Stellar Bancorp, Inc. (NYSE:STEL) Q2 2023 Earnings Conference Call July 28, 2023 9:00 AM ET
Company Participants
Courtney Theriot – Chief Accounting Officer
Robert Franklin – CEO
Paul Egge – SEVP, CFO
Ramon Vitulli – President
Joe West – SEVP, Chief Credit Officer
Conference Call Participants
David Feaster – Raymond James
Matt Olney – Stephens
William Jones – KBW
Graham Dick – Piper Sandler
John Rodis – Janney
Operator
Good day, and thank you for standing by. Welcome to the Stellar Bancorp Inc. reports Second Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] 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
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 end. Also note that if we give guidance about future results, that guidance is only a reflection of management’s beliefs at the time the statement is made, and such beliefs are subject to change.
We disclaim any obligation to publicly update any forward-looking statements, except as 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.stellrbancorpinc.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.
Robert Franklin
Thank you, Courtney, and good morning. Welcome to the Stellar Bancorp’s Second Quarter Earnings Call. I’ll 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.
Paul Egge
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 $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 increasing — 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 lower merger expense. 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 SCB, 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% to 4.49% in the second quarter and from 4.38% to 3.97% when you exclude purchase accounting accretion. Accordingly, our pretax 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 pretax 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 of 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 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 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, 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 overreliance, 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.
Robert Franklin
Thank you, Paul. And operator, we’re ready for questions.
Question-and-Answer Session
Operator
Than you. [Operator Instructions] Our first question comes from David Feaster with Raymond James. Your line is open.
David Feaster
Hey. Good morning, everybody.
Robert Franklin
Good morning.
David Feaster
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 it 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.
Ramon Vitulli
Hey, David. This is Ray. Yes, so exactly. The second quarter, we saw improvement in pretty much every category of the — 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 and 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.
And if you look year-to-date, both the — what I would call the net new in 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.
David Feaster
Yeah. 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 newer 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?
Ramon Vitulli
Well, the new — 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. So I think there is opportunity there.
And we’ve got — 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, those came in at about 3.45% and pretty stable compared to the first quarter of — not including the MIB. So just the interest-bearing of new deposits that were open in the quarter at 3.45%, and that’s very similar to the first quarter.
David Feaster
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 six months to 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 maybe where a core NIM could shake out once things do start stabilizing.
Ramon Vitulli
Probably I’ll 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 $0.5 billion or so in each category. And that came off — on the renewed, that came on at 806, it came off at 724. So really like that where 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 the — what we’re seeing.
Joe West
Yeah. This is Joe. On the demand side, we’ve taken 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. So on the CRE side, we’ve seen a slowdown because of the — 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’s 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. But for new business on the commercial real estate side is going to be slow.
David Feaster
Okay. That’s helpful. And I guess maybe, Paul, I don’t want to put words in your mouth, but kind of here in 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
Yeah. It’s a fair characterization, but I 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 the 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 eight or so percent 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 assets — of a lot of our asset base and the balance sheet as of October 1.
And when you think about how that is going to be really meaningful, 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 for pricing that’s happening not as fast the 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 well this kind of timing differential really exists in the near term.
Robert Franklin
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. I think for a number of months, you’ve seen it very difficult that the cost of capital today for people to pencil some of these deals to make them work. So 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 still is 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.
David Feaster
Got it. That’s helpful. Thanks everybody.
Robert Franklin
Thank you.
Operator
[Operator Instructions] Our next question comes from Matt Olney with Stephens. Your line is open.
Matt Olney
Hey. Thanks. Good morning, everybody.
Robert Franklin
Hey, Matt.
Matt Olney
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. I 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
Certainly. 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 shoots, 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.
We’re the biggest locally focused bank in one of the best markets in the U.S. And we’ve just rebranded, and the results of the fresh rebranding and output as it relates to new account openings has been strong. So 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. So ultimately, we’re — it will be something that’s hard to predict, but we’re feeling good about where we stand.
Robert Franklin
And Matt, I think we’re also in our season. Typically, both banks have seen deposit growth begin sort of that May, June time frame 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, 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. So our focus and our belief is that we’ll continue to build deposits through the end of the year.
Matt Olney
Okay. Great. Appreciate the comments. And then 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. 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 we should think about kind of the forecast?
Paul Egge
Well, July 1 put us into the interchange discount, I guess, you could say, as the byproduct of us crossing $10 billion. So 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 will be a slower road to offset.
