Earnings Call Transcript
TRUSTMARK CORP (TRMK)
Earnings Call Transcript - TRMK Q2 2023
Operator, Operator
Good morning, ladies and gentlemen, and 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. 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 and 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, and 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 $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 noninterest income grew 4.2% linked-quarter. Noninterest income totaled $53.6 million in the second quarter and represented 27.7% of total revenue. Noninterest 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 nonaccrual loans. Net charge-offs during the quarter totaled $1.2 million and represented four basis points of average loans. Nonperforming 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 15th 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'll be glad to. Thank you. Turning to Slide 4, loans held for investments totaled $12.6 billion as of June 30th, marking an increase of $117 million in the same quarter. Loan growth during Q2 was driven by commercial real estate, equipment finance, and our mortgage divisions. We remain very disciplined in terms of credit and processing. We expect strong loan growth to continue throughout the remainder of 2023. Our loan portfolio is well diversified in terms of both product type and geography. Moving to Slide 5, Trustmark's commercial real estate portfolio is 93% vertical, with 62% in existing properties and 38% in construction and land development. Our construction land development portfolio consists of 82% construction. Trustmark's office portfolio is relatively small at $280 million, making up only 2% of our total loan portfolio. This portfolio includes high-quality tenants, low lease turnover, strong occupancy levels, and low leverage, with credit metrics remaining very strong. Turning to Slide 6, the bank's commercial loan portfolio is well diversified across various industries, with no single category exceeding 13%. Looking at Slide 7, our provision for credit losses for loans held for investment was $8.2 million during the quarter, driven by a weakening macroeconomic outlook, supporting our loan growth, and an increase in the average life of our mortgage portfolio. The provision for credit losses for off-balance sheet credit exposure was $246,000 for the second quarter. As of June 30, the allowance for loan losses for loans held for investment stood at $129.3 million. Moving on to Slide 8, we continue to report solid credit quality metrics. The allowance for credit losses accounts for 1.03% of loans held for investment and 301% of non-accruals, excluding loans that are individually analyzed. In the second quarter, net charge-offs totaled $1.2 million, or 0.04% of average loans, with both non-accruals and nonperforming assets remaining at 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, Chief Financial Officer
Thanks, Duane, and good morning, everyone. Looking at deposits on slide 9, let me begin by saying we remain pleased with our ability to manage our deposit costs, maintain the strong liquidity that our core deposit base provides amid an exceptionally competitive environment for deposits. Deposits totaled $14.9 billion at June 30, that was a $130 million increase linked quarter and $144 million increase year-over-year. The linked quarter increase was driven primarily by increases in time deposits with promotional CDs of $197 million and brokered CDs of $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 30, 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 broker deposit book totaled $615 million with an all-in weighted average rate base of about 5.25% and a weighted average remaining term of about six months as of June 30. 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 an annualized rate of about 3.2%. As of June 30, 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 maintain substantially secured borrowing capacity which stood at $5.5 billion at June 30, 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 a 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 Fed hiking 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 in 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 the 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 bankcard 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. Now 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 the 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%. And 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% and 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, the 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 remained solid, with a common equity Tier one 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
Thank you, Tom. Turning to Slide 17, let's review our outlook starting with the balance sheet. We expect loans and deposits to grow in the mid-single digits for the year. Security balances are anticipated to decline in the high single digits, as cash flow from the portfolio is not reinvested, which will be influenced by changes in market interest rates. Moving on to the income statement, we expect net interest income to grow in the mid- to high single digits in 2023, driven by the growth of earning assets and reflecting a full year net interest margin in the mid-3.20's based on current market implied forward interest rates. The total provision for credit losses, including unfunded commitments, will depend on future loan growth and the macroeconomic forecast. Expected net charge-offs requiring additional reserving should be nominal based on the current economic outlook. From a noninterest income standpoint, we anticipate insurance revenue to increase in the high single digits for the full year, while wealth management is expected to see low single-digit growth. We expect service charges and bank card fees to rise in the low single digits, and mortgage banking revenue is expected to stabilize at or above the prior year level. Noninterest expense is projected to grow in the mid-single digits for the year, reflecting general inflationary pressures, particularly on wages and the new talent added across the system, which is also influenced by commissions in various business lines. We remain focused on our FIT2GROW initiatives, as discussed throughout 2022. Our Atlanta-based equipment finance division has expanded its portfolio to $127 million as of June 30. The implementation of our technology plans continued in the second quarter, including the conversion of our credit card platform and advancements in our loan underwriting system. During the quarter, we advanced our sales through service process, which will be fully rolled out across the retail branch network throughout 2023 and into early 2024. We believe these actions will enhance Trustmark's performance and create long-term value for our shareholders. Lastly, we will continue to take a disciplined approach to capital deployment, favoring organic loan growth and potential mergers and acquisitions. We will maintain a strong capital base and implement corporate priorities and initiatives. With that overview of our second quarter financial results and outlook, we would like to open the floor to questions.
