Stellar Bancorp - Q2 2023

Transcript

Operator (participant)

Good day. Thank you for standing by. Welcome to the Stellar Bancorp, Inc Report, 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 one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Courtney Theriot, Chief Accounting Officer. Please go ahead.

Courtney Theriot (Chief Accounting Officer)

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 Egge. Also in attendance today are Steve Retzloff, 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 forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, as amended. We intend all such statements to be covered by the safe harbor provisions for forward-looking statements contained in the Act.

Note that if we give guidance about future results, that guidance is only a reflection of management's beliefs at the time the statement is made, and such beliefs are subject to change. We disclaim any obligation to publicly update any forward-looking statements, except as 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.stellarbancorp.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.

Bob Franklin (CEO)

Thank you, Courtney, good morning. Welcome to the Stellar Bancorp 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, 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 outmigration 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 nineties 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. 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.

Paul Egge (CFO)

Thanks, Bob. 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 $0.66, 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 $0.70 earned in the first quarter, due mostly to increases in funding costs, more than offsetting increased interest income. 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 SVB, 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 brokered CDs, 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%-4.49% in the second quarter, and from 4.38%-3.97% when you exclude purchase accounting accretion.

Accordingly, our pre-tax, pre-provision earnings power ticks 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, 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 and 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 has gone from 12.39% at year-end 2022 to 13.03% at June 30. 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 intangible asset 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-offs have 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, 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 overreliance, 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, I will now turn the call back over to Bob.

Bob Franklin (CEO)

Thank you, Paul. Operator, we're ready for questions.

Operator (participant)

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, or you wish to remove yourself from the queue, please press star one one again. We'll pause for a moment while we compile our Q&A roster. Our 1st question comes from David Feaster with Raymond James. Your line is open.

David Feaster (Managing Director - Banking)

Hey, good morning, everybody.

Bob Franklin (CEO)

Morning.

Paul Egge (CFO)

Good morning.

David Feaster (Managing Director - Banking)

Maybe let's just start on the deposit front. You know, 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 sound like truly more migration to higher rate accounts. It sounds like 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.

Paul Egge (CFO)

Hey, David, this is Ray. No, exactly. In the second quarter, we saw improvement in pretty much every category of the, what we call the deposit waterfall. Whether that's opened accounts exceeding in terms of percent 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 dollar, 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, we've gotten through the conversion. We have a process now as far as onboarding and kind of the energy around the Stellar brand.

David Feaster (Managing Director - Banking)

I'd like to maybe dig into that a bit. Just 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. 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? I guess, in terms of where are you seeing new add-on rates, for average deposits, deposit costs?

Ray Vitulli (President and CEO of the Bank)

Well, what's coming in new in the quarter is a combination. You know, 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 NIB. If you look at the number of accounts, it's really nice, the number of NIB accounts that are coming in as a percent of the total. I think there's opportunity there, and our bankers are out with a little bit of pause on the loan side. We're out, you know, trying to win customers on the deposit side.

On the interest-bearing that came in, cost of those deposits, David, those came in at about 3.45%, pretty stable compared to the first quarter of the. Not including the NIB, just the interest-bearing of new deposits that were opened in the quarter at 3.45%, that's very similar to the first quarter.

David Feaster (Managing Director - Banking)

All right, encouraging. 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? Then just talking about the repricing dynamic, in the next maybe, you know, 6-12 months, where add-on rates are coming, where roll-off rates are, and then just trying to think about kind of how this all plays into the NIM and, and maybe where a core NIM could shake out, you know, once things do start stabilizing.

Ray Vitulli (President and CEO of the Bank)

We'll probably all touch on that. Let me give you a little bit on the color on the new quarter. Our new loans came on at 7.62% for the quarter. Our renewed loans came on at 8.06%, and those amounts were around the same, about $500 million or so each in the each category. That came off at seven. On the renewed, that came on at 8.06%, it came off at 7.24%. Really like that where we put on those renewed loans. 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 the what we're seeing.

Bob Franklin (CEO)

This is Joe. Well, the demand side, we've taken a something of a pause on commercial real estate. We've raised the bar on our underwriting and looking for more equity, shorter amortizations, better compensating balances from borrowers. On the CRE side, we've seen a slowdown because of our increased underwriting requirements. We're seeing some activity on the C&I side, in visiting with, with our customers. We're talking to some people that have been with some other banks and want to talk to us. 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.

David Feaster (Managing Director - Banking)

Okay, that's helpful. 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?

