Heritage Financial Corp

NASDAQ:HFWA

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Hello, everyone, and welcome to the Heritage Financial 2024 Q2 Earnings Call. My name is Emily, and I'll be moderating your call today. [Operator Instructions] I will now hand the call over to our host, CEO, Jeff Deuel, to begin. Please go ahead, Jeff.

[Jeffrey J. Deuel, executive]

Thank you, Emily. Welcome and good morning to everyone who called in. For 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 premarket, 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 we will -- 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 Hinson, executive]

Thank you, Jeff. I will be reviewing some of the main drivers of our performance for Q2. As I walk through our financial results, unless otherwise noted, all of 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 on 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 nonaccrual loans. Bryan McDonald will have an update on loan production and yields in a few minutes.

Deposit balances are showing some stabilization, although focal day 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. Nonmaturity 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 on the sale of $39 million of securities, all of which occurred in June. These sales were done in order to continue to rightsize our investment portfolio and free up funds for other balance sheet initiatives.

It is estimated that the annualized pretax income improvement from this loss trade will be approximately $1 million resulting in an earn-back period of about 2 years. We will continue to consider additional loss trades in order to defend our margins 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. 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 point increase in our cost of borrowings for 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 repricing of $400 million of BTFP debt that matured in early May. The increase in borrowing costs negatively impacted the margin by 4 basis points in Q2.

The margin was positively impacted by 2 basis points due to the loan interest recoveries previously mentioned. The combined net impact of increased borrowing costs and loan interest recoveries made up 2 of the total 3 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 recognized 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. Noninterest 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, a reduction of 17 FTE.

And 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 rates 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 tangent 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, executive]

Thank you, Don. I'm pleased to report that credit quality at quarter end remained strong and stable. Nonaccrual loans totaled 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 nonaccrual loans would be just under $1 million. Overall, nonaccrual loans declined by $966,000 during the quarter. There was one relationship placed on nonaccrual 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 to secure the loans. Page 18 of the investor presentation reflects the stability in our nonaccrual loans over the past 2-plus years.

Within our nonperforming 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 multifamily construction loan that represented just over $15 million of the total.

This loan has migrated from pass to substandard over the course of the last 6 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 nonowner 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 nonaccrual loans. Through the first 6 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 us 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, executive]

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 5 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 and owner-occupied commercial real estate, nonowner-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 breakeven level this year, which is 1 year earlier than we anticipated. We have nine bankers on our Boise commercial team, which was fully formed and moved into their space last summer. This team is not yet in the flag but is also performing well ahead of our original projection. Combined, the costs associated with these teams accounted for $1.85 million of our noninterest 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, executive]

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 challenges -- 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 25 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 plan 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, '24, and I will remain CEO of Heritage Financial until May 6, 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 will -- I have been asked about the timing of the announcement. First, as I mentioned earlier, we started this process in mid-'22 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 6, 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'm 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]

[Operator Instructions]

Our first question today comes from Eric Spector with Raymond James.

[Eric Spector, analyst]

This is Eric dialing in for David Feaster. Starting off, I was just curious if you could talk about deposit trends, starting with noninterest-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. I'm just curious your sense of expectations for core deposit growth going forward and what initiatives you have in place to track core deposit growth?

[Jeffrey J. Deuel, executive]

That's a lot, Eric. 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, the -- other than those may be 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, executive]

Sure. I would just add, deposits have been a real focus of ours all year. It's part of our strategic and 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 we'll 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 it's -- 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. So I'm really happy with what the team has done to influence the things that we can't control with the customer base. And obviously, we 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, analyst]

That's helpful color. And then just maybe touching on the growth side. You've done a great job accelerating growth. And I appreciate the guidance on the low single digits for the rest of the year. Just given you had diversified production, just curious where you're seeing good opportunities maybe looking out to next year and where you see the most growth? .

[Jeffrey J. Deuel, executive]

Bryan, you want to take that?

[Bryan McDonald, executive]

Yes. Sure. I would just point you to Slide 13 in the investor deck, it gives a real nice breakout of the loan types. And you can see in Q4 of '23, Q1 and then Q2 of '24 are 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, but 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, analyst]

Yes. That's helpful. And then maybe just touching on the hiring side. I 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 where -- what you're seeing on the hiring front, your appetite for hires. Is there 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, executive]

Sure, Jeff, do you want me to take that one?

[Jeffrey J. Deuel, executive]

Sure, Bryan.

[Bryan McDonald, executive]

Yes. The leader that joined us in July was a longtime member of another regional community bank here. He was there for 17 years and know him -- 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 -- in Boise market to add some additional sales -- some members to 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 a good integration in the company from a cultural standpoint and good salespeople.

[Operator]

Our next question comes from Jeff Rulis with D.A. Davidson.

[Jeff Rulis, analyst]

Don, you mentioned talking about the balance sheet repositioning and continue 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 the repositioning, just trying to see if more is planned? And if it is, how much -- why that's a tough question to ask or to answer, I suppose, but just checking back in on the strategy there.

