Heritage Financial - Q2 2024
July 25, 2024
Transcript
Operator (participant)
Hello everyone and welcome to the Heritage Financial 2024 Q2 Earnings Call. My name is Emily and I'll be moderating your call today. After the presentation, you will have the opportunity to ask any questions, which you can do so by pressing star followed by the number one on your telephone keypad. I will now hand the call over to our host, CEO Jeff Deuel, to begin. Please go ahead, Jeff.
Jeffrey J. Deuel (President and CEO)
Thank you, Emily. Welcome and good morning to everyone who called in or those who may listen later. This is Jeff Deuel, CEO of Heritage Financial. Attending with me are Bryan McDonald, President and CEO of Heritage Bank; Don Hinson, Chief Financial Officer; and Tony Chalfant, Chief Credit Officer. Our second quarter earnings release went out this morning pre-market, and hopefully you've had an opportunity to review it prior to the call. We have also posted an updated second quarter investor presentation on the investor relations portion of our corporate website, which includes more detail on our deposits, our loan portfolio, liquidity, and credit quality. We will reference this presentation during the call. Please refer to the forward-looking statements in the press release. We are pleased with our solid performance in Q2, including active balance sheet management and expense management activities.
Although we continue to experience some margin pressure, our strategies are enabling us to protect core earnings, and we expect they will result in improved profitability as we transition to a more normalized rate environment. Deposit balances fluctuated during the quarter, and focal date balances ended slightly down from the prior quarter. However, average total deposits increased from the prior quarter, while the mix of deposits continues to partially shift into higher rate products. Loan growth was strong in Q2, running at 9.5% annualized. Credit quality remains quite stable, resulting from our conservative approach to credit and our long-term practice of actively managing the loan portfolio. We have ample liquidity, a relatively low loan-to-deposit ratio, and a solid capital base. Going forward, we will continue to keep a sharp eye on expenses while we focus on growing loans and deposits.
We will now move to Don, who will take a few minutes to cover our financial results.
Donald J. Hinson (EVP and CFO)
Thank you, Jeff. I'll be reviewing some of the main drivers of our performance for Q2. As I walk through our financial results, unless otherwise noted, all the prior period comparisons will be with the first quarter of 2024. Starting with the balance sheet, loan growth was strong again in Q2, increasing $104 million for the quarter. Yields in the loan portfolio were 5.52% for the quarter, which was 11 basis points higher than Q1. Approximately 3 basis points of this increase was due to interest recoveries recognized on resolved non-accrual loans. Bryan McDonald will have an update on loan production and yields in a few minutes. Deposit balances are showing some stabilization. Although focal date deposits decreased $17 million during the quarter, average total deposits increased $29 million from the prior quarter.
Average total deposits for the quarter were about $40 million higher than quarter-end balances due to some volatility that occurred at quarter-end, and we consider our average deposit balances as more indicative of the trends we are experiencing. There continues to be a change in the mix of deposits from non-maturity deposit balances to CDs, although at a slower pace. Non-maturity deposits decreased $120 million during the quarter, and CDs increased $104 million, $30 million of which was in the form of additional brokered CDs. These factors contributed to an increase of 19 basis points, taking our cost of interest-bearing deposits to 1.89% for Q2. Due to the current market pressures related to deposit rates, we expect to continue to experience an increase in the cost of our core deposits, although again at a slower pace.
This is illustrated by the cost of interest-bearing deposits being 1.95% for the month of June, with a spot rate of 1.96% as of June 30. Investment balances decreased $72 million, mostly due to a loss trade executed during the quarter. A loss of $1.9 million was recognized in the sale of $39 million of securities, all of which occurred in June. These sales were done in order to continue to right-size our investment portfolio and free up funds for other balance sheet initiatives. It is estimated that the annualized pre-tax income improvement from this loss trade will be approximately $1 million, resulting in an earnback period of about two years. We will continue to consider additional loss trades in order to defend our margin from downward pressures and reposition our balance sheet.
Moving on to the income statement, net interest income decreased slightly from the prior quarter due to a decrease in the net interest margin. The net interest margin decreased to 3.29% in Q2, from 3.32% in the prior quarter. This decrease is primarily due to the cost of interest-bearing deposits increasing more rapidly than the yields on earning assets. Also impacting the margin in Q2 was a 48 basis points increase in our cost of borrowings from the prior quarter, resulting in a $600,000 increase in interest expense, which is more than the overall decrease in net interest income we experienced for the quarter. This occurred due to the repricing of $400 million of BTFP debt that matured in early May. The increase in borrowing costs negatively impacted the margin by four basis points in Q2.
