Trustmark - Q2 2023
July 26, 2023
Transcript
Operator (participant)
Good morning, ladies and gentlemen, Welcome to Trustmark Corporation's second quarter earnings conference call. At this time, all participants are in listen-only mode. Following the presentation this morning, there will be a question-and-answer session. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two2. As a reminder, this call is being recorded. It is now my pleasure to introduce Mr. Joey Rein, Director of Corporate Strategy at Trustmark. Go ahead.
Joey Rein (Director of Corporate Strategy)
Good morning! I'd like to remind everyone that a copy of our second quarter earnings release, as well as the slide presentation that will be discussed on our call this morning, is available on the Investor Relations section of our website at trustmark.com. During the course of our call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We would like to caution you that these forward-looking statements may differ materially from actual results due to a number of risks and uncertainties, which are outlined in our earnings release, as well as our filings with the Securities and Exchange Commission. At this time, I'd like to introduce Duane Dewey, President and CEO of Trustmark.
Duane Dewey (President and CEO)
Thank you, Joey. Good morning, everyone. Thank you for joining us. With me this morning are Tom Owens, our Chief Financial Officer, Barry Harvey, our Chief Credit and Operations Officer, and Tom Chambers, our Chief Accounting Officer. Trustmark had a solid second quarter with continued loan and deposit growth, expanding net interest income, and growth in our fee income businesses. We reported net income of $45 million, or $0.74 per diluted share in the second quarter. This level of profitability resulted in a return on average tangible common equity of 15.18% and a return on average assets of 0.96%. Let's look at our financial highlights in a little more detail by turning to slide 3. Loans held for investment increased to $117 million, or 0.9% linked-quarter, to a total of $12.6 billion.
Deposits during the quarter grew $130 million or 0.9% linked-quarter to a level of $14.9 billion. Revenue in the second quarter totaled $193 million, an increase of 2.4% linked-quarter. Net interest income increased 1.6% linked-quarter, while non-interest income grew 4.2% linked-quarter. Non-interest income totaled $53.6 million in the second quarter and represented 27.7% of total revenue. Non-interest expense in the second quarter was $132.2 million, up 3% compared to the prior quarter. Credit quality remained solid, as the allowance for credit losses represented 1.03% of loans held for investment and 301% of non-accrual loans.
Net charge-offs during the quarter totaled $1.2 million and represented 4 basis points of average loans. Non-performing assets represented 0.6% of total loans as of June 30. We continue to maintain strong capital levels with Common Equity Tier 1 of 9.87% and a total risk-based capital ratio of 12.08%. The board declared a quarterly cash dividend of $0.23 per share, payable on September 15, to shareholders of record as of September 1. At this time, I'd like to ask Barry Harvey to provide some color on loan growth and credit quality.
Barry Harvey (Chief Credit and Operations Officer)
I would be glad to, Duane. Thank you. Turning to slide four, loans held for investments totaled $12.6 billion as of June 30th. That's an increase, as Duane mentioned, of $117 million bank quarter. Loan growth during Q2 came from CRE, equipment finance, and our mortgage loan businesses. We continue to be very disciplined, both from a credit and from a pricing standpoint. We do expect continued solid loan growth throughout the remainder of 2023. Our loan portfolio continues to be well diversified, based upon both product type as well as geography. Looking to slide five, Trustmark's CRE portfolio is 93% vertical, with 62% in the existing category and 38% being in the construction land development. Our construction land development portfolio is 82% construction.
Trustmark's office portfolio, as you can see, is very modest, at $280 million outstanding, which represents only 2% of our overall loan book. The portfolio is comprised of credits with high-quality tenants, low lease turnover, strong occupancy levels, and low leverage. The credit metrics on this portfolio remains extremely strong. Turning to slide six, the bank's commercial loan portfolio is well diversified, as you can see, across numerous industry segments, with no single category exceeding 13%. Looking to slide seven, our provision for credit losses for loans held for investment was $8.2 million during the quarter, which was attributable to a weakening macroeconomic forecast, funding or provisioning for our loan growth, and an increase in the average life within our mortgage company's portfolio.
The provision for credit losses for all balance sheet credit exposure was $246,000 for the second quarter. On June 30th, the allowance for loan losses for loans held for investment, the balance was $129.3 million. Looking on to slide eight, we continue to post solid credit quality metrics. The allowance for credit losses represents 1.03% of loans held for investment and 301% of nonaccruals, excluding those loans that are individually analyzed. In the second quarter, net charge-offs totaled $1.2 million, or 0.04% of average loans. Both nonaccruals, nonperforming assets remain near historically low levels. Duane?
