Q2 2023 Trustmark Corporation Earnings Call
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 to ask a question you May Press Star then one on a touchtone phone to withdraw your question.
<unk>. Please press Star then two as a reminder, this call is being recorded its now my pleasure to introduce Mr. Joey rein.
Erector of corporate strategy at Trustmark go ahead.
Good morning.
To remind everyone that a copy of our second quarter earnings release as well as a slide presentation that will be discussed on our call. This morning is available on the Investor Relations section of our website at Trustmark Dot com.
During the course of our call management May make forward looking statements within the meaning of the private Securities Litigation Reform Act by 295.
We'd 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 Securities and Exchange Commission at this time I'd like to introduce Duane Dewey President and CEO of Trustmark.
Thank you Joey and good morning, everyone and thank you for joining US with me. This morning are Tom I wouldn't 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 about 45 million or 74 cents 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 a 0.96%.
Let's look at our financial highlights in a little more detail by turning to slide three.
Loans held for investment increased to 117 million or 9% linked quarter to a total of $12 6 billion.
Deposits during the quarter grew 130 million or 9% linked quarter to a level of $14 9 billion.
Revenue in the second quarter.
Third 93 million, an increase of two 4% linked quarter.
Net interest income increased one 6% linked quarter non interest 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%.
Paired to the prior quarter.
Credit quality remains solid and the allowance for credit losses represented 1.0% to 3% of loans held for investment and 301% of non accrual loans.
Net charge offs during the quarter totaled $1 2 million and represented four basis points of average loans nonperforming assets represented <unk>, 6% of total launch as of June 30.
We continue to maintain strong capital levels with cost.
Equity tier one of 987% and a total risk based capital ratio of 12.08%.
Board declared a quarterly cash dividend of 23 cents per share payable.
On September 15 to shareholders of record as of September one.
At this time I'd like to ask Barry Harvey to provide some color on loan growth and credit quality.
I would like to thank you.
Turning to slide four loans held for investments totaled $12 6 billion as of June 30th that's an increases do I mentioned of 117 million by quarter.
Loan growth during Q2 came from CRE and equipment finance and our mortgage businesses.
We continue to be very disciplined both on the from a credit and from a pricing standpoint, we.
We do expect continued solid loan growth throughout the remainder of 2023.
Our loan portfolio continues to be well diversified baseball both product types as well as geography.
Looking to slide.
Trustmark CRE portfolio is 93% vertical.
With 62% in the existing categories and 38% being in the construction land development.
Our construction land development portfolio is 82% construction.
Trustmark office portfolio as you can see is it 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 exceeded 13%.
Looking to slide seven.
Our provision for credit losses for loans held for investment.
Well, the $8 2 million during the quarter.
Which was attributable to a weakening macroeconomic forecast.
Funding, our provisioning for loan growth.
And an increase in the average life within our mortgage Companys portfolio.
The provision for credit losses for off balance sheet.
Credit exposure was.
246000.
For the second quarter.
On June 30, the allowance for loan losses.
For loans held for investment was.
The balance was $129 $3 million.
Looking on slide eight.
We continue to post solid credit quality metrics.
The allowance for credit losses represents.
The allowance for credit losses represents one 3% of loans held for investment.
And 301% of non accruals, excluding those loans that are individually and lost.
And the second quarter net charge offs totaled $1 2 million.
Or point out 4% of average loans.
Both non accruals non performing assets remained near historically low levels the way.
Okay. Thank you Barry now turning to the liability side of the balance sheet I'd like to ask <unk> to discuss our deposit base and net interest margin.
Thanks, Dwayne and 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 maintain strong liquidity and our core deposit base per box.
Again, an exceptionally competitive.
Awesome.
Deposits totaled $14 9 billion at June 30, yes that was the $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.
In brokerage 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.
Yeah.
As of June 30, that's a promotional time deposit book totaled 887 $887 million with a weighted average rate paid of 432% and a weighted average remaining term of about eight months.
Our broker deposit book totaled $615 million with an all in weighted average rate paid is about five and a quarter and a weighted average remaining term of about six months as of June .
