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spk14: Good day and thank you for standing by. Welcome to the Stellar Bank Corp Anchor Report's second quarter 2023 results conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Courtney Theriault, Chief Accounting Officer. Please go ahead.
spk16: Good morning. Our team would like to welcome you to our earnings call for the second quarter of 2023. This morning's earnings call will be led by our CEO, Bob Franklin, and CFO, Paul Eddy. Also in attendance today are Steve Resloff, Executive Chairman of the company, Ray Vitulli, President of the company and CEO of the bank, and Joe West, Senior Executive Vice President and Chief Credit Officer of the bank. Before we begin, I need to remind everyone that some of the remarks made today constitute all of these statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend all such statements to be covered by the State House of 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 belief at the time the statement is made and such beliefs are subject to change. We just claim any obligation to publicly update any forward-looking statements, except as may be required by law. Please see the last page of the text in this morning's earnings release, which is available on our website at ir.stellerbankcorpinc.com for additional information about the risk factors associated with forward-looking statements. At the conclusion of our remarks, we will open the line and allow time for questions. I will now turn the call over to our CEO, Bob Franklin.
spk22: Thank you, Courtney. and good morning. Welcome to the Stellar Bank Corp second quarter earnings call. I begin by thanking the great team at Stellar Bank for their continued and tireless efforts to build Stellar Bank into the premier local bank in our markets. Our team has been busy refining processes post conversion and will continue in their work as we move through the year. We will be concentrating on efficiencies through technology and expense control as we better define our needs as a combined organization. This year has had its challenges with rapidly rising interest rates, bank failures, and uncertainty in the economy. There continues to be pressure on industry margins as we see inflation in people costs, funding, deposit costs, and competition for the dollars we held in our institutions at low cost for years. However, we are seeing a slowdown in deposit runoff while also seeing the beginning of a stabilization of deposit costs. Though we are not able to call bottom for NIM compression because of uncertainty with the Fed actions, we certainly feel that downward pressure is easing. We continue to concentrate our efforts on capital, liquidity, and credit, something we began almost a year ago. We have tightened our credit underwriting while still seeing modest loan growth. We have managed our deposit rate increases, Though we saw some out migration earlier in the year, we have seen moderation of those outflows and we have begun attracting new deposits. We have been able to maintain our target of a low 90s loan to deposit ratio, all in an effort to manage through the current economic uncertainties. As we move through the balance of the year, we will continue these efforts. Our goal is to ready our institution for the opportunities that will be caused by the stresses of the last year. We believe that our industry will continue to consolidate, and we intend to be positioned to benefit from that consolidation. Our shareholders will benefit from our efforts and the great markets that we serve. I'll now turn the call over to Paul Egge, our CFO.
spk20: Thanks, Bob, and good morning, everybody. We are very pleased to report strong operating performance in the second quarter. Our net income was $35.2 million, representing diluted earnings per share of 66 cents, an annualized ROAA of 1.31%, and a return on tangible common equity of 17.05%. This was incrementally lower than the $37.1 million, or diluted EPS, of 70 cents earned in the first quarter, due mostly to increases in funding costs more than offsetting increased interest income. Also notable for the quarter was non-interest income normalizing to a lower level and non-interest expense decreasing, thanks largely to lower merger expenses. During the second quarter, we experienced a meaningful amount of catch-up in our cost of funds, which was higher than our expectations and reflective of an intensely competitive deposit market post-SDB, resulting in shifts in our funding mix and, more generally, reflective of where we sit in the interest rate cycle. To put this in perspective, we went from a cumulative cycle-to-date beta of approximately 15% on cost of deposits at the end of the first quarter to a cumulative beta north of 24% through the end of the second quarter, which brings us closer to broader industry trends. Since we started out with a pretty low cost of deposits and we maintain a strong base of non-interest-bearing deposits at around 43% of deposits, we're pretty pleased with how our cost of funds compares to many of our peers. particularly those in attractive metro markets. In the interest of keeping our core funding core, we've maintained relative discipline on deposit pricing with a willingness to backfill with wholesale sources such as FHLB Advances, which increased from $239 million to $370 million in the second quarter, and BrokerCD, which increased from about $203 million to $538 million in the second quarter. All this contributed to higher funding costs. Due to increased funding costs, we saw net interest margin contract from 4.80% to 4.49% in the second quarter, and from 4.38% to 3.97% when you exclude purchase accounting accretion. Accordingly, our pre-tax pre-revision earnings power ticked down to 1.66% from 1.89% in the first quarter, and on an adjusted basis, to 1.56% from 1.99%. While we do not like to see a downward trend in our NIM or pre-tax pre-provision profitability, we still feel pretty good about how we look relative to the industry and our ability to protect our relative profitability profile in a challenging environment. Before turning the call back over to Bob, I'd like to make a couple comments on our progress in positioning relative to our focus on capital, credit, and liquidity. On capital, strong year-to-date profitability fueled in part by interest-based purchase accounting accretions more than offsetting significant non-cash accelerated intangible amortization expense from the merger has helped us build regulatory capital at a very rapid clip. Total risk-based capital had gone from 12.39% at year-end 2022 to 13.03% at June 30. And we feel very good about our prospects to continue to build capital in the near term. I should note that at the end of the quarter, we had about $131 million in loan discount remaining and a core deposit in tangible assets left to amortize of $129.8 million. With respect to credit, we remain very pleased with credit performance so far in 2023. Although non-performing assets have ticked down and net charge loss has been minimal, we took a provision of $1.9 million relative to modest loan growth of just over $182 million, putting our allowance for credit losses to total loans at 1.24%. We feel appropriately reserved given current economic unknowns, but we otherwise take comfort in our credit discipline and from lending in some of the strongest markets in the country. On liquidity, our focus at the outset of 2023 on maintaining flexibility on the liquidity front continues to prove strategic for us. We have been able to strategically access wholesale funding without over-reliance, and we feel good about our ability to manage our balance sheet to maintain favorable margins and earnings power. In summary, we believe Stellar is well-positioned to manage through the current operating environment and to thrive. The year to date has been quite eventful for the industry and even more eventful for Stellar due to our rebranding and systems conversion in the first quarter and broader integration efforts. We are super proud of the entire stellar team and appreciative of everyone's efforts. The future of stellar is indeed bright. Thank you. And I will now turn the call back over to Bob.
spk22: Thank you, Paul and operator. We're all ready for questions.
spk14: Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star one, one on your telephone. If your question has been answered, you should move yourself from the queue. Please press star one, one. Again, we'll pause for a moment where we compile our Q and a roster.