Paul Egge (CFO)

It's fair characterization, but I'd lean towards the pace of contraction, 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 of our balance sheet funded by 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 asset, of a lot of our asset base in the balance sheet as of October one. And when you think about how that is going to be really meaning 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.

Bob Franklin (CEO)

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's starting 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. That really bodes well for our organization and us. The math is still the math, and so people are getting used to higher interest rates. In the interim, I think we see a little bit slower loan growth.

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.

David Feaster (Managing Director - Banking)

Okay, that's helpful. Thanks, everybody.

Bob Franklin (CEO)

Thank you.

Operator (participant)

Again, 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, or you wish to move yourself from the queue, please press star one one again. One moment for our next question. Our next question comes from Matt Olney with Stephens. Your line is open.

Matt Olney (Managing Director - Regional Banks)

Hey, thanks. Good morning, everybody.

Bob Franklin (CEO)

Hey, Matt.

Matt Olney (Managing Director - Regional Banks)

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. Would 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 of the year?

Paul Egge (CFO)

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. 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. There's a lot of factors that will ultimately drive this wholesale funding piece, which amounts to a plug. 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.

We're the biggest locally focused bank in one of the best markets in the U.S., we've just rebranded, and the results of the fresh rebranding and output as it relates to new account openings has been strong. We're optimistic, but we're realistic at the same time that there's a lot of meaningful forces, market forces having their way on the deposit market. Ultimately, we're, it'll be something that's hard to predict, but we're feeling good about where we stand.

Bob Franklin (CEO)

Matt, I think, we're also in our season. Typically, both banks have seen deposit growth begin in 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. It looks like we're starting to have that deposit build, or at least the front end of that is starting to happen, which we feel encouraged by. We think we've got deposit pricing right now. And I think we're, it appears that we're able to attract new deposits into that. With our focus and our belief is that we'll continue to build deposits through the end of the year.

Matt Olney (Managing Director - Regional Banks)

Okay. Great, appreciate the comments. Switching over to the fees, I think Paul made a comment in the prepared remarks, talking about kind of a normalization of the fee run rate. 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 for us to think about kind of the forecast?

Paul Egge (CFO)

Well, July 1 put us into the interchange discount, I guess you could say, as a by-product 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. 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.

Matt Olney (Managing Director - Regional Banks)

Okay. I think that, last I heard, the interchange estimate, the impact was about, was it $2 million to $2.5 million annually, that we'll start to see that in the third quarter? Is that right?

Paul Egge (CFO)

Yes, since we've grown a little bit and I would handicap I would take our debit card and ATM card income and put about a 40% I would handicap that by 40%.

Matt Olney (Managing Director - Regional Banks)

Okay, got it. Okay, thanks for that. 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 in prepared remarks of bringing the brands together, bringing the teams together, integration. Would love to appreciate kind of where you expect to be in the near term.

Paul Egge (CFO)

We're always analyzing the expense dynamics. 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 by-product of the current interest rate environment, we're turning over more rocks, and 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. We're trying to be very practical as it relates to that dynamic. We are on pace on a core expense run rate. We're feeling good about where that sits for the year consistently guidance.

Bob Franklin (CEO)

As you think about this we brought two banks together that, 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. That's not just with people, but with processes and technology, to lower those costs.

Matt Olney (Managing Director - Regional Banks)

Okay. Appreciate the comments. Then, 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.

Bob Franklin (CEO)

Well, you're right. Stellar Bank 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. The marks on portfolios are becoming a big thing in trying to understand what that looks like, what the capital destruction looks like, and the ability to get a deal done. 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. I think as we move through this a bit, I think people will get a better understanding.

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 of scale, that's 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 gonna happen in the next quarter or so, but 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.

Matt Olney (Managing Director - Regional Banks)

Okay, guys. Thanks for taking my questions.

Bob Franklin (CEO)

Thanks, Matt.

Operator (participant)

One moment for our next question. Our next question comes from Will Jones with KBW. Your line is open.

Will Jones (Associate VP, Equity Research - Banking)

Hey, great. Good morning, guys.

Bob Franklin (CEO)

Morning, Will.

Will Jones (Associate VP, Equity Research - Banking)

We've talked a lot about funding, thus far already, but we really haven't hit on the fact that you guys are still seeing really solid loan growth. I know you guys had 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, 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?

Bob Franklin (CEO)

I think you're gonna see moderate loan growth. I think where we are in this cycle, whether we're thinking about what credit issues might, might come in the future, where interest rates are going, and the ability to add loan growth at a decent spread. That's 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, 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 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.