The margin was positively impacted by two basis points due to the loan interest recoveries previously mentioned. The combined net impact of increased borrowing costs and low interest recoveries made up two of the total three basis points in margin compression in Q2. The pace and duration of our margin compression will be highly dependent on the rate of increase in our cost of interest-bearing deposits, as well as maintaining deposit balances. As both our cost of deposits and deposit balances level off, we expect to experience margin stabilization due to the repricing of adjustable rate loans, in addition to higher origination rates on new loans. Based on current trends and market conditions, we are expecting the margin to bottom out in the low to mid-3.20s before the end of the year.
We recognize the provision for credit losses in the amount of $1.3 million during Q2, which is a slight decrease from $1.4 million in the prior quarter. The provision expense was due substantially to loan growth experienced during the quarter. Non-interest expense decreased in the prior quarter due mostly to lower compensation expense, as we had lower FTE in Q2, and we recognized $1.1 million of severance costs in Q1 as a result of staff reductions. Average FTE count was 748 in Q2, compared to 765 in Q1 at a reduction of 17 FTE. Finally, moving on to capital, all of our regulatory capital ratios remain comfortably above well-capitalized thresholds, and our TCE ratio was 8.9%, up slightly from the prior quarter. Our strong capital ratios have allowed us to be active in loss trades on investments and in stock buybacks.
During Q2, we repurchased 236,000 shares as part of our stock repurchase program at a weighted average price of $18.19, or 104% of June 30 tangible book value per share. As a reminder, we completed our previous stock repurchase plan and approved a new plan in April. We have 1.5 million shares available for repurchase under the new plan as of the end of Q2. I will now pass the call to Tony, who will have an update on our credit quality metrics.
Tony Chalfant (EVP and Chief Credit Officer)
Thank you, Don. I'm pleased to report that credit quality at quarter-end remained strong and stable. Non-accrual loans total just over $3.8 million, and we do not hold any OREO. This represents 0.08% of total loans and compares to 0.11% at the end of the first quarter. I would also note that adjusting for government guarantees, our non-accrual loans would be just under $1 million. Overall, non-accrual loans declined by $966,000 during the quarter. There was one relationship placed on non-accrual status early in the quarter that was partially charged off near the end of the quarter. Most of the improvement came from the final resolution of two problem loan relationships that were fully repaid from the sale of collateral that secured the loans. Page 18 of the investor presentation reflects the stability in our non-accrual loans over the past two-plus years.
Within our non-performing loans total, we have seen an increase in loans past due more than 90 days and still accruing through the first half of the year. The majority of the $4.3 million in balances is attributed to one classified C&I relationship that is being actively managed by our special assets team. The loans remain on accrual status as they are well-secured and in the process of collection. Criticized loans, those rated special mention and substandard, totaled just over $176 million at quarter-end, rising by a modest 2.2% during the quarter. This is an increase of $26.5 million since year-end 2023, or just under 18%. The largest single driver of this increase was the downgrade of one multi-family construction loan that represented just over $15 million of the total. This loan has migrated from past to substandard over the course of the last six months.
Overall, criticized loans remain in line with our historical performance during good economic conditions. It is worth noting that loans in the more severe substandard category were 1.8% of total loans at quarter-end versus 1.6% at year-end 2022 and 2023. The credit quality of our office loan portfolio remained stable and largely unchanged during the quarter. This loan segment represents $552 million, or 12.2% of total loans, and is split evenly between owner and non-owner-occupied properties. The average loan size is $1 million. They are diversified by geographic location, and we have little exposure to the core downtown markets. Criticized office loans are limited to just under $19 million, or 3.4% of total office loans. Page 17 of the investor presentation provides more detailed information about our office loan portfolio. During the quarter, we experienced total charge-offs of $550,000 that were split fairly evenly between commercial and consumer loans.
The losses were offset by $563,000 in recoveries, leading to net recoveries of $13,000 for the quarter. Most of the recovery was tied to one of the same loan payoffs that lowered our non-accrual loans. Through the first six months of the year, we are in a net recovery position of $46,000. While we continue to see movement back to a more normalized credit environment, the pace has been slower than expected. While our credit metrics remain strong, we remain watchful of the potential weaknesses in the broader economic environment. We are confident that our consistent and disciplined approach to credit underwriting and concentration management will continue to serve well in a wide variety of business cycles. I'll now turn the call over to Bryan for an update on loan production.