spk01: Our first question comes from David Feaster with Raymond James.
spk14: Your line is open.
spk13: Hey, good morning, everybody. Good morning.
spk11: Maybe let's just start on the deposit front. I appreciate the commentary about some of the trends that you're seeing and stabilization. It sounds like Most of the migration that you saw happened earlier in the quarter. I'm just curious, could you help us understand maybe some of the trends that you saw? How much is true? Like, was it outflows out of the bank? It doesn't sound like that's the case, but sounds like truly more migration to higher rate accounts. And it sounds like that that's slowed this quarter, but, you know, not stopping. I'm just curious maybe if you could help us think of the trends on deposit balances and Kind of the early read on the third quarter.
spk04: Hey, David, this is Ray. Yeah, so exactly. The second quarter, we saw improvement in pretty much every category of what we call the deposit waterfall. So whether that's opened accounts exceeding in terms of dollar amount closed accounts or then looking at our carried deposits, which is kind of that really the bulk of everything and what happened in carried where you know, we saw some significant decreases in the first quarter and that substantially improved. Still a decrease in the carried, but nothing like we saw in the first quarter, which was encouraging. And if you look year-to-date, both the what I would call the net new and dollars, we picked up a really nice amount in net new. And I'm talking about core, not including any brokered money. So That's encouraging. I think it really speaks to the fact that we've gotten through the conversion. We have a process now as far as onboarding and kind of energy around the Stellar brand.
spk11: I'd like to maybe dig into that a bit. Could you elaborate on the growth that you're seeing? It sounds like you think you might be able to drive core deposit growth going forward, right? I guess where are you having success driving this new account growth? Is it with existing clients? Is it new clients that you're attracting to the bank? And I guess in terms of where are you seeing new add-on rates, I guess, for average deposits, deposit costs?
spk04: Well, on the new, what's coming in new in the quarter is a combination. We're expanding relationships and taking a few market share gains on the deposit side. The one thing that's nice is the amount of MIB. If you look at the number of accounts, it's really nice, the number of MIB accounts that are coming in as a percentage of the total. I think there is opportunity there. Our bankers are out with a little bit of pause on the loan side. We're out trying to win customers on the deposit side. The new – on the interest bearing that came in, cost of those deposits, David, those came in at about $345 and pretty stable compared to the first quarter, not including the NIV. So just the interest bearing of new deposits that were opened in the quarter at $345, and that's very similar to the first quarter.
spk11: All right. That's encouraging. And then maybe touching on the loan side – Could you help us understand maybe how demand is trending across your footprint? Where are you seeing good opportunities? And then just talking about the repricing dynamic in the next maybe, you know, six to 12 months, where, you know, where add-on rates are coming, where roll-off rates are. And then, you know, just trying to think about kind of how this all plays into the NIM and maybe where a core NIM could shake out, you know, once things do start stabilizing.
spk04: We'll probably all touch on that. Let me give you a little bit on the color on the new, on the quarter. So our new loans came on at 762 for the quarter. Our renewed loans came on at 806. And those amounts were around the same, about a half a billion or so each in each category. And that came off a seven, on the renewed that came on at 806, it came off a 724. So really like that where we're, what we put on on those renewed loans. And of course, we're working on those new loans as we continue to calibrate our models around new loan pricing. I'll let Joe maybe talk about what we're seeing.
spk21: Yeah, this is Joe. On the demand side, we've taken something of a pause on the course of real estate. We've raised the bar on our underwriting and looking for more equity, shorter amortizations, better compensating balances from borrowers. So on the CRE side, we've seen a slowdown because of our increased underwriting requirements. And we're seeing some activity on the C&I side, investing with our customers. We're talking to some people that have been with some other banks and want to talk to us. So we're sort of cautiously optimistic of a little bit of growth in the C&I side. For new business on the commercial real estate side, it's going to be slow.
spk11: Okay. That's helpful. And I guess maybe, Paul, I don't want to put words in your mouth, but kind of hearing those numbers, it feels like maybe we're getting closer to a trough in the margin, or at least the pace of compression should slow materially. Is that a fair characterization?
spk20: Yeah, it's a fair characterization, but I lean towards the pace. of compression slowing. Really, what we're facing, and I think a lot of our peers are facing similar dynamics, is a timing issue. The assets aren't repricing at the same pace of the funding base, and there is an aspect of our funding base now, more so than in the past, that is wholesale in nature. We're about around 8 or so percent of our balance sheet funded Wholesale funds, we'd rather be zero, but we're cognizant of the current realities. We have this great core deposit base. And ultimately, we consider ourselves very fortunate to have a very large base of purchase accounting accretion, all interest-based purchase accounting accretion, which really amounts to a repricing of our assets, of a lot of our asset base in the balance sheet as of October 1st. And when you think about how that is going to be really meaning, I think that we're fortunate to have that be as meaningful for us because really that brings forward the repricing that's happening every day, albeit it's repricing that's happening at not as fast a pace as we'd like it to. But it's really supporting what we think is more core margin, bringing more core margin forward. to support us while this kind of timing differential really exists in the near term?
spk22: Yeah, I think one of the things we're watching happening in the marketplace is that we're seeing assets start to reprice so that people can actually get deals done again. For a number of months, you've seen it very difficult at the cost of capital today for people to pencil some of these deals to make them work. that started to change a bit. We're still in a great market. Houston, Texas is still one of the best markets, if not the best in the country. And that really bodes well for us and our organization, but the math is still the math. And so people are getting used to higher interest rates. So in the interim, I think we see a little bit slower loan growth, but at the end of the day, we'll start to see things pick up again as we start to move through this cycle and people get used to what the borrowing costs are. Okay.
spk10: That's helpful. Thanks, everybody.
spk14: Thank you. Again, ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your telephone. If your question has been answered or you wish to move yourself from the queue, please press star 1-1 again. And one moment for our next question. Our next question comes from Matt Only with Stevens. Your line is open.
spk09: Hey, thanks. Good morning, everybody. Hey, Matt. I'll start with Paul. I think you said that 8% of the balance sheet is funded by wholesale sources, and obviously it's moved up a little bit, but still pretty low overall versus some others out there. We'd love to appreciate your expectations for that 8% for the back half of the year, especially with your comments about... maybe some optimism getting some core deposit growth the back half the year?