Duane Dewey (President and CEO)
Okay, thank you, Barry. Now turning to the liability side of the balance sheet, I'd like to ask Tom Owens to discuss our deposit base and net interest margin.
Tom Owens (CFO)
Thanks, Duane. Good morning, everyone. Looking at deposits on slide nine, let me begin by saying we remain pleased with our ability to manage our deposit costs and maintain the strong liquidity that our core deposit base provides, amid an exceptionally competitive environment for deposits. Deposits totaled $14.9 billion at June 30th. That was a $130 million increase linked-quarter and a $144 million increase year-over-year. The linked-quarter increase was driven primarily by increases in time deposits, with promotional CDs up $197 million and brokered CDs up $448 million. The increase in time deposits was offset somewhat by declines in other segments, most notably a $216 million decline in public fund balances, primarily attributable to normal seasonality.
As of June 30th, our promotional time deposit book totaled $887 million, with a weighted average rate paid of 4.32% and a weighted average remaining term of about eight months. Our brokered deposit book totaled $615 million, with an all-in weighted average rate paid of about five and a quarter, and a weighted average remaining term of about six months as of June 30th. Our cost of interest-bearing deposits increased by 43 basis points from the prior quarter to 1.96%. Turning to slide 10, Trustmark continues to maintain a stable, granular and low exposure deposit base.
During the second quarter, we had an average of about 461,000 personal and non-personal deposit accounts, excluding collateralized public fund accounts, with an average balance per account of about $26,000. Average accounts increased by about 4,000 for the quarter, or at an annualized rate of about 3.2%. As of June 30th, 64% of our deposits were insured and 15% were collateralized, meaning that our mix of deposits that are uninsured and uncollateralized was essentially unchanged linked-quarter at 22%. We maintained substantially secured borrowing capacity, which stood at $5.5 billion at June 30th, representing 172% coverage of uninsured and uncollateralized deposits.
Our second quarter total deposit cost of 1.48% represented a linked-quarter increase of 35 basis points and a cumulative beta cycle to date of 29%. Our forecast for the remainder of the year is for continued increase in deposit costs, reaching a rate of about 2.15% in the fourth quarter, which would represent a cycle-to-date- beta of 39%. The forecast reflects market implied forward interest rates, with the Fed hiking the top of the target range for the Fed funds rate to 5.5% later this morning, and then remaining on hold through the remainder of the year.
Turning our attention to revenue on slide 11, net interest income (FTE) increased $2.2 million linked-quarter, totaling $143.3 million, which resulted in a net interest margin of 3.33%, representing a linked-quarter decrease of 6 basis points. Drivers of the linked-quarter compression and net interest margin included accelerating deposit betas, deposit mix change to interest bearing from non-interest bearing, and excess on-hand liquidity maintained due to the challenging macroeconomic environment that pervaded, particularly in the early part of the second quarter. Turning to slide 12, the balance sheet remains well positioned for higher interest rates, with substantial asset sensitivity, driven by loan portfolio mix with 50% variable rate coupon.
During the second quarter, we maintained the weighted average maturity of the cash flow hedge portfolio by entering into $100 million of forward-starting interest rate swaps, which brought the notional for the portfolio at quarter end to $950 million.. with a weighted average maturity of 3.1 years and a weighted average received fixed rate of 3.12%. Through implementation of the cash flow hedging program, we've substantially reduced our adverse asset sensitivity to a potential downward shock in interest rates, while maintaining upside potential from higher interest rates.
Turning to Slide 13, non-interest income for the second quarter totaled $53.6 million, a $2.2 million linked-quarter increase and a $300,000 increase year-over-year. The linked-quarter increase was driven by increases in bank card and other fees of $1.1 million, insurance commissions of $459,000, and service charges on deposit accounts of $359,000. For the quarter, non-interest income increased to 27.7% of total revenue, continuing to demonstrate our well-diversified revenue stream.
Looking at Slide 14, mortgage banking revenue totaled $6.6 million in the second quarter. That was a $1 million decrease linked-quarter, driven by a $1.6 million increase in the amortization of the mortgage servicing asset, which more than offset a $100,000 increase in gain on sale and a $500,000 reduction in negative net hedge ineffectiveness. Year-over-year, mortgage banking declined by $1.5 million, driven primarily by reduced gain on sale. Mortgage loan production totaled $431 million in the second quarter, an increase of 19.5% linked-quarter, and a decrease of 36.7% year-over-year.
