kind of a clean yield without the impact of PPP, either the balances or the income?
Certainly. Obviously, PPP income obfuscates a lot of banks' overall yield story. We feel really good about really the last couple quarters' worth of originations, how it's leveled off. Ray, pipe in if I get this off. Our yield on loans and new originations is between around 4.6%, 4.55%-4.6%, and has leveled off reflective of the nature of our business. Ultimately, I think that is a more diversified portfolio from which we have a higher level of pricing power. I think things get a little bit different as you go up market and depending on the nature of CBTX's loans.
We're going to meld in somewhere in the middle, but the beauty of the layer cake that Bob highlighted prior is we have this base of extremely diffused smaller loans that are gonna have a better yield profile from which to layer on the broad base of lending that CBTX does, which tends to be a little bit more variable rate than ours, and that speaks to a little bit of that rate differential as well.
Okay, great. Thank you guys. Really appreciate it.
Yep.
Thank you. We have a follow-up question from Matt Olney from Stephens. Your line is open, sir.
Yeah, thanks. Just to follow up on the asset sensitive profile of the combined bank. Can you just remind us how much of the loans of each side of the bank, how much of them will get the immediate benefit of higher Fed funds? Then how much of those, how much will loan floors be a challenge over the course of the first few rate hikes?
Loan floors will be a bigger challenge at Allegiance than CBTX. We have a meaningful amount of our variable rate loans have floors that we are below. That actually speaks to how and why the interest rate shock profile for us is decidedly more neutral than for CBTX.
Any color on the CBTX side, in terms of the variable rate side, with higher rates?
I can speak more explicitly to the overall balance sheet profile, as indicated by their asset sensitive position. They have more variable rate loans, more LIBOR-based loans, traditionally than us. As a byproduct, I think less floor dynamics at play.
Got it. Okay. Thank you.
Thank you.
Thanks, Matt.
I'm showing no further questions at this time. I would like to turn the conference back to Mr. Bob Franklin, Chairman, CEO and President of CBTX, Inc., for any closing remarks. Sir?
Thank you. Once again, we appreciate your time and interest and look forward to speaking to you again in the future. Some thought, some thoughtful consideration on this. As you can tell, we've spent a lot of time diving into each organization. We feel very comfortable that, again, this is the right time. It's the right combination. We're excited to get to work on building this because we know there's tremendous opportunities for this combined company to continue to grow and deliver for our region what we have delivered individually. I look forward to working with Steve and Ray and Paul and our combined team to get this done. This is an exciting time for our organizations, we're looking forward to get back to work. If anybody has any specific questions, you can call Paul.
Again, I want to thank you very much.
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.