spk20: Certainly. Well, while we are optimistic, we are pretty practical about the fact that a more meaningful amount of wholesale funding is likely to remain on our balance sheet for longer. But we see green sheets, particularly as it relates to a lot of the statistics we've had in new account openings and whatnot, and the way that we're kind of successfully bending the curve as it relates to loan growth. So there's a lot of factors that will ultimately drive this wholesale funding piece, which amounts to a plug. But the more success we are able to have, the further we get from, the safer the distance we get from the first quarter, the more we can get back to business as usual, and our business as usual is strong. biggest locally focused bank and one of the best markets in the U S and we just have, we've just rebranded and the results of the fresh rebranding and, uh, output as it relates to new, new account openings has been strong. So we're, uh, we're optimistic, but, uh, we're realistic at the same time that there's a lot of meaningful, uh, forces market forces, uh, having their way on the deposit market. So ultimately we're, uh, It'll be something that's hard to predict, but we're feeling good about where we stand.
spk22: And Matt, I think we're also in our season. Typically, both banks have seen deposit growth begin sort of that May-June timeframe and start to build through the end of the year. We're sort of in a little bit of an unprecedented time just based on what's happened with the Fed, but it looks like we're starting to have that deposit build, or at least the front end of that is starting to happen um which we feel encouraged by we think we've got deposit pricing right now um and i think we're it appears that we're able to attract new deposits into that so uh with our focus and our and our belief is that we'll continue to build deposits through the end of the year okay great appreciate the comments and then switching over to the fees
spk09: I think Paul made a comment in the prepared remarks talking about kind of a normalization of the fee run rate. So should we expect this to be kind of the normal run rate on fees, what we saw in 2Q, or any other puts and takes? Or should we think about kind of the forecast?
spk20: Well, July 1 put us into the interchange discount, I guess you could say, as a byproduct of us crossing $10 billion. All that is true with the caveat that interchange income is something that we'll expect to see being 40% lower from the base. But of course, you know, we're going to seek to grow so as to offset some of that, but that'll be a slower road to offset.
spk09: Okay. And I think that last I heard that interchange estimate, the impact was about Was it $2.5 million annually that we'll start to see that in the third quarter? Is that right?
spk19: Yes, we've grown a little bit, and I would handicap.
spk20: I would take our debit card and ATM card income and put about a 40%. I would handicap that by 40%. Okay, got it.
spk09: It'll get you to the same place. Okay, thanks for that. And then I guess on the... Expense side, we'd love to hear kind of what the outlook is with all the kind of puts and takes you mentioned, prepared remarks, bringing the brands together, bringing the teams together, integration. We'd love to appreciate kind of where you expect to be in the near term.
spk20: We're always analyzing the expense dynamics, but up to this point, when you pull out the M&A fees, we're kind of right on track with respect to our guidance. Naturally, with revenue being softer as a byproduct of the current industry environment, we're turning over more rocks. We're trying to be very thoughtful about where we allocate incremental spend or to the extent we allocate incremental spend, where that comes from. So we're trying to be very practical as it relates to that dynamic. But we are on pace on a core expense run rate. We're feeling good about where that sits. for the year, consistent with guidance.
spk22: As you think about this, we brought two banks together to get over the $10 billion mark. We did a lot of things around people without totally knowing everything about each other. As we brought the banks together, now we have a lot more feel about people and process and the inefficiencies that we may or may not have. I think the expectation for us is we'll get more efficient, and we do have the ability to get more efficient, unlike maybe an acquisition where you're just folding something into the tent. I think we have the opportunity to gain efficiencies as we move through the year. And that's not just with people, but with processes and technology to lower those costs.
spk09: Okay. Appreciate the comments. And then I guess on the M&A front in the industry, we've seen a handful of deals announced this week. And I know Stellar has been heavily involved in M&A in the past. Would love to get some updated thoughts on M&A chatter in Texas as far as what you're hearing and then thoughts on M&A with respect to the Stellar Bank from here. Thanks.
spk22: Well, you're right. Stellar Banks is encouraged by what may be out there. I think we've had a lot of discussions with folks around different opportunities. People are still trying to understand kind of where they are. I think, you know, the marks on portfolios are becoming a big thing and trying to understand what that looks like, what the capital destruction looks like. and the ability to get a deal done. And so I think you've seen some deals happen where people are starting to understand what that looks like on the other side, what the combined organizations can do, and what the benefit to the shareholders are. And I think as we move through this a bit, I think people will get a better understanding of where if they're going to take a slight discount to what they thought they were going to get in a sale, to understand what the benefits are on the other side of that to gain more efficiencies and just have a better franchise. Scale has become so much more important as margins start to get squeezed a bit again. We're encouraged by the possibilities out there. I wouldn't say it's going to happen in the next quarter or so, but Uh, you can't, you never can tell we're opportunistic depending on where people are. We continue to have those conversations and we are interested in doing something.
spk09: Okay, guys, thanks for taking my questions.
spk01: One moment for our next question. Next question comes from Will Jones with KBW. Your line is open.
spk05: Hey, great. Good morning, guys. So we talked a lot about funding thus far already, but we really haven't hit on the fact that you guys are still seeing really, really solid loan growth. I know you guys tended to be a little more conservative on Outlook at the start of the year, although understandably. But now that the dust has kind of settled and the demand is still there for you guys, it's Is more of a mid to high single-digit growth rate the right way to think about loan growth as we move into the back half of the year? Or is it really appropriate to think that growth kind of slows from here?
spk22: I think you're going to see moderate loan growth. I think that where we are in this cycle, whether we're thinking about what credit issues might come in the future, where interest rates are going, and the ability to add loan growth at a decent spread. And that's kind of, I think, the focus. For us to go out and buy dollars today and have that spread erode our margins at this point doesn't seem like the right mix. I think we want to be adding loan growth at good margins and safe type of loans. I think loan growth will be moderate, but we continue to have some, and a big function of that is the fact that we are in the market that we're in. It continues to push us to make good loans, and they're available with strength, and guarantor strength and liquidity is still out there and available.
spk04: Yeah, well, the originations that we've had over the past two quarters have been really around half of what they were, kind of our peak, which was the third quarter of 22. So it all kind of starts with what we originate, and that's in that 500 million plus range. And then when you look at what happens after that, a couple drivers for the last two quarters have been that our payoffs haven't been at the level that we've experienced in the past. And then we're still getting a lift in the carry, so the advances exceeding the payments So, that's kind of driving the growth. It's not so much of that loan origination. On that level of originations, it probably would have been a little bit less growth, but these dynamics of advances exceeding payments and lower payoffs has drove a lot of the growth in the last two quarters.