Retail production remained strong in the second quarter, representing 81% of volume or about $349 million, and loans sold in the secondary market represented 77% of production, while loans held on balance sheet represented 23%. Gain on sale margin increased by 4 basis points linked-quarter to 1.24%. Now I'll ask Tom Chambers to cover non-interest expense and capital management.
Tom Chambers (Chief Accounting Officer)
Thank you, Tom. Turning to Slide 15, you'll see a detail of our non-interest expenses broken out between adjusted, other, and total. Adjusted non-interest expense was $131.6 million during the second quarter, a linked-quarter increase of $4.1 million or 3.2%, mainly driven by an increase in salary and employee benefits of $1.9 million as a result of second quarter mortgage commissions and annual merit increases. In addition, services and fees increased $2.8 million due to increased professional and consulting fees during the quarter. As noted on Slide 16, Trustmark remains well positioned from a capital perspective. As Duane previously mentioned, our capital ratios remain solid, with a Common Equity Tier 1 ratio of 9.87% and a total risk-based capital ratio of 12.08%.
Trustmark did not repurchase any of its common shares during the second quarter. Although we have a $50 million authority for the remainder of 2023 under our board authorized stock repurchase program, we are unlikely to engage in stock repurchase in a meaningful way. Our priority for capital deployment continues to be through organic lending. Back to you, Duane.
Duane Dewey (President and CEO)
Okay, thank you, Tom. Turning to Slide 17, let's review our outlook. Let's first look at the balance sheet. We're expecting loans and deposits to grow mid-single digits for the year. Security balances are expected to decline by high single digits as cash flow runoff of the portfolio is not reinvested, which is, of course, subject to the impact of changes in market interest rates. Moving on to the income statement. We're expecting net interest income to grow mid to high single digits in 2023, driven by earning asset growth, and we're reflecting a full year net interest margin in the mid 3.20% based on the current market implied forward interest rates. The total provision for credit losses, including unfunded commitments, is dependent upon future loan growth and the macroeconomic forecast. Net charge-offs requiring additional reserving are expected to be nominal based on the current economic outlook.
From a non-interest income perspective, insurance revenue is expected to increase high single digits full year, with wealth management expected to increase low single digits. We're expecting service charges and bank card fees to increase low single digits, and mortgage banking revenue is expected to stabilize at or above the prior year level. Non-interest expense is expected to increase mid-single digits for the year. This reflects general inflationary pressures, especially on wages, new talent added across the system, and is subject to the impact of commissions in various lines of business. We remain intently focused on our FIT2GROW initiatives, as discussed throughout the 2022 year. Our Atlanta-based equipment finance division has grown its portfolio to $127 million as of June 30.
Implementation of our technology plans continued in the second quarter with the conversion of our credit card platform, as well as the implementation of advancements in our loan underwriting system. During the quarter, we continued to design our sales through service process, which will be fully implemented across the retail branch network... throughout 2023 and into early 2024. We believe these actions will enhance Trustmark's performance and build long-term value for our shareholders. We will continue a disciplined approach to capital deployment with a preference for organic loan growth and potential M&A. We will continue to maintain strong capital base with and implement corporate priorities and initiatives. With that overview of our second quarter financial results and outlook commentary, we'd like to open the floor to questions.
Operator (participant)
We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Catherine Mealor of KBW. Go ahead.
Catherine Mealor (Managing Director)
Thanks. Good morning.
Duane Dewey (President and CEO)
Good morning, Catherine.
Catherine Mealor (Managing Director)
I thought I'd start with the margin. Surprising, I know, but I wanted to maybe talk about your updated thoughts on deposit betas. It looks like you lowered your expected full-cycle beta just a little bit to 39% from 43% last quarter. I think most companies are increasing it versus decreasing it. Just curious what you're seeing in your markets. You know, are you seeing kind of a stabilization in deposit activity through the, for the quarter, or is there anything else to kind of read through, you know, your better guidance? Thanks.
Tom Owens (CFO)
Good morning, Catherine. This is Tom Owens.
Catherine Mealor (Managing Director)
Good morning.
Tom Owens (CFO)
Thanks for the question. You're right. The 39% in the fourth quarter is a lower cumulative beta. Couple thoughts. One, as we've discussed on previous calls, for a full-cycle beta, and now we're looking at, you know, a Fed funds rate of 5.5%, and who knows whether this Fed goes higher than that or not. Our thinking hasn't changed so much in terms of what that full-cycle beta would be, which would maybe be mid-50s for interest-bearing deposit cost and mid-40s for total deposit cost. It's really more about the trajectory of it. You know, our forecast is based on market implied forward interest rates, which, as you know, a quarter ago, the market was pricing that the Fed would be easing in the second half of this year.