[Donald Hinson, executive]

Yes, 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. Well, obviously, it was a smaller trade in Q2 than it was the previous 2 quarters. And so I'm not sure we'll hit the size of the -- what we did in Q4 and Q1. But at this point, it wouldn't surprise me if we're continuing to do this to, again, rightsize, I would say, our -- certain aspects of our balance sheet because of the investment portfolio and our borrowing levels. And if the earn-backs makes sense, then we will -- it will continue to probably be a plan going forward.

[Jeff Rulis, 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...

[Donald Hinson, executive]

Yes, I can see where it comes from on this. It's -- 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, analyst]

Okay. And did you -- Don, did you have the June NIM average?

[Donald Hinson, executive]

Yes, it's 3.26 versus the quarter of 3.29.

[Jeff Rulis, 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, executive]

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 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 '25. 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 often in the near future, I guess, next year, sometime maybe.

[Operator]

The next question comes from Matthew Clark with Piper Sandler.

[Matthew Clark, analyst]

Just a follow-up on the borrowings, the ones you used 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 Hinson, executive]

Well, I could see it if you're talking about like the next 4 or 5 quarters, I could definitely see it coming down by about $400 million. If things worked as we are trying to work it down over time. Part of that is just going to be coming from investment -- normal investment activity as far as the payments on those, but maybe some loss trades could be in there. So -- and in 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 -- when you talk about the borrowings this might help you, the cost for -- was $521 million for Q2, but we did -- the $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 that the spot rate of overall borrowings right now is $532 million as of the end of the quarter. So that may help you as you think about that. Our -- the impact on -- as I mentioned in my comments, the impact on NIM from borrowings was 4 basis points as far as the increase in -- or the decrease in NIM was 4 basis points from the borrowing cost, I don't expect that to be about 1 basis point in Q3.

[Matthew Clark, analyst]

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 Hinson, executive]

They were $145 million at the end of the quarter. We added $30 million. The one nice thing about brokerage 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, analyst]

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 Hinson, executive]

Sure. And thanks for asking. I was a little concerned no one was going to ask about expenses here. So I think that we -- expenses were much lower in Q2, and part of that was due to higher than normal, I would say, open positions that we have, in addition to the -- 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 were not expected to repeat. And looking ahead, we're going to play add. We've got the builder banking business we're looking to add, and we have some other initiatives which will probably increase expenses. So I'm still looking forward, guiding in the $40 million to $41 million range, although it would likely be maybe in the low end of that range going forward.

[Matthew Clark, analyst]

Any thoughts about next year?

[Donald Hinson, executive]

Well, next year, we would -- think that if there is 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 that we'll have a minimal increase next year.

[Matthew Clark, analyst]

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, just any thoughts on kind of limitations for that business in terms of contribution to the mix.

[Jeffrey J. Deuel, executive]

Bryan, do you want to take that?

[Bryan McDonald, executive]

Sure. As I said in my comments, we were -- 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.

[Tony Chalfant, executive]

Yes. Thanks, Bryan. And Matt, we've modeled this out. And the reality is we're starting from a pretty low level in that -- 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 we -- 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 will 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 like multifamily, industrial, things like that, we'll have plenty of room to accommodate this amount of growth over the next 2 to 3 years. So anyway, hopefully, that answers the question.

[Matthew Clark, analyst]

Yes, 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 I believe.

[Donald Hinson, executive]

Well, it's certainly not as attractive as it was a month ago, but I think we're still going to looking to manage our capital levels. So -- 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 it to be somewhat active, modestly active going forward.

[Operator]

The next question comes from Kelly Motta with KBW.

[Kelly Motta, analyst]

I thought I would start with the loan-to-deposit ratio. You are a lot lower still than peers, but it has been creeping up. Wondering, 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 guidepost 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, executive]

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 the 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 Hinson, executive]

No, I think as you said it, 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 get -- we still want to leverage the balance sheet to be more profitable.

[Kelly Motta, 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 Hinson, executive]

Kelly, the problem is the par value on that. We acquired that sub debt and the par value is $25 million. So we take a really big hit to offset that. And if rates come back down, it will lower because it's based off of SOFR now. So we have looked at it, but just haven't made any sense to do it.

[Kelly Motta, analyst]

Got it. Okay. That's helpful. Last, just a housekeeping question for me. What's a good tax rate from here, it's bounced around a little.

[Donald Hinson, executive]

Yes. It's been a busy year so far on that, but I would say 13% for this year. And then maybe a little for next year.

[Operator]

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, executive]

Thanks, Emily. If there is no more questions, we'll wrap up this quarter's call. We thank you all for your time and your support and your interest in our ongoing performance, and we look forward to seeing some of you next week. Thank you.

[Operator]

Thank you, everyone, for joining us today. This concludes our call. If you would like to listen to the replay, please dial [phone] and use the access code 638 306. The replay will be available until end of day, Thursday, August 1. Thank you all for joining us today. You may now disconnect your lines.