spk05: That's helpful, Ray. Is the loan to deposit ratio, is that really kind of your governor on loan growth or where you can ultimately lever up the loan side of the balance sheet? Or is it really just to the extent you can grow deposits or just how do you think about where your ability to grow loans is ultimately capped at?
spk22: I wouldn't say it's a governor on what we do, but we don't have a great comfort in outstripping our ability to, we really focus on core funding and for us to go in and try to get to a 105, 110, 115% loan or deposit, but just by doing it through excess funds or wholesale funds is not really the way we want to build the bank. For us, we think the true value in these organizations is to build core funding. So it's not a governor, and we'll vacillate around it, but it's kind of where we like to sit when we move ourselves back to optimization, is about 90%.
spk06: Great. That's helpful.
spk05: And lastly for me, Paul, I know accounting can be, you know, really hard to predict almost like a distinct finger in the air, but we saw a little bit high level of accretion this quarter. Could you just remind us, you know, what we're scheduled accretion is for the remainder of the year and then, you know, how you kind of think about four year accretion number.
spk20: So we have appreciated a lot of what I'll call windfall accretion up to this point. So I've, estimate that about 35 to 40% of the purchase accounting accretion that we've experienced year to date has been ahead of schedule. So we put out guidance that our purchase accounting accretion for the year will be somewhere like $26 to $28 million back in January. And it's been year to date really strong and really our initial conservatism on the expectations with respect to purchase accounting adjustments was based on the concept that we thought less loans would prepay. And we've had more than expected. We're still not banking on there being as much prepayment. We'd like to kind of think about it more as scheduled purchase accounting. And then if what we'll call windfall purchase accounting comes about, that we'll take it. But 35 to 40% of what we've had year to date is higher than our expectations is what I'll put.
spk07: Got it. Understood. Thanks, guys.
spk01: One moment for our next question. Our next question comes from Graham Dick with Piper Sandler. Your line is open. Hey, good morning, guys.
spk08: Good morning. So I heard some of the conversations around new deposit openings and how you're starting to see a better percentage of those being non-interest-bearing or at least have a non-interest-bearing piece to it. And I know it's very difficult to predict, and there's a lot of remix going on in the industry right now. And it's honestly a good problem to have with, you know, your non-interest-bearing deposits being, you know, considerably above 40%. But I was just trying to get a sense of what you guys are seeing near term on remix out of non-interest-bearing deposits. And if you think you're close to where you might be able to start holding the line on those balances quarter over quarter, just any help there would be appreciated.
spk18: You're right. It's really hard to handicap.
spk20: But we're bullied by the fact that we continue to open non-interest bearing deposits and then we've seen a higher level of relative stability when you compare to the front half of the year. Since we've never been super forward on our interest bearing accounts, you know, we've always known that sweeping has been a reality for our clients and maybe, that optimization increased year to date. But at the same time, these are operating accounts. People need these balances to manage all their payables, including payroll, things along those lines. And some organizations get to be pretty decent in size where it makes sense for them to maintain meaningful balances. And it's diffused amongst a lot of customers. So There's a lot of macro things that are shrinking that allocation to non-sparing deposits. And that's kind of hard to see where the bottom of that remix is going to be. But we're really pleased with the fact that we're able to continue to open and build these accounts. We think we have the platform to be the category killer community bank in one of the best markets in the U.S. So it's about executing. In the near term, it may be a slower road and maybe more of a function of kind of swimming against the stream of what's going on macro pressure-wise. But we're really pleased about where we sit and how our prospects lie.
spk04: Back to the hard to predict, that it's difficult. But if you look at the onboarding of the new accounts, that ratio of non-interest-bearing to total accounts is in excess of what our non-interest-bearing is today. So you've got to see what happens after those accounts get opened. But at least on the front end, we're opening a healthy amount of non-interest-bearing accounts as a percentage of the total.
spk08: Great. That's really helpful. And then I guess I just wanted to circle up to capital. I know you said you wanted to continue building it in CT1s. You're well over 11% now. Any near-term capital targets you guys would point to? And then I guess, how do you think about capital priorities now with maybe buyback versus M&A or organic growth? Any way you could frame that up would be helpful. Thanks.
spk20: Sure. I'd say our principal capital priority is more with respect to the merger that we're The size of our purchase accounting adjustments brought the capital down, as we all know, to levels that are lower than the way we like to typically operate. And focusing on total capital ratio, as we did in our remarks, we're really pleased with the growth. And ultimately, to position ourselves to be opportunistic on the M&A front and otherwise, our efforts will be supported by a really strong capital base. So we're focused on growing that and You know, as we think about the priorities, the other priorities are giving dividends and share repurchases, but we think it's hard to prioritize those in the near term while we're focused on building and positioning our base for what might come next opportunistically.
spk22: Yeah, I think as you think about the rest of the year, we're approaching sort of our optimization of capital. But we also want to make sure that we're putting ourselves in a position to do what we want to do in the future. We do think M&A is out there for us, and we want to be able to capitalize on that. And today, given where things are, that takes some capital to do it. And that's why we may be sort of accumulating a little more than we may have otherwise.
spk08: Okay, I appreciate it. And then on that M&A front, it sounds like talks are picking up, and obviously you guys are interested. What does the target look like, the ideal target look like for you guys in terms of size, business lines, I guess deposit mix, et cetera?
spk22: Well, rather than be too specific about that so that people aren't just guessing around what we're doing, What we look for are partners that help our franchise, whether it be deposit base, marketplace, don't do any damage. So we're not looking for things that would actually hurt the momentum that we have and the franchise that we have. As long as it's additive to what we're doing and the markets that we're in, that's kind of what we're looking for. And there's plenty of opportunities there. for us to do that, that would be sort of what I think we'd be looking for.
spk20: We'd like to get bigger, but the focus is on being better.
spk08: Good way to put it.
spk01: I appreciate it, guys. Thank you. Thanks. One moment for our next question. Our next question comes from John Rodas with Jannie. Your line is open.
spk02: Good morning, guys. Paul, just a quick question on the tax rate. It dipped down during the second quarter. I think last quarter you talked about sort of 21%, give or take. What's the right number we should use going forward?
spk20: I would take the weighted average of our year-to-date. It's more reflective of where we're sitting. Okay.
spk03: Move that forward. Okay. Sounds good. Thank you, guys.
spk14: Thank you, John. Thank you. And I'm not showing any further questions at this time. I'd like to turn the call back over to Bob for any closing remarks.
spk22: Great. Thank you, everybody, for their interest today. And that will conclude our call. Thank you.