Our cost of interest bearing deposits increased by 43 basis points from the prior quarter to 196%.
Turning to slide 10, Trustmark continues to maintain a stable granular and O exposure deposit base.
Second quarter, we had an average of about 461000.
Arsenal of non personal deposit accounts, excluding collateralize public fund accounts.
The average balance per account of about $26000.
Average counts increased by about 4000 for the quarter.
Annualized rate of about three 2%.
As of June 30 up 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 a 172% coverage of uninsured.
Collateralized deposits.
Our second quarter total deposit cost of 148% represented the linked quarter increase of 35 basis points and accumulative beta cycle to date of 29%.
Our forecast for the remainder of the year is for continued increase in deposit costs, reaching a range of about 2.15% in the fourth quarter, which would represent our cycle to date beta of 30.
39%.
Our forecast reflects market implied forward interest rates with the fed hiking the top of the target range for the fed funds rate to five 5% later this morning.
And then remaining on hold through the remainder of the year.
Yeah.
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 333% representing a linked quarter decrease of six basis points.
Drivers of the linked quarter compression in net interest margin included.
Celebrating deposit betas.
Deposit mix change to interest bearing from noninterest bearing.
In excess on hand liquidity maintained due to the challenging macroeconomic environment pervaded, particularly in the early part of the second quarter.
Yes.
Turning to slide 12, the balance sheet remains well positioned for higher interest rates with substantial asset sensitivity driven by loan portfolio mix was 50% variable rate coupons.
During the second quarter, we maintained the weighted average maturity of the cash flow hedge portfolio by entering into $100 million of forward forward, starting interest rate swaps, which brought the notional for the portfolio at quarter end $950 million with the weighted average maturity of three one years and a weighted.
Average received fixed rate of 312%.
Through implementation of the cash flow hedging program, we have 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, noninterest income for the second quarter totaled $53 $6 million or $2 $2 million linked quarter increase and a $300000 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 459000 in service charges on deposit accounts of 359000.
For the quarter noninterest income increased to 27, 7% of total revenue.
Continuing to demonstrate our well diversified revenue stream.
I'm looking at slide 14 mortgage banking revenue totaled $6 $6 million in the second quarter.
That was a $1 million decreased linked quarter, driven by a $1 $6 million increase in the amortization of the mortgage servicing asset, which more than offset a $100000 increase in gain on sale and a $500000 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 billion in the second quarter, an increase of 19, 5% linked quarter and a decrease of 36, 7% year over year.
Retail product production remained strong in the second quarter, representing 81% of volume or about $349 million.
Loans sold in the secondary market represented 77% of production.
Loans held on balance sheet represented 23%.
Gain on sale margin increased by four basis points linked quarter to 1.24%.
And now I'll ask Tom Chambers to cover noninterest expense and capital management.
Thank you Tom turning to slide 15, you'll see a detail of our noninterest expenses broken out between adjusted other and told them.
Adjusted non interest expense was 131 $6 million during the second quarter, a linked quarter increase of $4 1 million.
Or three 2%, mainly driven by an increase in salary and employee benefits of $1 $9 million as a result of the second quarter mortgage commissions and annual merit increases and additional services fees increased $2 $8 million due to increased professional and consulting fees during the.
Quarter.
As noted on the slide 16, Trustmark remains well positioned from a capital perspective.
Dwayne previously mentioned our capital ratios remained solid with common equity tier one ratio of 987% and a total risk based capital ratio of 12.08%.
Trustmark did not repurchase any of its common shares in the second quarter, Although we have a $50 million of 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 Olympic.
Back to you.
Thank you John Slide 17, let's review our outlook, let's first look at the balance sheet, we're expecting bonds and deposits to grow at mid single digits for the year.
Security balances are expected to decline by high single digits as cash flow Ralph.
All of us 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 reflecting a full year net interest margin in the mid three 'twenty based on the current market implied foreign 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 are expected to increase low single digits.
<unk> as 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.
Noninterest expense is expected to increase mid single digits for the year desperate blacks general inflationary pressures, especially on wages new talent across.