Now we're looking at market implied forwards that basically have the Fed hiking today and then remaining on hold through the first quarter next year, and not beginning to ease until the second quarter. That's really moved the goalpost in terms of where the peak in this interest rate cycle is, in terms of the market implied forwards, and it's extended it out. What I would describe it as, Catherine, is a flatter trajectory towards a similar destination.
Catherine Mealor (Managing Director)
That makes sense. Okay, thank you for that. Then maybe just on the deposit composition, you talked a little bit about some of the promotional CDs you're doing. See a little bit of mix shift out of non-interest bearing, but that's not actually been, I think, less than what we've seen at some of your peer banks. Can you just talk about how you're thinking about what that remix looks like as we move to the back half of the year between CDs, non-interest bearing, and the other?
Tom Owens (CFO)
One point to make is that on the non-interest bearing, some of what you've seen is a transition from DDA to interest-bearing accounts on which we're are higher value-added accounts, so we're able to charge fees on those accounts. I'm going to say in round numbers, in the second quarter, for example, we had $150 million or so of that migration. You know, that decline linked-quarter in non-interest bearing was a little bit more in the second quarter than it was in the first. When I think when you adjust for that, we're in the same neighborhood or maybe even a little less. Our thinking there has not really changed. You know, we're at about 23% now.
We're continuing to project that we're gonna bottom out at about 20%.
Catherine Mealor (Managing Director)
Great. Okay. Maybe one last one on the margin, then I'll step out of the questions. Just as we think big picture, you talked a little bit about the swaps that you put on, but in a higher for longer, let's just say we get to Fed 5.50%, we stay there for a while. Just big picture, how do you think about the direction of your margin from here under that scenario? Then separately, in an environment where we start to see the Fed start to cut, also, how you feel about the direction of the margin in that scenario? It feels like, I mean, you're so asset sensitive, it feels like you're taking some of that off the table. Just kind of trying to think how you're thinking about it.
Tom Owens (CFO)
Yeah, there's a lot there, Catherine, but.
Catherine Mealor (Managing Director)
I know.
Tom Owens (CFO)
Keep it as simple as I can. You know, when you get a Fed hike, because half of our loan book is floating rate, you get the lift from that. We get a Fed hike today, that's helpful in the short term, right? What happens, though, is in a higher for longer, as it becomes a race, essentially, if you think about it, between the ongoing repricing of your fixed-rate loan portfolio and then the onward upward grind in deposit cost over time. If you look at our guidance for full year NIM, where the trajectory takes you is into the low 3% as a run rate, but then essentially you do stabilize at that point. The other thing I would say is stabilize somewhat, right?
The other thing I would say is to your question about the Fed potentially beginning to ease at some point. Yes, we are asset sensitive, you know, you probably have some offset there because as everyone on this call knows, deposit betas are not linear, right? Here we are towards the higher end of, in all likelihood, the range of interest rates for this interest rate cycle. Deposit betas have accelerated, and deposit betas seemingly will continue to accelerate with the Fed on hold, say, through the first or second quarter of next year as the market implied forward suggests.
What happens is, to my way of thinking anyway, if you get into the onset of a significant Fed easing cycle, those same deposits that were much higher-beta later in the cycle on our way up, historically, you have the opportunity to reprice those down more quickly as the Fed begins an easing cycle. That tends to be what happens. In the same way, that ongoing grinding up of deposit costs from that high beta compresses your net interest margin in a higher for longer environment, it gives you the opportunity, once the Fed does begin to cut, to reprice those down more rapidly. Although we remain asset sensitive, that out of the gate, you know, in a Fed easing cycle, say, for the first 100 basis points or so, that can actually be helpful.
That can be a tailwind that offsets some of that natural asset sensitivity.
Catherine Mealor (Managing Director)
Great. Okay. That's very helpful, just to put it into context. All right. Thank you so much. I appreciate it.
Tom Owens (CFO)
Thank you, Catherine.
Operator (participant)
Our next question comes from Kevin Fitzsimmons of D.A. Davidson. Go ahead.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Hey, guys. Good morning.