spk14: Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day. Music playing. Thank you. So, Thank you. Thank you. Good day and thank you for standing by. Welcome to the Stellar Bank Corp Anchor Report's second quarter 2023 results conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised, today's conference is being recorded. I would now like to hand the conference over to your speaker today, Courtney Theriault, Chief Accounting Officer. Please go ahead.
spk16: Good morning. Our team would like to welcome you to our earnings call for the second quarter of 2023. This morning's earnings call will be led by our CEO, Bob Franklin, and CFO, Paul Eddy. Also in attendance today are Steve Resloff, Executive Chairman of the company, Ray Vitulli, President of the company and CEO of the bank, and Joe West, Senior Executive Vice President and Chief Credit Officer of the bank. Before we begin, I need to remind everyone that some of the remarks made today constitute all of these statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend all such statements to be covered by the State House of 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 belief at the time the statement is made and such beliefs are subject to change. We just claim any obligation to publicly update any forward-looking statements, except as may be required by law. Please see the last page of the text in this morning's earnings release, which is available on our website at ir.stellerbankcorpinc.com for additional information about the risk factors associated with forward-looking statements. At the conclusion of our remarks, we will open the line and allow time for questions. I will now turn the call over to our CEO, Bob Franklin.
spk22: Thank you, Courtney. and good morning. Welcome to the Stellar Bank Corp second quarter earnings call. I begin by thanking the great team at Stellar Bank for their continued and tireless efforts to build Stellar Bank into the premier local bank in our markets. Our team has been busy refining processes post conversion and will continue in their work as we move through the year. We will be concentrating on efficiencies through technology and expense control as we better define our needs as a combined organization. This year has had its challenges with rapidly rising interest rates, bank failures, and uncertainty in the economy. There continues to be pressure on industry margins as we see inflation in people costs, funding, deposit costs, and competition for the dollars we held in our institutions at low cost for years. However, we are seeing a slowdown in deposit runoff while also seeing the beginning of a stabilization of deposit costs. Though we are not able to call a bottom for NIM compression because of uncertainty with the Fed actions, we certainly feel that downward pressure is easing. We continue to concentrate our efforts on capital, liquidity, and credit, something we began almost a year ago. We have tightened our credit underwriting while still seeing modest loan growth. We have managed our deposit rate increases, Though we saw some out migration earlier in the year, we have seen moderation of those outflows and we have begun attracting new deposits. We have been able to maintain our target of a low 90s loan to deposit ratio, all in an effort to manage through the current economic uncertainties. As we move through the balance of the year, we will continue these efforts. Our goal is to ready our institution for the opportunities that will be caused by the stresses of the last year. We believe that our industry will continue to consolidate, and we intend to be positioned to benefit from that consolidation. Our shareholders will benefit from our efforts and the great markets that we serve. I'll now turn the call over to Paul Egge, our CFO.
spk20: Thanks, Bob, and good morning, everybody. We are very pleased to report strong operating performance in the second quarter. Our net income was $35.2 million, representing diluted earnings per share of 66 cents, an annualized ROAA of 1.31%, and a return on tangible common equity of 17.05%. This was incrementally lower than the $37.1 million, or diluted EPS, of 70 cents earned in the first quarter, due mostly to increases in funding costs more than offsetting increased interest income. Also notable for the quarter was non-interest income normalizing to a lower level and non-interest expense decreasing, thanks largely to lower merger expenses. During the second quarter, we experienced a meaningful amount of catch-up in our cost of funds, which was higher than our expectations and reflective of an intensely competitive deposit market post-SDB, resulting in shifts in our funding mix and, more generally, reflective of where we sit in the interest rate cycle. To put this in perspective, we went from a cumulative cycle-to-date beta of approximately 15% on cost of deposits at the end of the first quarter to a cumulative beta north of 24% through the end of the second quarter, which brings us closer to broader industry trends. Since we started out with a pretty low cost of deposits and we maintain a strong base of non-interest-bearing deposits at around 43% of deposits, we're pretty pleased with how our cost of funds compares to many of our peers. particularly those in attractive metro markets. In the interest of keeping our core funding core, we've maintained relative discipline on deposit pricing with a willingness to backfill with wholesale sources such as FHLB Advances, which increased from $239 million to $370 million in the second quarter, and Broker TD, which increased from about $203 million to $538 million in the second quarter. All this contributed to higher funding costs. Due to increased funding costs, we saw net interest margin contract from 4.80% to 4.49% in the second quarter and from 4.38% to 3.97% when you exclude purchase accounting accretion. Accordingly, our pre-tax pre-revision earnings power ticked down to 1.66% from 1.89% in the first quarter, and on an adjusted basis, to 1.56% from 1.99%. While we do not like to see a downward trend in our NIM or pre-tax pre-provision profitability, we still feel pretty good about how we look relative to the industry and our ability to protect our relative profitability profile in a challenging environment. Before turning the call back over to Bob, I'd like to make a couple comments on our progress in positioning relative to our focus on capital, credit, and liquidity. On capital, strong year-to-date profitability fueled in part by interest-based purchase accounting accretion more than offsetting significant non-cash accelerated intangible amortization expense from the merger has helped us build regulatory capital at a very rapid clip. Total risk-based capital had gone from 12.39% at year-end 2022 to 13.03% at June 30. And we feel very good about our prospects to continue to build capital in the near term. I should note that at the end of the quarter, we had about $131 million in loan discount remaining and a core deposit in tangible assets left to amortize of $129.8 million. With respect to credit, we remain very pleased with credit performance so far in 2023. Although non-performing assets have ticked down and net charge loss has been minimal, we took a provision of $1.9 million relative to modest loan growth of just over $182 million, putting our allowance for credit losses to total loans at 1.24%. We feel appropriately reserved giving current economic unknowns, but we otherwise take comfort in our credit discipline and from lending in some of the strongest markets in the country. On liquidity, our focus at the outset of 2023 on maintaining flexibility on the liquidity front continues to prove strategic for us. We have been able to strategically access wholesale funding without over-reliance, and we feel good about our ability to manage our balance sheet to maintain favorable margins and earnings power. In summary, we believe Stellar is well-positioned to manage through the current operating environment and to thrive. The year to date has been quite eventful for the industry and even more eventful for Stellar due to our rebranding and systems conversion in the first quarter and broader integration efforts. We are super proud of the entire stellar team and appreciative of everyone's efforts. The future of stellar is indeed bright. Thank you. And I will now turn the call back over to Bob.
spk22: Thank you, Paul and operator. We're all ready for questions.