Added across the system and is subject to the impact of commissions in various lines of business.
We remain intently focused on our efforts to grow initiatives as discussed throughout the 2022 gear.
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 continue to design our sales through service process, which will be fully implemented across the retail branch network throughout 2023 and into early 'twenty four.
We believe these actions will enhance trustmark performance and build long term value for our shareholders.
Finally, 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.
That overview of our second quarter financial results and outlook commentary, we'd like to open the floor to <unk>.
<unk>.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre 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 K B W. Go ahead.
Thanks, Good morning.
Catherine.
I thought I'd start with the margin that's 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. So just curious what.
Are you seeing in your markets.
Are you seeing kind of a stabilization in.
And deposit activity through the for the quarter was there anything else to kind of read through them you better got it. Thanks.
Good morning, Catherine This is Tom good morning, Thanks for the question.
So you're right.
The 39% in the fourth quarter is a lower cumulative paid a couple of thoughts.
As we've discussed on previous calls for.
Full cycle paid out and that we're looking at.
Fed funds rate, a five and a half and who knows whether it's bad.
Higher than that or not.
Our thinking hasn't changed so much in terms of what that full cycle with beta would be which would maybe be mid fifties.
For interest bearing deposit cost and mid Forty's for total deposit cost its really about 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 that would be easing in.
In the second half of this year.
And now we're looking at market implied forwards basically.
The fed hiking today, and then remains on hold.
Through the first quarter next year and not beginning to ease until the second quarter and so that's really moved the goalposts in terms of where the peak yet in this interest rate cycle is in terms of the market implied forwards.
And its extended it out so what I would describe it as Catherine has a flatter trajectory towards a similar.
Festination.
That makes sense, okay. Thank you for that.
On the deposit composition, you talked a little bit about some of the promotional Cds, you're doing you know a little bit of mix shift.
Non interest bearing but that's not.
Actually I think less and less.
You see that 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 noninterest bearing to the other.
Well one point to make is that on the noninterest bearing.
So what you've seen is a transition from DDA.
To.
Interest bearing accounts on which were.
Our 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 are you know that that decline linked quarter in noninterest bearing with 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.
There has not really changed you know we're at about 23% now we're continuing to project that were gone up kind of bottom out at about 20%.
Great.
Maybe one last one on the margins and off the balance of the question.
If you think big picture, you talked a little bit about the swap that you put on but.
In a higher for longer and let's just say we get to that.
15, we'd 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.
In an environment, where we start to see the fed start to cut all state how you feel about the direction of the margin in that scenario.
It feels like given your sort of 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 yeah, theres a lot there Kathryn but.
And it's as simple as I can.
Yeah.
Yeah.
You know 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.
Yeah.
Yeah.
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 all year now where the trajectory takes us into the low threes as a run rate, but then essentially you do stabilize at that point so.
The other thing I would say it stabilized somewhat right. The other thing I would say, yes to your question about the fed potentially getting to ages 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 in all likelihood a range of interest rates for this this interest rate cycle, so deposit betas have.
Got it.
And deposit betas seemingly will continue to accelerate with the fed on hold.
Through the first or second quarter of next year.
Market implied forward suggest.
But then what happens is.
My way of thinking any way 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.
It begins an easing cycle that tends to be what happens and so in the same way that ongoing grinding up of deposit costs from that high paid out.
Compresses your net interest margin down are higher for longer environment gives you the opportunity once the fed does begin to cut.
To reprice those down more rapidly.
So, although we remain asset sensitive.
<unk>.
Out of the gate.
And a fed easing cycle say for the first 100 basis points or so that can actually be helpful that can be a tailwind that offset some of that natural asset sensitivity.
Great. Okay. That's that's very helpful. Just to put it into context, great. Thank you so much I appreciate it thank.
Thank you Catherine.
Yeah.
Our next question comes from Kevin Fitzsimmons of D. A Davidson go ahead.
Hey, guys good morning.
Good morning, Kevin.
Maybe you know.