Operator, Operator
We will now begin the question-and-answer session. Our first question comes from Catherine Mealor of KBW. Go ahead.
Catherine Mealor, Analyst
Thanks. Good morning.
Duane Dewey, President and CEO
Good morning, Katherine. I'd start with the margin, surprising I know, but I wanted to maybe talk about your updated thoughts on deposit beta. It looks like you lowered your expected full-cycle beta just a little bit 39% from 43% last quarter. I think most companies are increasing it versus decreasing it. So just curious, what you're seeing in your markets? Are you seeing kind of a stabilization in deposit activity for the quarter? Is there anything else to kind of read through your better guidance? Thanks.
Tom Owens, Chief Financial Officer
Good morning, Catherine, this is Tom Owens. Thanks for the question. So, you're right. The 39% in the fourth quarter is a lower cumulative beta. A couple of thoughts. One, as we've discussed on previous calls, for a full-cycle beta. And now we're looking at 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. Our forecast is based on market implied forward interest rates, which as you know, a quarter ago, the market was pricing as I said would be easing in the second half of this year. And 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. And so 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. So what I would describe it as, Catherine, is a flatter trajectory towards a similar destination.
Catherine Mealor, Analyst
That makes sense. Okay. Thank you for that. And then maybe just on the deposit composition. You talked a little bit about some of the promotional CDs you're doing a little bit of a mix shift out of non-interest-bearing that not actually been I think less than what we've seen in 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, Chief Financial Officer
Well, 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 are higher value-added accounts, so we're able to charge fees on those accounts. So I'm going to say, in round numbers in the second quarter, for example, we had $150 million or so of that migration. So that decline linked-quarter in non-interest bearing was a little bit more in the second quarter than it was in the first. But I think when you adjust for that we're in the same neighborhood or maybe even a little less. So our thinking there has not really changed. We're at about 23% now. We're continuing to project that we're going to – it's going to bottom out at about 20%.
Catherine Mealor, Analyst
Great. Okay. And then one last one on the margin and then I'll step out of the questions. Just as I 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 say 550 and we stay there for a while. Just big picture how do you think about the direction of your margin from here under that scenario? And 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, but it feels like you're taking some of that off the table so just kind of trying to think how you're thinking about it?
Tom Owens, Chief Financial Officer
Yes, there's a lot there, Catherine. But as simple as I can, when you get a Fed hike because half of our loan book is floating rate, you get the lift from that. So 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. So if you look at our guidance for full year NIM, where the trajectory takes you into the low 3s as a run rate but then essentially, you do stabilize at that point. So 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 but you probably have some offset there because as everyone on this call knows, deposit betas are not linear, right? And here we are towards the higher end of all likelihood the range of interest rates for this interest rate cycle. So 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. But then 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. And so, in the same way that ongoing winding up of deposit costs from that high beta compresses your net interest margin and in a higher for longer environment it gives you the opportunity, once the Fed does begin to cut, to reprice those down more rapidly. So although we remain asset sensitive, that out of the gate 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, Analyst
Great. Okay. That is very helpful just to put it into context. Okay. Thank you so much. Appreciate it.
Tom Owens, Chief Financial Officer
Thank you, Catherine.
Operator, Operator
Our next question comes from Kevin Fitzsimmons of D.A. Davidson. Go ahead.