spk14: Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press star one, one on your telephone. If your question has been answered, you should move yourself from the queue. Please press star one. When again, we'll pause for a moment where we compile our Q and a roster.
spk01: Our first question comes from David Feaster with Raymond James.
spk14: Your line is open.
spk13: Hey, good morning, everybody. Morning.
spk11: Maybe let's just start on the deposit front. Appreciate the commentary about some of the trends that you're seeing and stabilization. It sounds like Most of the migration that you saw happened earlier in the quarter. I'm just curious, could you help us understand maybe some of the trends that you saw? How much is true? Like, was it outflows out of the bank? It doesn't sound like that's the case, but sounds like truly more migration to higher rate accounts. And it sounds like that that's slowed this quarter, but not stopping. I'm just curious maybe if you could help us think of the trends on deposit balances and Kind of the early read on the third quarter.
spk04: Hey, David, this is Ray. Yeah, so exactly. The second quarter, we saw improvement in pretty much every category of what we call the deposit waterfall. So whether that's opened accounts exceeding in terms of dollar amount closed accounts or then looking at our carried deposits, which is kind of that really the bulk of everything and what happened in carried where We saw some significant decreases in the first quarter, and that substantially improved. Still a decrease in the carried, but nothing like we saw in the first quarter, which was encouraging. If you look year-to-date, both what I would call the net new in dollars, we picked up a really nice amount in net new. I'm talking about core, not including any brokered money. That's encouraging. I think it really speaks to the fact that we've gotten through the conversion. We have a process now as far as onboarding and kind of energy around the Stellar brand.
spk11: I'd like to maybe dig into that a bit. Could you elaborate on the growth that you're seeing? It sounds like you think you might be able to drive core deposit growth going forward, right? I guess where are you having success driving this new account growth? Is it with existing clients? Is it new clients that you're attracting to the bank? And I guess in terms of where are you seeing new add-on rates, I guess, for average deposits, deposit costs?
spk04: Well, on the new, what's coming in new in the quarter is a combination. We're expanding relationships and taking a few market share gains on the deposit side. The one thing that's nice is the amount of MIB. If you look at the number of accounts, it's really nice, the number of MIB accounts that are coming in as a percentage of the total. I think there is opportunity there. Our bankers are out with a little bit of pause on the loan side. We're out trying to win customers on the deposit side. The new – on the interest bearing that came in, cost of those deposits, David, those came in at about $345 and pretty stable compared to the first quarter, not including the NIV. So just the interest bearing of new deposits that were opened in the quarter at $345, and that's very similar to the first quarter.
spk11: All right. That's encouraging. And then maybe touching on the loan side – Could you help us understand maybe how demand is trending across your footprint? Where are you seeing good opportunities? And then just talking about the repricing dynamic in the next maybe, you know, six to 12 months, where, you know, where add-on rates are coming, where roll-off rates are. And then, you know, just trying to think about kind of how this all plays into the NIM and maybe where a core NIM could shake out, you know, once things do start stabilizing.
spk04: We'll probably all touch on that. Let me give you a little bit on the color on the quarter. Our new loans came on at $762,000 for the quarter. Our renewed loans came on at $806,000. Those amounts were around the same, about a half a billion or so each category. On the renewed that came on at $806,000, it came off at $724,000. We really like that where we what we put on on those renewed loans. And of course, we're working on those new loans as we continue to calibrate our models around new loan pricing. I'll let Joe maybe talk about what we're seeing.
spk21: Yeah, this is Joe. On the demand side, we've taken something of a pause on the course of real estate. We've raised the bar on our underwriting and looking for more equity, shorter amortizations, better compensating balances from borrowers. So on the CRE side, we've seen a slowdown because of our increased underwriting requirements. And we're seeing some activity on the C&I side, investing with our customers. We're talking to some people that have been with some other banks and want to talk to us. So we're sort of cautiously optimistic of a little bit of growth in the C&I side. For new business on the commercial real estate side, it's going to be slow.
spk11: Okay. That's helpful. And I guess maybe, Paul, I don't want to put words in your mouth, but kind of hearing those numbers, it feels like maybe we're getting closer to a trough in the margin, or at least the pace of compression should slow materially. Is that a fair characterization?
spk20: Yeah, it's a fair characterization, but I lean towards the pace. of compression slowing. Really, what we're facing, and I think a lot of our peers are facing similar dynamics, is a timing issue. The assets aren't repricing at the same pace of the funding base, and there is an aspect of our funding base now, more so than in the past, that is wholesale in nature. We're about around 8 or so percent of our balance sheet funded Wholesale funds, we'd rather be zero, but we're cognizant of the current realities. We have this great core deposit base. And ultimately, we consider ourselves very fortunate to have a very large base of purchase accounting accretion, all interest-based purchase accounting accretion, which really amounts to a repricing of our assets, of a lot of our asset base in the balance sheet as of October 1st. And when you think about how that is going to be really meaning, I think that we're fortunate to have that be as meaningful for us because really that brings forward the repricing that's happening every day, albeit it's repricing that's happening at not as fast a pace as we'd like it to. But it's really supporting what we think is more core margin, bringing more core margin forward. to support us while this kind of timing differential really exists in the near term?
spk22: Yeah, I think one of the things we're watching happening in the marketplace is that we're seeing assets start to reprice so that people can actually get deals done again. For a number of months, you've seen it very difficult at the cost of capital today for people to pencil some of these deals to make them work. that started to change a bit. We're still in a great market. Houston, Texas is still one of the best markets, if not the best in the country. And that really bodes well for us and our organization, but the math is still the math. And so people are getting used to higher interest rates. So in the interim, I think we see a little bit slower loan growth, but at the end of the day, we'll start to see things pick up again as we start to move through this cycle and people get used to what the borrowing costs are. Okay.
spk10: That's helpful. Thanks, everybody.
spk14: Thank you. Again, ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your telephone. If your question has been answered or you wish to move yourself from the queue, please press star 1-1 again. And one moment for our next question. Our next question comes from Matt Only with Stevens. Your line is open.
spk09: Hey, thanks. Good morning, everybody. Hey, Matt. I'll start with Paul. I think you said that 8% of the balance sheet is funded by wholesale sources, and obviously it's moved up a little bit, but still pretty low overall versus some others out there. We'd love to appreciate your expectations for that 8% for the back half of the year, especially with your comments about the maybe some optimism getting some core deposit growth the back half the year?