Tom Owens (CFO)
Morning, Kevin.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Maybe, you know, I appreciate all the color and the outlook looking further out. I guess, what I want to drill into a little more is what happened in second quarter. It seems like, Tom, that you know, you guys had got into more margin pressure and then stabilizing the back half of the year. That's it seems like the margin definitely held up better than you and we expected, and I guess it's on the cost of deposit. What, you know, if you can point to what happened, was it a easing of the pricing pressure, the competition, the mix shift over the course of the quarter? What, what kind of came in better than expected, this quarter for the margin? Thanks.
Tom Owens (CFO)
Great question, Kevin. Several thoughts to share with you on that. First of all, the guidance on the full year NIM, to your, to your point about maybe stabilizing the second half, the guidance for the full year NIM does suggest more decline on a linked-quarter basis in the third quarter and the fourth quarter, right? That's where the math takes you in terms of ongoing increase in deposit cost with only one more Fed hike.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Right.
Tom Owens (CFO)
Having said that, in terms of the fundamentals, what happened in a positive way in the second quarter, a couple of things. One is that through the course of the year, to characterize it as you posed it, easing of competitive pressures or something like that, I would say that is not the case at all. Not the case at all. I mean, it continues to be a very competitive environment for deposits. We see it everywhere we turn. I think there's a couple things, though. One is, through this process, we have continued to experiment with combinations of product, price, promotion. We've continued to leverage our continually improving capabilities in digital delivery and digital promotion. We've had some success there in getting more targeted over time.
If you look at our promotional practices today versus where they were coming into the year in January, they are more targeted. That's given us the opportunity to reduce somewhat the repricing of the back book as we go through this. The other is, you know, I'm getting all the questions so far this morning. Barry, you'll get some, I'm sure. On the other side of the balance sheet, as it relates to loans, as we've said on previous calls, we have taken steps to increase the return requirements on the loans that we're making. At the margin, that has reduced loan growth, right? It's not just the deposit side, it's the calibration of the relationship between loan growth and deposit growth.
Because we have dialed that back a bit on the loan growth side, that gives us the opportunity to dial back a little bit less our promotional and competitive profile on the deposit side.
Duane Dewey (President and CEO)
Kevin, this is Duane. I just add, if you recall, coming out of 2022, where we experienced, particularly in the second half, virtually 20% loan growth for 2022. Coming into the first quarter, you know, that moderated slightly, but was still very significant, $290 million in the first quarter. you know, now we're seeing, and as Tom noted, we're backing off, we're tightening a little bit on our ROE hurdles and that sort of thing, but we're seeing it moderate just a little bit across the system. Therefore, as Tom noted, it allows us a little flexibility on the other side of the balance sheet.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Got it. I see the guidance on loan, oh, so I'm seeing that now. You intend for loan growth and deposit growth to really be linked, right? At that mid-single digit pace, right?
Duane Dewey (President and CEO)
That's-
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
I take it.
Duane Dewey (President and CEO)
That's the goal.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Loan probably won't change all that dramatically. You're comfortable with where it is now?
Duane Dewey (President and CEO)
Yes. Yes, we are.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Okay. Let me get Barry involved, since you pointed that out, Tom. How do you feel? You know, I know, you know, you're subject to the CECL model, but looking further out, when you're stressing and when you're sitting down with your customers, what kind of sense are you getting for the potential for problems down the line, meaning commercial real estate, maturities over the next few years, that are gonna see a big increase in rate? I recognize office is not a big part of your portfolio, but just trying to judge, you know, the numbers are what they are today, but, like, what you're concerned about or what you're not concerned about on credit? Thanks.
Barry Harvey (Chief Credit and Operations Officer)
Hey, Kevin, this is Barry. I guess a few things. One, as far as the maturing process, it's, you know, our CRE book, the maturing process, we're about 14% for 2023, 34% for 2024, 32% for 2025, and then it drops off dramatically there. Our CRE book is predominantly gonna be construction and then mini-perm financing. There's a, when we're looking at the various books, we're looking to see, as those loans continue to reprice, then, and bearing in mind that all of those construction mini-perms are variable rate, across the board, so they are absorbing those higher interest rates, you know, and have been all the way along with the rate bumps.
We're continuing to look to see as they have to hurdle from a net service standpoint, how they're gonna perform, given where they were when they were underwritten, and the reserves established, and the valuations versus the environment they'll need to either go to the permanent market in or possibly sell to a third party. We're continuously evaluating those. You know, we're not seeing a lot of cracks at this point in going through these evaluations, and we're feeling very comfortable with our book, primary source of repayment, secondary source of repayment. We're comfortable with that aspect of it. From a provisioning standpoint, you know, this quarter, during the provisioning process, it was, you know, we were driven primarily by three factors. One was loan growth and where the loan growth came from, and the provisioning required there.