Appreciate all the color and the outlook looking further out I guess, what I wanted to drill into a little more is what happened in second quarter. It seems like that.
B.
You guys had guided to more margin pressure and then stabilizing in the back after the year. So that's.
It seems like the margin definitely held up better than than you are and we.
As expected and I guess, that's kind of the cost of deposits so what what what.
What you know, but if you can point to what happened was it the easing of the pricing pressure of the competition, but the mix shift over the course of the quarter, what what kind of <unk>.
Came in better than expected.
This quarter for the margin.
So great question Kevin.
Her thoughts to share with you on that first of all so the guidance on the full year NIM to your point about maybe stabilizing in 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 an ongoing increase in deposit cost we thought with me one more fed hike.
Right.
In terms of the fundamentals what what happened in a positive way in the second quarter a couple of things.
One is.
That.
Through the course of the year, so to characterize it as you've 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.
See it everywhere, we turn I think Theres a couple of things 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 and then the other is you know.
I'm getting all the questions. So far this morning, I'm very you'll get some I'm sure, but on the other side of the balance sheet as it relates to what 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. So it's not just the deposit side. It's it's the calibration of the relationship between loan growth and deposit growth and 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 or our promotional uncompetitive profile on the deposit side.
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 2020 to come and ended the first quarter that moderated slightly but was still very significant 290 million.
In the first quarter, then you know now we're seeing and as Tom noted, where we're backing off where we're tightening a little bit on our ROE hurdles in 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.
Yeah.
Got it.
I see the guidance on loans.
I'm seeing that now so you you intend for loan growth and deposit.
Growth to really be linked right at that mid single digit pace right. So that's how I take out the Gulf alone.
You'll probably won't change all that dramatically you're comfortable with where it is now.
Yes, yes, we are.
Okay.
Let me, let me get very involved since you pointed that out to them. So how how do you feel.
You know I know.
You're subject to the seats or model.
But looking further out how.
When you are stressing and when you're sitting down with your customers what kind of sense are you getting.
The potential for problems down the Y meeting commercial real estate.
Maturities over the next few years are.
That are going to see a big increase in rate I recognize office, there's not a big part of your portfolio, but just trying to judge.
You know the numbers are what they are today.
What you're concerned about or what youre not concerned on credit.
Yes.
Hey, Kevin This is Barry.
I guess, a few things one as far as the the maturing process.
Our our CRE book the material process were about 14% for 23, 34% for 24, 32% 425.
And then it drops off dramatically there so our see our CRE book is predominantly going to be construction, and then mini perm financing and so there's a when we're.
Looking at the various books.
Looking to say and it's those loans continue to reprice been bearing in mind that all of those construction many firms 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 Red bumps were continuing to look to see and stay paprika hurdle from a debt service standpoint, how theyre going to 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 sale to a third party. So we're continuously evaluating those.
We're not seeing a lot of cracks at this point and going through these evaluations and we're feeling very comfortable with the with our book primary source of repayment secondary source of repayment.
So we're comfortable with that aspect of it from a provisioning standpoint.
This quarter, we're doing.
The provisioning process. It was we were driven primarily by three factors one was loan growth and where the loan growth came from and the provisioning required there and then we did have a slight weakening in the macroeconomic forecast that was probably about a third of our provision driver.
And then from there we did have the lengthening it out from a life alone in our mortgage book and since our mortgage book is $2 $3 billion. When it does like that out from Bush's from 'twenty, one quarters to 25 quarters in a given quarter. It does require some meaningful provision.
Both we had provisioning both from a quantitative standpoint, and we had some provisioning from a qualitative standpoint as well so.
That was the driver of the $8 $2 million provision and you.
You know how much of that against the slow from an average life expansion, we'll have to wait and see and then but my for my forecasting perspective, you know things have been pretty good from an unemployment standpoint remember southern unemployment is is one of the key allows driver characteristics pretty much.
And every one of our books. So if we did see a substantial substantial weakening.
In the southern unemployment been out 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 for quarter reversion to the main and then and then from there the main drives the <unk>.
Provisioning.