spk20: Certainly. Well, while we are optimistic, we are pretty practical about the fact that a more meaningful amount of wholesale funding is likely to remain on our balance sheet for longer. But we see green sheets, particularly as it relates to a lot of the statistics we've had in new account openings and whatnot, and the way that we're kind of successfully bending the curve as it relates to loan growth. So there's a lot of factors that will ultimately drive this wholesale funding piece, which amounts to a plug. But the more success we are able to have, the further we get from, the safer the distance we get from the first quarter, the more we can get back to business as usual, and our business as usual is strong. biggest locally focused bank and one of the best markets in the U S and we just have, we've just rebranded and the results of the fresh rebranding and, uh, output as it relates to new, new account openings has been strong. So we're, uh, we're optimistic, but, uh, we're realistic at the same time that there's a lot of meaningful, uh, forces market forces, uh, having their way on the deposit market. So ultimately we're, uh, It'll be something that's hard to predict, but we're feeling good about where we stand.
spk22: And Matt, I think that we're also in our season. Typically, both banks have seen deposit growth begin sort of that May-June timeframe and start to build through the end of the year. We're sort of in a little bit of an unprecedented time just based on what's happened with the Fed. But it looks like we're starting to have that deposit build, or at least the front end of that is starting to happen. um which we feel encouraged by we think we've got deposit pricing right now um and i think we're it appears that we're able to attract new deposits into that so uh with our focus and our and our belief is that we'll continue to build deposits through the end of the year okay great appreciate the comments and then switching over to the fees
spk09: I think Paul made a comment in the prepared remarks talking about kind of a normalization of the fee run rate. So should we expect this to be kind of the normal run rate on fees, what we saw in 2Q, or any other puts and takes? Let's think about kind of the forecast.
spk20: Well, July 1 put us into the interchange discount, I guess you could say, as a byproduct of us crossing $10 billion. All that is true with the caveat that interchange income is something that we'll expect to see being 40% lower from the base. But of course, we're going to seek to grow so as to offset some of that, but that'll be a slower road to offset.
spk09: Okay. And I think that last I heard that interchange estimate, the impact was about Was it $2.5 million annually that we'll start to see that in the third quarter? Is that right?
spk19: Yes, we've grown a little bit, and I would handicap.
spk20: I would take our debit card and ATM card income and put about a 40%. I would handicap that by 40%. Okay, got it.
spk09: It'll get you to the same place. Okay, thanks for that. And then I guess on the... Expense side, would love to hear kind of what the outlook is with all the kind of puts and takes you mentioned, prepared remarks, bringing the brands together, bringing the teams together, integration. Would love to appreciate kind of where you expect to be in the near term.
spk20: We're always analyzing the expense dynamics, but up to this point, when you pull out the M&A fees, we're kind of right on track with respect to our guidance. Naturally, with revenue being softer as a byproduct of the current industry environment, we're turning over more rocks. We're trying to be very thoughtful about where we allocate incremental spend or to the extent we allocate incremental spend, where that comes from. So we're trying to be very practical as it relates to that dynamic. But we are on pace on a core expense run rate. We're feeling good about where that sits. for the year, consistent with guidance.
spk22: As you think about this, we brought two banks together to get over the $10 billion mark. We did a lot of things around people without totally knowing everything about each other. As we brought the banks together, now we have a lot more feel about people and process and the inefficiencies that we may or may not have. I think the expectation for us is we'll get more efficient, and we do have the ability to get more efficient, unlike maybe an acquisition where you're just folding something into the tent. I think we have the opportunity to gain efficiencies as we move through the year. And that's not just with people, but with processes and technology to lower those costs.
spk09: Okay. Appreciate the comments, and then I guess on the M&A front in the industry, we've seen a handful of deals announced this week, and I know Stellar has been heavily involved in M&A in the past. Would love to get some updated thoughts on M&A chatter in Texas as far as what you're hearing, and then thoughts on M&A with respect to Stellar Bank from here. Thanks.
spk22: Well, you're right. Stellar Banks is encouraged by what may be out there. I think we've had a lot of discussions with folks around different opportunities. People are still trying to understand kind of where they are. I think, you know, the marks on portfolios are becoming a big thing and trying to understand what that looks like, what the capital destruction looks like. and the ability to get a deal done. And so I think you've seen some deals happen where people are starting to understand what that looks like on the other side, what the combined organizations can do, and what the benefit to the shareholders are. And I think as we move through this a bit, I think people will get a better understanding of where if they're going to take a slight discount to what they thought they were going to get in a sale, to understand what the benefits are on the other side of that to gain more efficiencies and just have a better franchise. Scale has become so much more important as margins start to get squeezed a bit again. We're encouraged by the possibilities out there. I wouldn't say it's going to happen in the next quarter or so, but Uh, you can't, you never can tell we're opportunistic depending on where people are. We continue to have those conversations and we are interested in doing something.
spk09: Okay, guys, thanks for taking my questions.
spk01: One moment for our next question. The next question comes from Will Jones with KBW.
spk14: Your line is open.
spk05: Hey, great. Good morning, guys. So we talked a lot about funding thus far already, but we really haven't hit on the fact that you guys are still seeing really, really solid loan growth. I know you guys tended to be a little more conservative on Outlook at the start of the year, although understandably. But now that the dust has kind of settled and the demand is still there for you guys, it's Is more of a mid to high single-digit growth rate the right way to think about loan growth as we move into the back half of the year? Or is it really appropriate to think that growth kind of slows from here?
spk22: I think you're going to see moderate loan growth. I think that where we are in this cycle, whether we're thinking about what credit issues might come in the future, where interest rates are going, and the ability to add loan growth at a decent spread. And that's kind of, I think, the focus. For us to go out and buy dollars today and have that spread erode our margins at this point doesn't seem like the right mix. I think we want to be adding loan growth at good margins and safe type of loans. I think loan growth will be moderate, but we continue to have some, and a big function of that is the fact that we are in the market that we're in. It continues to push us to make good loans, and they're available with strength, and guarantor strength and liquidity is still out there and available.
spk04: Yeah, well, the originations that we've had over the past two quarters have been really around half of what they were, kind of our peak, which was the third quarter of 22. So it all kind of starts with what we originate, and that's in that 500 million plus range. And then when you look at what happens after that, a couple drivers for the last two quarters have been that our payoffs haven't been at the level that we've experienced in the past. And then we're still getting a lift in the carry, so the advances exceeding the payments So that's kind of driving the growth. It's not so much of that loan origination. On that level of originations, it probably would have been a little bit less growth, but these dynamics of advances exceeding payments and lower payoffs has drove a lot of the growth in the last two quarters.