Kevin Fitzsimmons, Analyst
Hey guys. Good morning.
Tom Owens, Chief Financial Officer
Good morning, Kevin.
Kevin Fitzsimmons, Analyst
I appreciate the insights and the long-term outlook. I want to focus a bit more on what transpired in the second quarter. Tom, you had indicated there would be increased margin pressure followed by stabilization in the latter half of the year. However, it appears the margin performed better than both you and we had anticipated. I am curious about the cost of deposits. Can you clarify what contributed to this better-than-expected performance in the margin? Was it due to a reduction in pricing pressures, changes in competition, or maybe a shift in the mix during the quarter? Thank you.
Tom Owens, Chief Financial Officer
Great question, Kevin. I have several thoughts to share with you on that. First, the guidance for the full year NIM suggests a potential stabilization in the second half, but it also indicates more decline on a linked-quarter basis in the third and fourth quarters. This is due to the ongoing increase in deposit costs alongside only one more Fed hike. Having said that…
Kevin Fitzsimmons, Analyst
Right.
Tom Owens, Chief Financial Officer
In the second quarter, several positive developments occurred in our fundamentals. Contrary to the idea of easing competitive pressures, the environment remains highly competitive for deposits. We are observing this challenge consistently. However, we've made progress by experimenting with various combinations of products, pricing, and promotions. Our digital delivery and promotion capabilities have improved significantly, leading to more targeted promotional practices compared to January. This improvement has allowed us to reduce the repricing of our existing portfolios somewhat. On the loan side, as we mentioned in previous calls, we have raised the return requirements for new loans at the margin, which consequently has slowed loan growth. This adjustment is not limited to deposits; it reflects the balance between loan growth and deposit growth. By moderating our loan growth, we have the flexibility to slightly reduce our promotional and competitive pressures on the deposit side.
Duane Dewey, President and CEO
So, Kevin, this is Duane. I'd 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 that moderated slightly but was still very significant $290 million in the first quarter. Then 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, Analyst
Got it. I see the guidance on loan growth, and you plan for loan and deposit growth to be linked at a mid-single-digit pace. I understand.
Duane Dewey, President and CEO
That's the goal.
Kevin Fitzsimmons, Analyst
You'll 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, Analyst
Okay. Let me involve Barry since you brought that up, Tom. What are your thoughts? I know you're under the CECL model, but looking ahead, when you stress-test and talk with your customers, what indications are you getting about potential issues in the future, particularly regarding commercial real estate maturities that will face significant rate increases in the coming years? I understand that office space isn't a major part of your portfolio, but I'm trying to gauge the current numbers against your concerns or lack of concerns about credit. Thank you.
Barry Harvey, Chief Credit and Operations Officer
Hey, Kevin, this is Barry. I want to highlight a few key points. In terms of our commercial real estate portfolio, we have about 14% maturing in 2023, 34% in 2024, and 32% in 2025, after which the percentage drops significantly. The portfolio mainly consists of construction loans and mini-perm financing. As we examine these loans, it’s important to consider that they are primarily variable rate, meaning they are currently affected by rising interest rates. We are monitoring how these loans perform relative to their underwriting standards and the established reserves and valuations, especially as they prepare to enter the permanent market or potentially be sold to another party. So far, we haven't observed major issues during our evaluations and feel confident about our repayment sources. Regarding provisioning this quarter, there are three main factors to consider. First, loan growth and its associated provisioning needs. Second, a slight downturn in the macroeconomic forecast contributed roughly one-third to our provisioning. Lastly, there’s been an extension in the life of our mortgage loans; with our mortgage book at $2.3 billion, the lengthening from 21 quarters to 25 quarters has necessitated significant provisioning. We implemented both quantitative and qualitative provisioning, resulting in an $8.2 million total. The extent to which life expansion slows will require further observation. From a forecasting angle, unemployment trends have been promising. Sharp increases in unemployment are a significant factor for loss across our portfolios. If we experience a meaningful rise in unemployment, it would likely affect future provisioning. So far, the changes in the fourth-quarter forecast have been minimal, and we anticipate a straight-line reversion to the mean, which will influence provisioning related to sudden national unemployment attributes. Currently, we are comfortable with our provisioning guidance. Initially, we thought it might exceed 2022 levels, but we now believe it will either align with or be slightly lower than last year’s figures based on our current insights.