Matt Olney
Okay. And I think that last I heard that interchange estimate the impact was about with a $2.5 million annually that we’ll start to see that in the third quarter. Is that right?
Paul Egge
Yes. It has grown a little bit. And I would handicap — I would take our debit card and ATM card income and put about 40% this — I would handicap that by 40%.
Matt Olney
Okay. Got it. 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 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
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 our — with respect to our guidance. Naturally, with revenue being softer as a byproduct to the current interest rate environment, we’ll turn it 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. 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.
Robert Franklin
Yeah. And I think as you think about this, we brought two banks together to get over the $10 billion mark. And we did a lot of things around people without totally knowing everything about each other. And 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. And so 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.
Matt Olney
Okay. I appreciate the comments. And then I guess, on the M&A front in the industry, have you 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.
Robert Franklin
Well, you’re right. Stellar Banks is encouraged by what may be out there. I think we’ve got a lot of discussions with folks around different opportunities. People are still trying to understand kind of where they are. I think marks — 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. 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 where — if they’re trying 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 those become so much more important as margins start to get squeezed a bit again. So we’re encouraged by the possibilities out there. I wouldn’t say it’s going to 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
Okay, guys. Thanks for taking my questions.
Robert Franklin
Thanks, Matt.
Operator
One moment for our next question. Our next question comes from Will Jones with KBW. Your line is open.
William Jones
Hey. Great. Good morning, guys.
Robert Franklin
Good morning.
William Jones
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 had tended to be a little more conservative on the 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 more of a mid to high-single digit growth rate. Is that 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?
Robert Franklin
I think you’re going to see moderate loan growth. Look, it’s — I think 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, it doesn’t seem like the right mix. I think we want to be adding loan growth at good margins and safe type of loans. So 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.
Ramon Vitulli
Well, 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 ’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 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 carries. So the advance is exceeding the payments. So that’s kind of driving the growth. It’s not so much of the — of that. The 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 drove a lot of the growth in the last two quarters.
William Jones
Got you. 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?
Robert Franklin
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 105%, 110%, 115% loan-to-deposit, but just by doing it through excess or excess funds or wholesale funds is not really our — the way we want to build the bank because, for us, we think the true value in these organizations are to build core funding. And so it’s not a governor, but — and we’ll — 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%.
William Jones
Great. That’s helpful. And lastly for me, Paul, I know accounting can be really hard to predict, almost like it is sticking in the air, but 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 kind of think about full year accretion number?
Paul Egge
So we have appreciated a lot of, what I’ll call, windfall accretion up to this point. So I estimate 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 at our purchase accounting accretion for the year. It 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, 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 it’s, what we’ll call, windfall purchase accounting comes about that we’ll take it. So — but 35% to 40% of what we’ve had year-to-date is higher than our expectations, that’s what I’ll put.
William Jones
Got it. Understood. Thanks, guys.
Operator
One moment for our next question. Our next question comes from Graham Dick with Piper Sandler. Your line is open.
Graham Dick
Hey. Good morning, guys.
Robert Franklin
Good morning.
Graham Dick
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 all 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.
Paul Egge
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 sleeping 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 other 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-interest bearing 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. 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.
Ramon Vitulli
Yeah. Back to the hard to predict, that is 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 our — what our non-interest bearing is today. So that — you 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.
Graham Dick
Great. That’s really helpful. And then I guess I just wanted to circle to capital. I know you said you wanted to continue building it in CET1s. 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 a buyback versus M&A or organic growth? Any way you could frame that up would be helpful. Thanks.
Paul Egge
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 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 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.
Robert Franklin
Yeah. I think as you think about the rest of the year, we’re approaching sort of our optimization of capital. And — 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.
Graham Dick
Okay. I appreciate it. And then on the 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?
Robert Franklin
Well, rather than be too specific about that so the people aren’t just guessing around what we’re doing, what we look for our 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.
Paul Egge
We’d like to get bigger, but the focus is on being better.
Graham Dick
They way to put it. I appreciate guys. Thank you.
Paul Egge
Thanks.
Operator
One moment for our next question. Our next question comes from John Rodis with Janney. Your line is open.
John Rodis
Good morning, guys.
Paul Egge
Good morning, John.
John Rodis
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
I would take the weighted average of our year-to-date is more reflective of where we’re sitting moving forward.
John Rodis
Okay. Sounds good. Thank you, guys.
Paul Egge
Thanks, John. Thank you.
Operator
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.
Robert Franklin
Great. Thank you everybody for their interest today, and that will conclude our call. Thank you.
Operator
Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect, and have a wonderful day.