Bryan McDonald (President and CEO)
Thanks, Tony. I'm going to provide detail on our second quarter loan production results, starting with our commercial lending group. For the quarter, our commercial teams closed $218 million in new commitments, up from $133 million last quarter and up from $212 million closed in the second quarter of 2023. Please refer to page 13 in the investor presentation for additional detail on new originated loans over the past five quarters. The commercial loan pipeline ended the second quarter at $480 million, up from $409 million last quarter and up from $473 million at the end of the second quarter of 2023. Loan demand remained steady in the second quarter, with new opportunities replacing closed business. The growth in the loan pipeline versus first quarter was largely caused by the seasonality of new opportunities in our low-income housing construction business.
Competition has continued at an elevated level for both real estate and commercial business loans, and we anticipate our pipeline will flatten from here or potentially decline to first quarter levels as the low-income housing-related loan opportunities cycle through. Loan growth for the second quarter was $104.5 million, up from $92.5 million last quarter. The growth was driven by a mortgage loan pool purchase of $25 million and $44 million of net advances on existing loans, most of which were construction loan advances. Please see slides 14 and 16 of the investor presentation for further detail on the change in loans during the quarter. We are unlikely to do additional mortgage pool purchases and expect higher construction loan payoffs going forward versus what we experienced in the first half of 2024.
Based on these factors and our pipeline expectations, we anticipate our loan growth rate will average low single digits for the remainder of the year. The deposit pipeline ended the quarter at $231 million, compared to $191 million last quarter, and average balances on new deposit accounts opened during the quarter are estimated at $77 million, compared to $40 million last quarter. Moving to interest rates, our average second quarter interest rate for new commercial loans was 6.88%, which is down 17 basis points versus the 7.05% average for last quarter. The decline was due to more competitive market conditions and lower rates in owner-occupied commercial real estate, non-owner-occupied commercial real estate, and C&I segments versus the first quarter. In addition, the second quarter rate for all new loans was 6.89%, down 26 basis points from 7.15% last quarter.
The decline was due to the lower average rates on commercial loans, which I just commented on, plus the impact of the mortgage pool, which had an average rate of 6.73%. Before passing the call back to Jeff, I'd like to provide an update on the new teams we hired in 2022 and 2023 and a plan we are deploying now to expand our builder banking business. We have 25 bankers on the three commercial teams we added in 2022. These bankers are located in Vancouver, Washington, Portland, Oregon, and Eugene, Oregon. The teams are performing ahead of our original projection, reaching a break-even level this year, which is 1 year earlier than we anticipated. We have 9 bankers on our Boise commercial team, which was fully formed and moved into their space last summer.
This team is not yet in the black but is also performing well ahead of our original projection. Combined, the costs associated with these teams accounted for $1.85 million of our non-interest expense in the second quarter. Moving on to our planned expansion of builder banking, Heritage Bank has had a builder banking business supported by a small dedicated team for many years. Current loan balances associated with the business line are about $70 million, and we are planning to increase this to $170 million over the next few years. We will accomplish this by expanding the team, including the addition of a very well-known local senior leader with experience in this business line who started with Heritage in early July. We plan to add a couple of additional bankers to the sales team in Boise and greater Seattle to support this effort.
I will now turn the call back to Jeff.
Jeffrey J. Deuel (President and CEO)
Thank you, Bryan. As I mentioned earlier, we're pleased with our solid performance in the second quarter of 2024. While we continue to experience the challenges of the rate environment, we're confident that the strength of our franchise will continue to benefit us over the long term. Our relatively low loan-to-deposit ratio positions us well to continue to support our existing customers as well as pursuing new high-quality relationships. We will also continue to benefit from our solid risk management practices and our strong capital position, and we'll continue to focus on expense management and improving efficiencies within the organization. Overall, we believe we are well-positioned to navigate the challenges ahead and to take advantage of any potential dislocation in our markets that may occur.
Before we move to questions, I would like to take a minute to talk about the June 25th announcement about CEO succession and answer a few questions I received following the announcement. As you know, historically, we have taken a very measured approach to CEO succession, and we planned well in advance. For additional perspective, the current process got underway in mid-2022. At that time, we considered all options and felt Bryan McDonald was a great candidate for the role. Over the past several quarters, Bryan has taken on more and more responsibility for running the bank and leading strategic initiatives with good success. As we have done in the past, Bryan became CEO of the bank on July 1, 2024, and I will remain CEO of Heritage Financial until May 6th, 2025, a date that is designed to line up with our annual shareholders' meeting.