We did have the slight weakening in the macroeconomic forecast. That was probably about a third of our provision driver. From there, we did have the lengthening out from a life of loan in our mortgage book. Since our mortgage book is $2.3 billion, when it does lengthen out from this, from 21 quarters to 25 quarters in a given quarter, it does require some meaningful provisioning. Both, we had provisioning both from a quantitative standpoint, and we had some provisioning from a qualitative standpoint as well. Clearly, that was the driver of the $8.2 million provision. You know, how much of that begins to slow from an average life expansion, we'll have to wait and see.
From a forecasting perspective, you know, things have been pretty good from an unemployment standpoint. Remember, southern unemployment is one of the key, a loss driver characteristics, pretty much in every one of our books. If we did see a substantial weakening in the southern unemployment, obviously, that would drive our provisioning going forward. Thus far, we've seen ever so slight changes in the four-quarter forecast. We do have a straight line, four-quarter reversion to the mean, from there, the mean drives the provisioning as it relates to the southern unemployment attribute or national unemployment attribute. I mean, at this point, we feel like we feel comfortable with the guidance we provided on provisioning.
At one point, probably before the year started, we thought it might be a little higher than 2022. I think at this point, we don't believe that to be the case. It may be in line or slightly less, We don't see it being higher than what we had in 2022 based on what we know today.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Okay, thanks, Barry. One last one for me. I saw a fellow, one of your Mississippi bank peers or competitors, announced or executed a bond transaction where they took down their bond portfolio by about a third. Took an upfront loss, but, you know, used it to pay down higher cost borrowings. Is that something I know you're already using cash flows to fund loan growth, but is that something that's even on your radar? Thanks.
Tom Owens (CFO)
Kevin, this is Tom Owens. That is not something that we have actively contemplated. We certainly are aware of those type of transactions, and the one to which you're referring. You know, I think every balance sheet is different. Every set of circumstances is different. I can see the merit from an economic standpoint, potentially, in doing that type of transaction, that is not something that we have actively contemplated at this time, no.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Got it. Understood. Thank you. Thank you, everyone.
Tom Owens (CFO)
Thank you, Kevin.
Operator (participant)
Our next question comes from Joe Yanchunis of Raymond James. Go ahead.
Joe Yanchunis (Senior Equity Research Associate)
Good morning.
Tom Owens (CFO)
Good morning, guy, Joe.
Joe Yanchunis (Senior Equity Research Associate)
I appreciate all the color you gave on the margin, but was hoping to slip in one more. Given your second half outlook, in conjunction with some of that deposit beta commentary you provided, when do you expect the NIM to kind of trough and inflect higher?
Tom Owens (CFO)
Joe, this is Tom Owens. Again, I would not expect the NIM to traject higher in all likelihood, until the pressure comes off on the deposit side, right? As I said in my earlier comments, you know, I think the mirror image of what we're living through now, right? Let's say we get the Fed hike today. Let's say the market implied forwards are correct, and the Fed is on hold for six or nine months. I do think that, you know, it also depends on the nature of a Fed ease, right?
If we get into a situation where the Fed has overdone it, and the economy softens, we wind up in recession, and you get the onset, let's say, mid-next year, of a meaningful Fed easing cycle, a couple 100 basis points, it just becomes apparent to the market that's what's going to happen. Again, I would say that book of higher-beta deposits represents the opportunity to reprice down very quickly. I'll give you the example of, you know, March of 2020, the pandemic, the Fed, you know, 150 basis points of emergency cuts there over the course of a couple weeks.
We had, from memory, you know, $1.5 billion-$1.7 billion at that point, of higher-beta deposits that we were able to reprice down substantially and basically immediately. You know, it just depends on the set of circumstances. It's, it's virtually impossible to answer your question other than to sort of paint examples of where that could occur. To me, that would be the opportunity. The same thing that's squeezing net interest margin here, this intensely competitive environment for deposit costs, the deposits, that basically is the Fed has engineered, right, by creating competition for bank deposits.
The ability for a depositor to, you know, pick up a 5% yield on a Treasury bill ETF, as frictionless as that is in today's world, unless and until that pressure comes off, I think for the industry, we're going to continue to grind here with higher deposit costs and pressure on net interest margin. It'll be the onset of the next easing cycle that reduces that competition for deposits and alleviates some of that pressure and gives us the opportunity to reprice down our deposit book.