As it relates to the southern unemployment attribute of national unemployment attribute so I mean at this point, we feel like we feel comfortable with the guidance we provided on provisioning.
And at what point, probably before the year started we thought it might be a little hard in 2022 I think at this point, we don't believe that to be the case it may be in line or slightly less but we don't we don't see it being higher than what we had in 2022 based on what we know today.
Yeah.
Okay. Thanks Barry.
One.
Last one for me.
I saw a fellow.
One of your Mississippi Bank peers or competitors are announced or executed.
Bond transaction, where they.
Check down the bond portfolio about by about a third.
Took an upfront loss, but you know used it to pay down higher cost borrowings is that is that something I know you're already using cash flows to fund some loan growth, but is that something that's even on your radar.
Yeah.
So Kevin it's Tom Owens that is not something that we have actively contemplated we certainly are aware of those type of transactions.
And the one two which you're referring.
And you know I think every 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.
Got it understood. Thank you. Thank you everyone.
Thank you Kevin.
Yeah.
Our next question comes from Joe in Tunis of Raymond James Go ahead.
Good morning.
Good morning, Joe.
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 made a commentary you provided.
When do you expect the NIM to kind of trough and inflect higher.
So Charles 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.
Syed right. So as I said in my early caught earlier comments.
You know I think the mirror image of the.
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.
The fed is on hold for six or nine months.
I do think that.
It also depends on the nature of a fad he's right.
If it if we if we get into a situation where.
The fed is 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 of hundred basis points and it just becomes apparent to the market. That's what's going to happen again, I would say that that book of higher beta deposits.
And the opportunity to reprice down very quickly, but give you. The example of you know March of 2020 the pandemic.
The fed 150 basis points of emergency cuts there over the course of a couple of weeks we had from memory.
151 $7 billion at that point.
Of higher beta deposits that we were able to reprice down substantially basically immediately so.
You know it.
Just depends on the set of circumstances, it's virtually impossible to answer your question other than to sort of paint examples of where that could occur but to me that would be the opportunity. The same thing that squeezing net interest margin here this intensely competitive environment for deposit cost base.
Deposits are basically as the fed has engineered right by creating competition for bank deposits the ability for depositor or to.
Pick up.
5% yield on a treasury Bill ETF as frictionless as that is in today's world.
Lesson 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 an easing cycle that reduces that competition for deposits and alleviate some of that pressure and do you see opportunity to reprice down our deposit book.
Okay.
Okay.
Understood.
I appreciate the thorough answer.
And thoughts there.
Kind of switching over so it's in the release and then some of your commentary you laid out your physical including yourselves through service process.
Can you provide some more detail on that project and maybe impact some of the potential financial impacts.
Some of these initiatives that you're implementing.
I'll take a stab at that.
I mean basically that is a.
For himself.
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 oh.
Sales and service focused approach is using an external source for that training and we're very excited about it its very positive through the fit to grow process, we implemented some changes in structure.
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.
Our loyal customer base, we have a very solid core deposit base et cetera throughout the system and we believe this will help US you know further.
Further capitalize on that strength.
Okay I appreciate it and then if I could.
Just follow up with one last question here.
So with capital levels continuing to build in the buyback in place what will it take for you to have a stronger appetite for share repurchases.
I'm, sorry, I missed part of that question could you repeat that.
Sorry, so 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.
So 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.
And 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 you could absolutely see a scenario.
Building on the discussion about NIM right.
You can you can see a scenario where the economy softens.
There.
Loan demand declined substantially.
Where bank stock prices become depressed I mean at the same time if in the meantime, we have been creating capital right. We've always said 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 right. We certainly don't hesitate to deploy.
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 'twenty. Four plays out you can certainly impact in this scenario getting into mid to late 'twenty for where that could become the case.
Okay.
Alright, well. Thank you for taking my questions I appreciate it.
Thank you.
The next question comes from Graham <expletive> of Piper Sandler. Please go ahead.
Hey, good morning, guys.
Hey, good morning Graham.
So most of my questions have been.