I will not remain on the board at that point. However, I will take on an advisory role for a period of time to provide extra capacity as needed. I don't believe Bryan and the team will need the extra capacity. However, that plan is consistent with our conservative approach. I have been asked about the timing of the announcement. First, as I mentioned earlier, we started this process in mid-2022 and have taken the time to vet Bryan as my successor. He has proven to be quite capable in the next 10 months, provides us time for a smooth transition. Second, my age has been driving the decision from the standpoint that I will be 67 years old when May 6th, 2025, rolls around, and I think it's time for me to pass the baton.
I look forward to watching Bryan lead the bank and continue to build upon the foundational work we have done over the past few years to prepare for the future. I am happy to provide additional color on this if there are further questions about CEO succession. But with that said, Emily, I think we can now open up the line for questions from the call attendees.
Operator (participant)
Thank you. As a reminder, if you would like to ask a question today, please do so now by pressing star, followed by the number one on your telephone keypad. If you change your mind or you feel like your question has already been answered, you can remove yourself from the queue by pressing star, then the number two. Our first question today comes from Eric Spector with Raymond James. Eric, please go ahead.
Eric Spector (Senior Equity Research Associate)
Hey, everybody. This is Eric dialing in for David Feaster. I appreciate you taking the questions. Just starting off, I was just curious if you could talk about deposit trends, starting with non-interest bearing. Curious maybe some of the trends you saw throughout the quarter and the pace of NIB declines and how that's trended thus far in the third quarter. Just curious your sense of expectations for core deposit growth going forward and what initiatives you have in place to drive core deposit growth.
Jeffrey J. Deuel (President and CEO)
That's a lot, Eric. Good morning. Thank you for the question. As we pointed out earlier in the narrative, we've started to see deposits stabilize. One of the things that we do every month, actually, is pull the organization through the branches and through the various commercial offices to see what is driving the transactions that exist under the surface. And what I'm happy to tell you is for the last couple of quarters, other than those maybe seeking a higher rate for excess cash reserves, that operating accounts have remained fairly stable. And really, the activity that we've seen under the surface has mostly been pretty traditional banking people buying things, selling things, tax issues that they might have as a result of selling a business, for example. But money movement has been much more normalized in the last couple of quarters than maybe what we saw mid-last year.
Don or Bryan, anything you want to add to that?
Bryan McDonald (President and CEO)
Sure. I would just add deposits have been a real focus of ours all year. It's part of one of our strategic initiatives this year. So a lot of focus on retention as well as expansion. And in addition to what Jeff mentioned, we're watching the deposit pipeline very closely and why we're winning or not winning relationships. And we've made good progress on adding new relationships this year and will continue to focus on it. Our average, it's the rates, as Jeff noted, that's driving the migration. Our average cost of interest bearing, which Don mentioned, is 1.89%. And so there's just some incentive there for customers to be more judicious in managing balances that they might have in their accounts, migrating to higher cost options that are available out in the market.
Really happy with what the team's done to influence the things that we can't control with the customer base. Obviously, we'd much rather migrate them into something here at Heritage versus have them go elsewhere. At the same time, we're a lot of attention focused on new relationships.
Eric Spector (Senior Equity Research Associate)
That's helpful, Bryan. And then just maybe touching on the growth side, you've done a great job accelerating growth. I appreciate the guidance on the low single digits for the rest of the year. Just giving you that diversified production, just curious where you're seeing good opportunities, maybe looking out the next year and where you see the most growth?
Bryan McDonald (President and CEO)
Sure.
Jeffrey J. Deuel (President and CEO)
Bryan, you want to take that?
Bryan McDonald (President and CEO)
Yeah, sure. I would just point you to slide 13 in the investor deck. It gives a real nice break out of the loan types. And you can see in Q4 of 2023, Q1, and then Q2 of 2024, our highest production segment for new business was in C&I. And that's by design. We really shifted last spring. C&I has always been a key component of our strategy, but particularly with the rate changes and some of the deposit outflows, we've really had a renewed focus on calling on commercial relationships. So you can see the success on that slide. And that is our focus going forward as well. It gives us great granularity, great diversity, and of course, comes with strong relationship core deposits, which are always critical, but even more so in this environment with the current curve.