Joe Yanchunis (Senior Equity Research Associate)
Understood, I appreciate the thorough answer and thoughts there. Kind of switching over, in the release and in some of your commentary, you laid out your FIT2GROW, including your sales through service process. Can you provide some more detail on that project and maybe unpack some of the potential financial impacts of some of these initiatives that you're implementing?
Duane Dewey (President and CEO)
I'll take a stab at that quickly. I mean, basically, that is a comprehensive bank-wide, particularly in the retail bank organization, customer-focused sales program, that is currently underway and will be implemented over the next several months. It is a sales and service-focused approach. It's using an external source for that training, and we're very excited about it. It's very positive. Through the FIT2GROW process, we've implemented some changes in structure and relationship banker arrangements and things like that out in the retail system, and this is designed to really take advantage of that. I'd stop short of making a real financial uptick on what that might generate.
We think in the long run, you know, we already have an extremely strong customer base. We have a very loyal customer base. We have a very solid core deposit base, et cetera, throughout the system. We believe this will help us, you know, further capitalize on that strength.
Joe Yanchunis (Senior Equity Research Associate)
I appreciate it. If I could, just follow up with one last question here. With capital levels continuing to build and, you know, the buyback in place, what will it take for you to have a stronger appetite for share repurchases?
Duane Dewey (President and CEO)
I'm sorry, I missed part of that question. Could you repeat that?
Joe Yanchunis (Senior Equity Research Associate)
Sorry. With capital levels continuing to build and, you know, you have the buyback in place, what will it take for you to have a stronger appetite for share repurchases?
Tom Owens (CFO)
This is Tom Owens. I would say, you know, as we've said on prior calls, at the moment, our focus with respect to deployment of capital is supporting loan growth. You know, we accreted capital pretty nicely during the quarter. We expect for that to continue to be the case, so we think our capital levels will build. We have not been actively engaged in buyback, as you said. You could absolutely see a scenario, you know, sort of building on the discussion about NIM, right? You know, you can see a scenario where the economy softens, where loan demand declines substantially, where bank stock prices become depressed.
I mean, at the same time, if in the meantime, we have been accreting capital, right, as we've always said, that's our preferred form of deployment is organic lending. As we've demonstrated in the past, when circumstances arise where we don't have the opportunity to deploy the retained earnings that we're accumulating, right, we certainly don't hesitate to deploy via share repurchase. You can envision a scenario. It's hard for me to envision a scenario, frankly, here in the second half of this year, where that would be the case. I think depending on how 2024 plays out, you could certainly imagine a scenario getting into mid to late 2024, where that could become the case.
Joe Yanchunis (Senior Equity Research Associate)
All right. Well, thank you for taking my questions. Appreciate it.
Duane Dewey (President and CEO)
Thank you.
Operator (participant)
The next question comes from Graham Dick of Piper Sandler. Please go ahead.
Graham Dick (VP of Investment Banking)
Hey, good morning, guys.
Duane Dewey (President and CEO)
Hey, good morning, Graham.
Graham Dick (VP of Investment Banking)
Most of my questions have been answered. I just had a couple follow-ups. I guess starting with the loan yield, you mentioned that part of the reason that the growth guide is coming down is because you're asking for a little more on the rate side of things with your borrowers. I guess, obviously, the other part of that is, you know, generally slower economic growth in your alls markets in the country as a whole. I just wanted to get maybe some specifics on, like, what the difference is you're asking for from clients? I mean, is it like a 50 basis points difference versus, you know, the last time you updated this guidance, or is it, you know, something else?
Are you starting to include, you know, deposit relationships into the actual, I guess, underwriting criteria for loans? Any color you can give there would be helpful.
Barry Harvey (Chief Credit and Operations Officer)
Graham, this is Barry, and I'll start. As it relates to the deals flowing in, I think most of our growth, I'll speak just to that. Most of our growth and production opportunity is still coming through the CRE side. We're very actively looking at other opportunities within C&I, public finance, consumer lending. As far as actual strong production of viable deals that can get on the books, we're still seeing most of that production coming from CRE. Within that category, we're very mindful, depending on the type of ask it is, depending on the type of project it is, what the market is willing and able to bear at this point.