Ray Vitulli (President and CEO of the Bank)

Will, when you the originations that we've had over the past two quarters have been really half, around half of what they were, kind of our peak, which was the third quarter of 2022. You know, it all kind of starts with what we originate, and that's in that $500 million+ range. And then when you look at what happens after that, a couple of 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. You know, that's kind of driving the growth. It's not so much of that loan origination, you know.

On that, 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 is you know, drove a lot of the growth in the last two quarters.

Will Jones (Associate VP, Equity Research - Banking)

Gotcha. That's helpful, Ray. Is the loan-to-deposit ratio, is that really your governor on loan growth? Where you could 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?

Bob Franklin (CEO)

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. For us to go in and, and try to get to 105%, 110%, 115% loan deposit, but just by doing with through excess or 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, but, and we'll dance late around it, but it's kind of where we like to sit when we move ourselves back to optimization, is about 90%, so.

Will Jones (Associate VP, Equity Research - Banking)

Great. That's, that's helpful. Lastly for me, Paul, I know accounting can be really hard to predict, almost like just finger in the air. We saw a little bit higher level of accretion this quarter. Could you just remind us where scheduled accretion is for the remainder of the year, and then how you think about full year accretion number?

Paul Egge (CFO)

We have appreciated a lot of what I'll call windfall accretion up to this point. I'd, I'd estimate that about 35%-40% of the purchase accounting accretion that we've experienced year to date has been ahead of schedule. We put out guidance that our purchase accounting accretion for the year will be somewhere like $26 million 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. 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 we'll take it. 35%-40%, what we've had year to date is higher than our expectations, is what I'll put.

Will Jones (Associate VP, Equity Research - Banking)

Got it. Understood. Thanks, guys.

Operator (participant)

One moment before our next question. Our next question comes from Graham Dick with Piper Sandler. Your line is open.

Graham Dick (VP - Investment Banking)

Hey, good morning, guys.

So I heard some of the conversations around new deposit openings and how you're starting to see a, 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 own 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, 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.

Paul Egge (CFO)

You're right. It's really hard to handicap, but we're buoyed 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 we've always known that sweeping has been a reality for our clients and maybe that optimization increased year to date. At the same time, these are operating accounts. People need these balances to manage other payables, including payroll, things along those lines. 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.

There's a lot of macro things that are shrinking that allocation to non-interest-bearing deposits, and that's kind of hard to see where the bottom of that remix is gonna 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. 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.

Bob Franklin (CEO)

It back to the hard to predict, that is difficult. 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. You got to see what happens after those accounts get opened. At least on the front end, we're opening a healthy amount of non-interest-bearing accounts as a percentage of the total.

Graham Dick (VP - Investment Banking)

Great, that's really helpful. I guess I just wanted to circle up to capital. I know you said you, you wanted to continue building it in CET1s. You're well over 11% now. Any near-term capital targets you guys would point to? 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, would be helpful. Thanks.

Paul Egge (CFO)

Sure. I'd say, our principal capital priority is more. With respect to the merger that 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. Focusing on total capital ratio, as we did in our remarks, we're really pleased with the growth. 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. We're focused on growing that. As we think about the priorities, the other priorities are, giving, dividends and share repurchases. 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.

Bob Franklin (CEO)

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. That today, given where things are, takes some capital to do it. That's why we may be sort of accumulating a little more than we may have otherwise.

Graham Dick (VP - Investment Banking)

Okay, I appreciate it. 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 deposit mix, et cetera?

Bob Franklin (CEO)

Well, I 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-based, marketplace, don't do any damage. 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. There's plenty of opportunities there for us to do that. That would be sort of what I think we'd be looking for.

Paul Egge (CFO)

Yeah. We'd like to get bigger, but the focus is on being better.

Graham Dick (VP - Investment Banking)

Good way to put it. I appreciate it, guys. Thank you.

Paul Egge (CFO)

Thanks.

Operator (participant)

One moment for our next question. Our next question comes from John Rodis with Janney. Your line is open.

John Rodis (Director and Equity Research Analyst)

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?

Paul Egge (CFO)

The, I would take the weighted average of, our year to date is more reflective of where we're sitting, going back forward.

John Rodis (Director and Equity Research Analyst)

Okay. Sounds good. Thank you, guys.

Bob Franklin (CEO)

Thanks, John. Thank you.

Operator (participant)

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.

Bob Franklin (CEO)

Great. Thank you, everybody, for their interest today, and that will conclude our call. Thank you.

Operator (participant)

Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.