Eric Spector (Senior Equity Research Associate)
Yeah, that's helpful. And then maybe just touching on the hiring side, appreciate your color on the build-out of the new builder banking team. There's obviously been a lot of disruption across your footprint. Just curious what you're seeing on the hiring front, your appetite for hires. If there's any other markets or segments you'd be interested in, kind of parlay that into your capital priorities as well. Any color there would be helpful.
Bryan McDonald (President and CEO)
Sure. Jeff, you want me to take that one?
Jeffrey J. Deuel (President and CEO)
Sure, Bryan. Thank you.
Yeah. The leader that joined us in July was a longtime member of another regional community bank here. He was there for 17 years, and we know him well here at Heritage. And so we are, as I mentioned in my comments, looking to add another couple team members to that team in the greater Seattle market and Boise market to add some additional sales, some members of the sales team to drive that additional $100 million. More broadly, we're always talking to bankers in the market and to the extent there's any sort of dislocation. We feel like we're in a good spot to be considered for those employees. Good track record with the groups that we've done in the past, including the teams we picked up in 2022. Just good integration in the company from a cultural standpoint and good salespeople.
Eric Spector (Senior Equity Research Associate)
Okay. Thanks for taking my questions. I'll step back.
Jeffrey J. Deuel (President and CEO)
Thanks, Eric.
Operator (participant)
Our next question comes from Jeff Rulis with D.A. Davidson. Jeff, please go ahead.
Jeff Rulis (Managing Director and Senior Research Analyst)
Thanks. Good morning.
Donald J. Hinson (EVP and CFO)
Good morning.
Jeff Rulis (Managing Director and Senior Research Analyst)
Don mentioned talking about the balance sheet repositioning and continuing to look at that. I guess trying to follow up on that is, are we, if anything, in the kind of the late innings of these repositionings, just trying to see if more is planned? And if it is, how much more? That's a tough question to ask or to answer, I suppose, but just checking back in on the strategy there.
Donald J. Hinson (EVP and CFO)
Yeah, Jeff, I think we will continue to look at these. If it makes sense, every quarter we'll take a look at where we're at and where we think we would like to be long-term. And if it makes sense, like it did, obviously, it was a smaller trade in Q2 than it was the previous two quarters. And so I'm not sure we'll hit the size of what we did in Q4 and Q1. But at this point, it wouldn't surprise me if we were continuing to do this to, again, right-size, I would say, certain aspects of our balance sheet with the investor portfolio and our borrowing levels. And if the earning assets make sense, it'll continue to probably be a plan going forward.
Jeff Rulis (Managing Director and Senior Research Analyst)
Right. I guess as a follow-on, just trying to get a sense for earning asset growth and where do you think that tracks with loan growth or trying to sense what you're going to do with the securities portfolio, I suppose, absent of sales.
Donald J. Hinson (EVP and CFO)
Well, yeah, I can see where you're coming from on this. I guess there's a chance that, obviously, our earning assets could actually come down some. But if they come down measurably, we're actually probably being made up in the margin, more than made up in the margin, right? So we wouldn't be doing this if it's not being accretive to earnings and net interest income. So I think that we may see some of the borrowings decrease, and therefore, there's a chance that you might see the overall earning assets decrease.
Jeff Rulis (Managing Director and Senior Research Analyst)
Okay. And Don, did you have the June NIM average?
Donald J. Hinson (EVP and CFO)
Yeah, it was 3.26% versus a quarter of 3.29%
Jeff Rulis (Managing Director and Senior Research Analyst)
Got it. And then, well, maybe just over to Jeff. Just on an M&A check-in, lift in valuations, and interested in just kind of checking back in with you on how those conversations are going.
Jeffrey J. Deuel (President and CEO)
Jeff, the increase in our currency is pretty recent, so I'm not sure it's changed the dialogue yet. But I will tell you that we have had some more confidential conversations in the last couple of quarters that have really come to a conclusion from the standpoint that we didn't think it was a good time for us to be buying, and maybe a target was not feeling like it was a good time to sell. And I think that's sort of the environment we're in. I think that what I'm picking up on is, and I guess this goes more for the smaller side of the potential opportunities, is an opportunity for them to maybe see things get back to normal and see what they can do in a more normalized environment and give it a little bit of time to see how that might turn out.