spk05: That's helpful, Ray. And then? Is the loan to deposit ratio, is that really kind of your governor on loan growth or where you can ultimately lever up the loan side of the balance sheet? Or is it really just to the extent you can grow deposits or just how do you think about where your ability to grow loans is ultimately capped at?
spk22: I wouldn't say it's a governor on what we do, but we don't have a great comfort in outstripping our ability to, we really focus on core funding and for us to go in and try to get to a 105, 110, 115% loan or deposit, but just by doing it through excess funds or wholesale funds is not really the way we want to build the bank. For us, we think the true value in these organizations is to build core funding. So it's not a governor, and that's laid around it, but it's kind of where we like to sit when we move ourselves back to optimization, is about 90%.
spk06: Great. That's helpful.
spk05: And lastly for me, Paul, I know accounting can be, you know, really hard to predict almost like a distinct finger in the air, but we saw a little bit high level of accretion this quarter. Could you just remind us, you know, what we're scheduled accretion is for the remainder of the year and then, you know, how you kind of think about four year accretion number.
spk20: So we have appreciated a lot of what I'll call windfall accretion up to this point. So I've, estimate that about 35 to 40 percent of the purchase accounting accretion that we've experienced year-to-date has been ahead of schedule. So we put out guidance that our purchase accounting accretion for the year will be somewhere like 26 to 28 million dollars back in January and it's been year-to-date really strong and really Our initial conservatism on the expectations with respect to purchase accounting adjustments was based on the concept that we thought less loans would prepay. And we've had more than expected. We're still not banking on there being as much prepayment. We'd like to kind of think about it more as scheduled purchase accounting. And then if what we'll call windfall purchase accounting comes about, that we'll take it. But 35 to 40% of what we've had year to date is higher than our expectations is what I'll put.
spk07: Got it. Understood. Thanks, guys.
spk01: One moment for our next question. Our next question comes from Graham Dick with Piper Sandler. Your line is open. Hey, good morning, guys.
spk08: Good morning. So I heard some of the conversations around new deposit openings and how you're starting to see a better percentage of those being non-interest-bearing or at least have a non-interest-bearing piece to it. And I know it's very difficult to predict, and there's a lot of remix going on in the industry right now. And it's honestly a good problem to have with your non-interest-bearing deposits being considerably above 40%. But I was just trying to get a sense of what you guys are seeing near term on remix out of non-interest-bearing deposits. And if you think you're close to where you might be able to start holding the line on those balances quarter over quarter. Just any help there would be appreciated.
spk18: You're right. It's really hard to handicap.
spk20: But we're bullied by the fact that we continue to open non-interest bearing deposits and then we've seen a higher level of relative stability when you compare to the front half of the year. Since we've never been super forward on our interest bearing accounts, you know, we've always known that sweeping has been a reality for our clients and maybe that optimization increased year to date. But at the same time, these are operating accounts. People need these balances to manage all their payables, including payroll, things along those lines. And some organizations get to be pretty decent in size where it makes sense for them to maintain meaningful balances. And it's diffused amongst a lot of customers. So There's a lot of macro things that are shrinking that allocation to non-sparing deposits. And that's kind of hard to see where the bottom of that remix is going to be. But we're really pleased with the fact that we're able to continue to open and build these accounts. We think we have the platform to be the category killer community bank in one of the best markets in the US. So it's about executing and In the near term, it may be a slower road and maybe more of a function of kind of swimming against the stream of what's going on macro pressure-wise. But we're really pleased about where we sit and how our prospects lie.
spk04: Yeah, back to the hard to predict, that it's difficult. But if you look at the onboarding of the new accounts, that ratio of non-interest bearing to total accounts is in excess of what our non-interest bearing is today. So you've got to see what happens after those accounts get opened. But at least on the front end, we're opening a healthy amount of non-interest bearing accounts as a percentage of the total.
spk08: Great. That's really helpful. And then I guess I just wanted to circle up to capital. I know you said you wanted to continue building it in CT1s. You're well over 11% now. Any near-term capital targets you guys would point to? And then I guess how do you think about capital priorities now with maybe buyback versus M&A or organic growth? Any way you could frame that up would be helpful. Thanks.
spk20: Sure. I'd say our principal capital priority is more with respect to the merger that we're The size of our purchase accounting adjustments brought the capital down, as we all know, to levels that are lower than the way we like to typically operate. And focusing on total capital ratio, as we did in our remarks, we're really pleased with the growth. And ultimately, to position ourselves to be opportunistic on the M&A front and otherwise, our efforts will be supported by a really strong capital base. So we're focused on growing that and You know, as we think about the priorities, the other priorities are giving dividends and share repurchases, but we think it's hard to prioritize those in the near term while we're focused on building and positioning our base for what might come next opportunistically.
spk22: Yeah, I think as you think about the rest of the year, we're approaching sort of our optimization of capital. But we also want to make sure that we're putting ourselves in a position to do what we want to do in the future. We do think M&A is out there for us, and we want to be able to capitalize on that. And today, given where things are, that takes some capital to do it. And that's why we may be sort of accumulating a little more than we may have otherwise.
spk08: Okay, I appreciate it. And then on that M&A front, it sounds like talks are picking up, and obviously you guys are interested. What does the target look like, the ideal target look like for you guys in terms of size, business lines, I guess deposit mix, et cetera?
spk22: Well, rather than be too specific about that so that people aren't just guessing around what we're doing, What we look for are partners that help our franchise, whether it be deposit base, marketplace, don't do any damage. So we're not looking for things that would actually hurt the momentum that we have and the franchise that we have. As long as it's additive to what we're doing in the markets that we're in, that's kind of what we're looking for. And there's plenty of opportunities there. for us to do that, that would be sort of what I think we'd be looking for.
spk20: We'd like to get bigger, but the focus is on being better.
spk08: Good way to put it.
spk01: I appreciate it, guys. Thank you. Thanks. One moment for our next question. Our next question comes from John Rodas with Jannie. Your line is open.
spk14: Good morning, guys.
spk02: Paul, just a quick question on the tax rate. It dipped down during the second quarter. I think last quarter you talked about sort of 21%, give or take. What's the right number we should use going forward?
spk20: I would take the weighted average of our year-to-date. It's more reflective of where we're sitting.
spk03: Move that forward. Okay. Sounds good.
spk14: Thank you, guys. Thank you, John. Thank you. And I'm not showing any further questions at this time. I'd like to turn the call back over to Bob for any closing remarks.
spk22: Great. Thank you, everybody, for their interest today. And that will conclude our call. Thank you.
spk14: Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.
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