Been answered I just had a couple follow ups I guess, starting with the the loan yield you mentioned that part of the reason that the 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 your other part of that is generally slower economic growth in your oldest markets in the country as a whole, but I just.
Wanted to get maybe some specifics on like what what the difference is you're asking for from clients. I mean is it like a 50 basis points difference versus the last time you updated this guidance or is it something else. So you're starting to include deposit relationships into into the actual I guess underwriting criteria for loans or any any color you can give there would be helpful.
Hey, Greg This is Barry and I will start.
As it relates to deals flowing in.
I think most of our growth and I'll speak I'll speak to that most of our growth in production opportunity is coming through that's still coming through the CRE side, we're very actively looking at other opportunities within C. N a.
Finance.
<unk> lending, but as far as actual.
Strong production of.
Bob will deals that can get on the books were still seeing most of that production coming from CRE and within that category. We're very very mindful, depending on the type of ask it is depending on the type of project. It is what the market is willing enable to bear at this.
Point, so from a structure standpoint, and from a pricing standpoint, we are able to continue to improve.
Improve our position from a pricing standpoint, specifically, whereas we might use 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 where we're seeing 75 basis points I'm being available to us routinely.
So it's gonna be true with a little higher spread on one month's ofer, we're able to see a little better consistent spread available to us as well.
The standpoint of.
[noise] 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 the pods and it's 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.
Barring deposits from the customer now 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 get them in.
Our borrowers are being very responsive we may not be the lead bank and every single transaction, but even as the second bank to bank deal. We are able to get deposits from them and people are being very successful and very persistent about doing that and so we've been very pleased with the results of what we're saying.
That effort.
Yeah, I would I would add real quick Graham on that question one category very did not mention that we're very excited about very pleased with his.
And as you know in December of 'twenty, two we announced an equipment Finance division that's based in Atlanta.
Atlanta, we're very excited about that group, we have a very high quality team there and.
As noted in the release.
We're up to about 127 million outstanding that grant.
We're expecting continued growth there and we're doing that in a very measured way and it is mid to large ticket equipment finance business with high quality borrowers.
Let source that we think we can continue to grow significantly and as you know that's part of the C&I book and prevents provides some diversification to the overall portfolio. So.
That would be an added note then that'd be one category, maybe where are the <unk> or in the mid range Theyre not the top band 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.
Okay. That's helpful and 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 that the proportion of total loans, you would like that to get to in time.
Yes, we did.
We're nowhere near it [laughter]. So 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.
Do bear in mind. This is typically going to be five to seven year paper that is.
Fully amortizing so there there.
There will be you know it will take a while to get to the level that they will find reference because there will be amortization that will be needed still need to have two over overcome that headwind as well. So 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.
Songs about about concentrations of things of that nature.
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 fit to grow initiative, but I just wanted to get any color from you guys on areas that youre looking at that you think you can improve upon.
Or make more efficient and then Conversely are there areas, where you see opportunities to invest.
So weak.
As we talk about in the fit to grow our discussion and we have invested over the last several years and particularly in 'twenty two 'twenty three.
And technology across the system.
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.
Had one.
Implementation of the new system to create and so we think efficiencies 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 and some of these pre.
<unk>.
And a third party.
Services are part of the equation, we expect that to decline over time care, especially into the 'twenty four time period. So those.
Those are some areas I would note in some of the expense guidance.
Unlike mentioning an 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 and as we talk about equipment finance as well as some of the commercial and corporate CRE.
<unk> et cetera. So we think all of those things ultimately contribute to better revenue growth and and we could see into 2020 for some of them are.
Maybe lightening up some of those third party spend et cetera across the system.
Okay.
Okay. That's very helpful. Thank you guys.
Thank you.
As a reminder, if you'd like to ask a question. Please press Star then one on your Touchtone phone, we will pause for a moment to assemble our roster.
Yes.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Duane Dewey for any closing remarks.
Well. Thank you again for joining US Tonight for today's second quarter Conference call. We look forward to being back together at the end of the third quarter and I appreciate the questions and look forward to continuing discussions. Thank you and have a great day.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
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