That's sort of what I've been hearing. So I think any opportunities for us are probably later in 2025. In the meantime, there's still disruption. You can see there's one slide in here that shows M&A and lift-outs. And I think that we're just as excited about doing more adds to the team through disruption as we are doing M&A. So I think all of it's on the table, but I think M&A is off in the near future, I guess, next year sometime, maybe.
Jeff Rulis (Managing Director and Senior Research Analyst)
Okay. Thank you.
Jeffrey J. Deuel (President and CEO)
Thank you.
Operator (participant)
The next question comes from Matthew Clark with Piper Sandler. Please go ahead, Matthew. Your line is open.
Matthew Clark (Managing Director)
Hey, good morning, everyone.
Jeffrey J. Deuel (President and CEO)
Morning, Matt.
Matthew Clark (Managing Director)
Just a follow-up on the borrowings. The ones you use to replace the BTFP with, are those overnight? And then how quickly might that $500 million come down? I know it somewhat depends on securities loss trades and the cash flow that you're generating off the portfolio, but just trying to get a sense for how much the $500 million might come down over the next year.
Donald J. Hinson (EVP and CFO)
Well, I could see it if you're talking about the next four or five quarters. I could definitely see it coming down by about $400 million if things worked as we're trying to work it down over time. Part of that's just going to be coming from normal investment activity as far as the payments on those, but maybe some loss trades could be in there. And then deposit growth that would offset that. So that's kind of what we it would be great to get it down that far. Now, I will tell you the spot we talked about the borrowings, this might help you some, is the cost for it was 5.21% for Q2, but we did that $400 million did go initially overnight. We did spread out some maturities, nothing over a year later in the quarter that brought down a little bit.
The spot rate of overall borrowings right now is 5.32% as of the end of the quarter. So that may help you as you think about that. The impact on, as I mentioned in my comments, the impact on NIM from borrowings was four basis points as far as the increase or the decrease in NIM was four basis points from the borrowing cost. I only expect that to be about one basis point in Q3.
Matthew Clark (Managing Director)
Yep. Got it. Okay. And then broker deposits, those balances, I think they were $115 million last quarter. I didn't see in the release of the deck.
Donald J. Hinson (EVP and CFO)
They were $145 million at the end of the quarter. We added $30 million. The nice thing about broker deposit rates is that we actually see the rates coming down on those. So that's going to help offset some maybe other pressures.
Matthew Clark (Managing Director)
Okay. Got it. And then just on expenses, your outlook for the run rate there here in maybe 3Q, 4Q? And I think we've talked in the past about trying to hold expenses flat next year if possible. Just any updated thoughts there?
Donald J. Hinson (EVP and CFO)
Sure. And thanks for asking. I was a little concerned no one was going to ask about expenses here. So I think that our expenses were much lower in Q2. Now, part of that was due to higher than normal, I would say, open positions than we have. In addition, we did have some FTE cuts. We also had a lot of open positions. We also benefited from kind of a few miscellaneous expense items, savings that we're not expected to repeat. And looking ahead, we're going to plan to add. We've got the builder banking business we're looking to add, and we have some other initiatives which will probably increase expenses some. So I'm still looking forward, guiding in the $40 million-$41 million range, although it would likely be maybe in the low end of that range going forward.
Matthew Clark (Managing Director)
Thoughts about next year?
Donald J. Hinson (EVP and CFO)
Well, next year, I think that if there's an increase, it would be minimal. We're going to try to hold as best we can to those levels, but there's a chance we'll have a minimal increase next year.
Matthew Clark (Managing Director)
Okay. And then just on the builder banking, I mean, historically, you guys have been very conservative or cautious around construction. And I think construction is about 10% of your portfolio today. I guess any thoughts on kind of limitations for that business in terms of contribution to the mix? Bryan, you want to take that?
Bryan McDonald (President and CEO)
Sure. As I said in my comments, our target is to grow it from about $70 million to $170 million, so potentially adding about $100 million. We spent quite a bit of time looking at our concentration levels and what makes up the construction category now and what it might look like with this addition. So I'll pass it to Tony and let him make some comments relative to the concentration levels and capital positions that we might be in.