Kevin Fitzsimmons, Analyst
Thanks, Barry. I have one final question. I noticed that one of your competitors in Mississippi announced a bond transaction where they reduced their bond portfolio by about one-third, incurring an upfront loss but used it to pay down more expensive borrowings. Is that something you're considering? I know you are already using cash flows to support loan growth, but is this on your radar? Thank you.
Tom Owens, Chief Financial Officer
So Kevin, this is Tom Owens. That is not something that we have actively contemplated. We certainly are aware of those types of transactions and the one to which you're referring. And 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, but that is not something that we have actively contemplated at this time, no.
Kevin Fitzsimmons, Analyst
Got it. Understood. Thank you, everyone.
Joey Rein, Director of Corporate Strategy
Thank you, Kevin.
Operator, Operator
Our next question comes from Joe Yanchunis of Raymond James. Go ahead.
Joe Yanchunis, Analyst
Good morning.
Barry Harvey, Chief Credit and Operations Officer
Good morning, Joe.
Joe Yanchunis, Analyst
I appreciate all the color you gave on the margin, but I 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, Chief Financial Officer
So Joe, this is Tom Owens. I wouldn't expect the net interest margin to increase until the pressure on deposits eases. As I mentioned earlier, what we're experiencing now is likely a mirror image of what might happen in the future. For instance, if the Fed raises rates today and holds them steady for six to nine months, the outcome will depend on how the Fed ultimately decides to ease. If the Fed acts too aggressively and the economy slows down, leading us into a recession, we could see a significant easing cycle emerge by mid-next year. If that happens and the market realizes it, the higher beta deposits could be repriced quickly. For example, during March 2020, at the start of the pandemic, the Fed cut rates by 150 basis points within weeks, and we managed to reprice around $1.5 to $1.7 billion in higher beta deposits almost immediately. Ultimately, the timing is hard to predict without considering various scenarios. To me, that would reflect an opportunity. The same competitive environment that's currently pressuring net interest margins is due to the deposits incentivized by the Fed, allowing depositors to easily attain a 5% yield from treasury bill ETFs. Until those pressures are alleviated, the industry will likely face higher deposit costs, which will continue to impact net interest margins. A shift in the easing cycle could reduce the competition for deposits, alleviating some pressure and allowing us to reprice our deposit book.
Joe Yanchunis, Analyst
I understand. Thank you for the detailed response. I'd like to shift focus. In your release and some of your comments, you outlined your sales through service process. Could you provide more information on that project and discuss the possible financial impacts of the initiatives you are 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 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. But I'd stop short of making a real financial uptick projection on what that might generate. We think in the long run, 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 and we believe this will help us further capitalize on that strength.
Joe Yanchunis, Analyst
Okay. I appreciate it. And then if I could just follow up with one last question here. So with capital levels continuing to build and 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, Analyst
Sorry. So with capital levels continuing to build and you have the buyback in place what will it take for you to have a stronger appetite for share repurchases?
Tom Owens, Chief Financial Officer
So this is Tom Owens. I would say, as we've said on prior calls at the moment our focus with respect to deployment of capital is supporting loan growth. And 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 sort of building on the discussion about NIM right? 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 in the meantime we have been accreting capital right as we've always said that that's our preferred form of deployment is organic lending. But 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, we certainly don't hesitate to deploy via share repurchase. So 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. But 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, Analyst
All right. Well, thank you for taking my questions. Appreciate it.
Duane Dewey, President and CEO
Thank you.
Operator, Operator
The next question comes from Graham Dick of Piper Sandler. Please go ahead.
Graham Dick, Analyst
Hey, good morning, guys.
Duane Dewey, President and CEO
Hey, good morning, Graham.
Graham Dick, Analyst
So, most of my questions have been answered. I just had a couple of 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? And then I guess obviously the other part of that is generally slower economic growth in your markets in the country as a whole. But I just wanted to get maybe some specifics on like, what the differences you're asking for from clients? I mean, is it like a 50 basis point difference versus the last time you updated this guidance, or is it something else? Are you starting to include deposit relationships into the actual I guess underwriting criteria for loans, or any color you can give there would be helpful.