From a structure standpoint and from a pricing standpoint, we are able to continue to improve our position. From a pricing standpoint, specifically, whereas we might used to be able to achieve a 50 basis point origination fee on some of our CRE projects, and it is project dependent and category dependent, but we're seeing 35 basis points being available to us routinely. Same is going to be true with a little higher spread on one month SOFR. We're able to see a little better, consistent, higher spread available to us as well. From the standpoint of how we approach the deposit side of the equation, our folks are laser focused on asking for deposits.
They have been continuing to ask for deposits, not just when we have an ask from the customer, but definitely when we have an ask and we're opening up our balance sheet, we are requiring deposits from the customer. As a condition of the loan closing, sometimes it may be, most of the time it's not, but we are getting those deposits. We are following up to make sure we get them, and our borrowers are being very responsive. We may not be the lead bank in every single transaction, but even as the second bank in a two-bank deal, we are able to get deposits from them, and our people are being very successful and very persistent about doing that. So we've been very pleased with the results of what we've seen from that effort.
Duane Dewey (President and CEO)
Yeah, I would add real quick, Graham, on that question. One category Barry did not mention that we're very excited about, very pleased with, is, as you know, in December of 2022, we announced an equipment finance division that's based in Atlanta. We're very excited about that group. We have a very high-quality team there, as noted in the release, we're up to about $127 million outstanding in that group. We're expecting continued growth there, we're doing that in a very measured way that is mid to large-ticket equipment finance business with high-quality borrowers, lessors, that we think we can continue to grow significantly. As you know, that's part of the C&I book and prevents or provides some diversification to the overall portfolio.
That would be an added note, and that'd be one category, maybe, where the ROEs are in the mid-range. They're not the top end, as Barry noted in some of the CRE projects, but again, very high quality, and we're very excited about where that business, we think can head over time.
Graham Dick (VP of Investment Banking)
Okay, that's helpful. I guess just following up on that equipment division: did you guys, when you initially opened that, did you lay out a path to the level or to the proportion of total loans you would like that to get to in time?
Duane Dewey (President and CEO)
Yes, we did. We're nowhere near it. We have a ways to grow. I think in that business, I think probably as an overall portfolio, from an overall portfolio perspective, you would never see us much over the 10% range, probably significantly below that for the future here for the next several years.
Barry Harvey (Chief Credit and Operations Officer)
Do bear in mind, this is typically gonna be five to seven-year paper that is fully amortizing. You know, it will take a while to get to the level that Duane referenced, because there will be amortization that will be they'll need to have to overcome that headwind as well. We've got plenty of runway in front of us to grow at a very nice pace with high-quality credits before we have any concerns about concentrations or things of that nature.
Graham Dick (VP of Investment Banking)
Okay, that's helpful. I guess just I wanted to hit on expenses really quickly. I know you guys have done a lot on this front over the last couple of years in trimming down and as part of the Fit to Grow initiative. I just wanted to get any color from you guys on areas that you're looking at that you think you could improve upon, or make more efficient, and then conversely, other areas where you see opportunities to invest.
Duane Dewey (President and CEO)
As we talk about in the FIT2GROW, you know, we have invested over the last several years, and particularly in 2022, 2023, in technology across the system, both the core loan system and our core, soup-to-nuts loan processing system. We expect significant efficiencies as those things, as the marketplace gets comfortable with those systems and as we reduce any kind of headwind, you know, the implementation of a new system creates, and so we think efficiency can be gained there. We have invested significantly in our digital applications and digital account acquisition and digital products and services across the system. We think that, over time, will also generate some efficiencies. In some of these projects, third-party services are part of the equation.
We expect that to decline over time here, especially into the 2024 time period. Those are some areas I would note in some of the expense guidance, like mentioning equipment finance, loan production personnel throughout our system. We've been taking advantage of every opportunity to add skill sets into our production side of the company. We're very excited about that as we talk about equipment finance, as well as some commercial and corporate CRE areas, et cetera. We think all of those things ultimately contribute to better revenue growth, and we could see into 2024, some maybe lightening of some of those third-party spends, et cetera, across the system.
Graham Dick (VP of Investment Banking)
That's very helpful. Thank you, guys.
Duane Dewey (President and CEO)
Thank you.
Operator (participant)
As a reminder, if you'd like to ask a question, please press star, then one on your touch tone phone. We will pause for a moment to assemble our roster. This concludes our question-and-answer session. I would like to turn the conference back over to Duane Dewey for any closing remarks.
Duane Dewey (President and CEO)
Well, thank you again for joining us today for today's second quarter conference call. We look forward to being back together at the end of the third quarter. Appreciate the questions and look forward to continuing discussions. Thank you. Have a great day.
Operator (participant)
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.