Donald J. Hinson (EVP and CFO)
Yeah. Thanks, Bryan. And yeah, Matt, we've modeled this out. And the reality is we're starting from a pretty low level in those categories right now. And obviously, going forward, we'd skew the mix more towards construction than lot development, but there'd be a little bit of both in there. But as we model it out, we're feeling pretty comfortable that it's not going to add a lot to our concentration levels going forward, and it'll keep us still well below the regulatory thresholds from a capital standpoint. So depending on sort of what happens in the other construction categories, which we think have slowed a little bit, the larger multifamily industrial, things like that, we'll have plenty of room to accommodate this amount of growth over the next two to three years. So anyway, hopefully, that answers the question.
Matthew Clark (Managing Director)
Yeah. That's helpful. And then last one, just on the buyback, you still have some amount that's authorized. I guess what's your appetite from here given the move in the shares of late?
Donald J. Hinson (EVP and CFO)
Well, it's certainly not as attractive as it was a month ago, but I think we're still going to look to manage our capital levels. And I think we still have a nice path ahead, our stock price has a nice path ahead of it going forward as NIM stabilizes and actually starts growing as we would expect it to do into next year. So I think it's still a good buy. It's just, obviously, we're going to be watching it and making those decisions on a kind of quarterly basis. I would expect us to be somewhat active, modestly active going forward.
Matthew Clark (Managing Director)
Okay. Great. Thank you. Thanks, Matt.
Operator (participant)
The next question comes from Kelly Motta with KBW. Please go ahead, Kelly.
Kelly Motta (Managing Director and Equity Research Analyst)
Hi. Thanks so much for the question. I thought I would start with the loan-to-deposit ratio. You're a lot lower still than peers, but it has been creeping up. It sounds like the loan growth is slowing a bit from what's been a really robust first half of the year, but wondering if there's any guideposts as to how we should be thinking about the funding of growth ahead and the flexibility on the balance sheet for that to potentially creep up a bit more from here?
Jeffrey J. Deuel (President and CEO)
Well, Kelly, I'm sure Don may want to add to this, but I think historically, we've always stated that we wanted to stay in that range, that 85%, maybe a little bit higher than that, but not really loving the idea of getting close to 90%. We're happy to see what we've been able to do so far, but I think we're managing that closely. We're managing our concentration levels as well. So I don't think you're going to see us go crazy there, but I think you'll see us keep working and chipping away at it. Don, anything you want to add?
Donald J. Hinson (EVP and CFO)
No, I think, as you said, Jeff, I think getting up to 85 is the more immediate goal over the next year or so, right? So it's not going to happen overnight, but maybe possibly by the end of 2025 to get up to 85. And that's with having deposit growth, right? So deposit growth is really a focus at this point, but we still want to leverage the balance sheet to be more profitable.
Kelly Motta (Managing Director and Equity Research Analyst)
Got it. Okay. That's helpful. And looking at, I appreciate all the work you guys have been doing on the loss trades. Looking at the average balance sheet, you guys do have some high-cost sub-debt in there. I know it's a relatively small amount. Is that redeemable yet? And if so, any thoughts on potentially, especially with the stock price up, redeeming some of that?
Donald J. Hinson (EVP and CFO)
Yeah. Kelly, the par value on that, we acquired that sub-debt, and the par value is $25 million. So we'd take a really big hit to offset that. And if rates come back down, it'll lower because it's based off of SOFR now. So we have looked at it. It just hasn't made any sense to do it.
Kelly Motta (Managing Director and Equity Research Analyst)
Got it. Okay. That's helpful. Last, just housekeeping question for me. What's a good tax rate from here? It's bounced around a little.
Donald J. Hinson (EVP and CFO)
Yeah. It's been a busy year SOFR on that, but I would say 13% for this year. And then maybe a little high.
Kelly Motta (Managing Director and Equity Research Analyst)
Great. Thank you so much.
Donald J. Hinson (EVP and CFO)
Okay.
Kelly Motta (Managing Director and Equity Research Analyst)
Got it.
Jeffrey J. Deuel (President and CEO)
Thanks, Kelly.
Operator (participant)
At this time, we have no further questions, so I'll hand the call back to the management team for any closing comments.
Jeffrey J. Deuel (President and CEO)
Thanks, Emily. If there are no more questions, we'll wrap up this quarter's call. We thank you all for your time, your support, and your interest in our ongoing performance, and we look forward to seeing some of you next week. Thank you.
Operator (participant)
Thank you, everyone, for joining us today. This concludes our call. If you would like to listen to the replay, please dial +1 929 458 6194 and use the access code 638306. The replay will be available until the end of day, Thursday, August 1st. Thank you all for joining us today. You may now disconnect your lines.