Barry Harvey, Chief Credit and Operations Officer
Hey, Graham, this is Barry and I'll start. Regarding the deals coming in, I believe most of our growth and production opportunities continue to originate from the commercial real estate side. We are actively exploring other areas within commercial and industrial lending, public finance, and consumer lending. However, the significant production of viable deals that we can process is still primarily from commercial real estate. In that category, we remain very attentive to the type of task and project at hand, as well as the current market conditions. From a structure and pricing perspective, we are improving our position; for instance, while we previously aimed for a 50 basis point origination fee on some commercial real estate projects, this varies by project and category, and we are now seeing 75 basis points becoming more common. The same applies to having a slightly higher spread on one-month SOFR, where we are experiencing more consistent and favorable spreads. On the deposit side, our team is focused on securing deposits. They consistently request deposits not only when there is an explicit customer request but also when we're opening up our balance sheet. We do this whether or not it's a requirement for loan closings, and while it might not always be a condition, we are successfully obtaining these deposits. Our borrowers have been responsive, and even when we are not the lead bank in every transaction, we are still able to secure deposits as the second bank in two-bank deals. Our approach has been effective and persistent, and we are pleased with the outcomes of our efforts.
Duane Dewey, President and CEO
I want to quickly add, Graham, that there's one category Barry did not mention that we're very excited about. In December 2022, we announced our equipment finance division based in Atlanta, and we think highly of that team. As stated in our release, we have around $127 million outstanding in that group, and we anticipate continued growth. We're pursuing this growth in a measured manner, focusing on mid- to large-ticket equipment finance with high-quality borrowers and lessors, which we believe offers significant potential for expansion. This falls under our C&I book and adds diversification to our overall portfolio. It's worth noting that the returns on equity in this area might be in the midrange— not at the high end like some of the CRE projects Barry mentioned— but we remain very optimistic about the future of this business.
Graham Dick, Analyst
Okay. That's helpful. Could you provide an update on the equipment division? When you launched that, did you outline a target for the share of total loans you hope it will achieve over time?
Duane Dewey, President and CEO
Yes, we did. We're nowhere near it. We have various avenues for growth in that business. From an overall portfolio perspective, we are unlikely to exceed the 10% range significantly, and we expect to remain well below that for the next several years.
Barry Harvey, Chief Credit and Operations Officer
Do keep in mind that this will typically be a five- to seven-year paper that is fully amortizing, so it will take some time to reach the level that Duane mentioned, as there will be amortization that needs to be addressed as well. We have ample opportunity ahead of us to grow at a strong pace with high-quality credits before we encounter any concerns about concentrations or similar issues.
Graham Dick, Analyst
Okay. That's helpful. And 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, and trimming down and as part of the FIT2GROW initiative. But I just wanted to get any color from you guys on areas that you're looking at that you think you can improve upon or make more efficient? And then conversely other areas, where you see opportunities to invest?
Duane Dewey, President and CEO
We have made substantial investments in technology over the past few years, especially in 2022 and 2023, focusing on our core loan processing system. We anticipate significant efficiencies as the marketplace adapts to these systems and we minimize the challenges that come with implementing new systems. We believe efficiency can be achieved in this area as well. Additionally, we have invested heavily in digital applications, account acquisition, and products and services, which we expect to lead to further efficiencies over time. Some of these projects involve third-party services, but we foresee a reduction in these costs, particularly as we move into 2024. Regarding our expense guidance, we've noted areas such as equipment finance and loan production personnel, where we are leveraging opportunities to enhance our production capabilities. We are enthusiastic about this progress in equipment finance and in some commercial and corporate real estate sectors. All these initiatives are expected to contribute to improved revenue growth, and we anticipate reducing some of those third-party expenditures throughout the system in 2024.
Graham Dick, Analyst
Okay. That’s very helpful. Thank you, guys.
Duane Dewey, President and CEO
Thank you.
Operator, Operator
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 and appreciate the questions and look forward to continuing discussions. Thank you, and have a great day.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.