Q2 2022 United Community Banks Inc Earnings Call
Speaker 1: Good morning, everyone, and welcome to United Community Bank's second quarter, 2022 earnings call. Hosting our call today are Chairman and Chief Executive Officer Lynn Harten, Chief Financial Officer Jefferson Harrelson, President and Chief Banking Officer Rich Bradshaw, and Chief Risk Officer Rob Edwards. And Chief Risk Officer Rob Edwards. And Chief Risk Officer Rob Edwards.
Speaker 1: United's presentation today includes references to operating earnings, pre-tax, pre-credit earnings, and other non- GAAP financial information. For these non- GAAP financial measures, United has provided a reconciliation of the corresponding GAAP financial measure in the financial highlight section of the earnings release, as well as at the end of the investor presentation. Both are included on the website at ucbi.com. Copies of the second quarter's earnings release and investor presentation were filed last night in form 8k with the SEC.
Speaker 1: And a replay of this call will be available in the Investor Relations section of the company's website at UCBI.com. Please be aware that during this call, forward-looking statements may be made by representatives of United. Any forward-looking statements should be considered in light of risks and uncertainties described on pages 5 and 6 of the company's 2021 Forum 10K, as well as other information provided by the company and its filings with the SEC and included on its website.
Speaker 1: At this time, I will turn the call over to Lynn Harten.
Speaker 1: Good morning and thank you for joining our call today.
Speaker 1: Despite the concerns over inflation,
Speaker 2: Fed tightening.
Speaker 1: In the direction of the economy, we had a solid quarter that demonstrates some of the strengths of the company and of our strategy.
Speaker 1: First, our net interest revenue grew an annualized rate of 37 percent, driven primarily by a 22 basis point expansion in our margin.
Speaker 1: This expansion highlights the strength of our deposit base created by our service performance.
Speaker 1: We've included some historical deposit beta information in our deck this quarter to give you additional insight into this core advantage.
Speaker 1: Do largely to our net interest revenue growth, our operating return on assets improved to 1.17%.
Speaker 2: Our return on tangible common increased to 14.2 percent. And our pre-tax, pre-provision income increased by $8 million, a 39 percent annualized growth rate.
Speaker 2: Secondly, our credit performance continues to be outstanding, with net recoveries and improvements in both non-performing assets and special mention credits.
Speaker 2: Our goal has always been to focus on balanced credit performance through the cycle, and we believe we're prepared if the economy does slip into recession. When the economy comes to its origin, rubber kits excruciation manifests within such a kind of financial monitoring which is certainly an infantic? of costs to serve and better interest. The innovation of the economy process is dependable over the cost Great OSAs and on the sage Gardner's profit and bond betweenrate and private Item you are our company. For now, it will be more data Hor ??able will be ???? Thank you.
Speaker 2: While we're not seeing significant signs of consumer or business stress,
Speaker 2: We know that increasing interest rates always flush out excessive leverage from the economy.
Speaker 2: We believe the majority of that is outside the banking system, but we are watching for any signs of weakness in the markets we serve.
Speaker 2: Our lung growth was in our target range, but distributed a bit differently than normally.
Speaker 2: Our CNL loans were essentially flat.
Speaker 2: Our commercial real estate was down slightly.
Speaker 2: Equipment of finance grew nicely, but at a slightly slower pace than in the past.
Speaker 2: A large part of our growth was driven by residential mortgage, where increasing fixed rates caused more of our customers to choose adjustable rates.
Speaker 2: which we have always held on balance sheet.
Speaker 2: These are all in market, United originated, relationship-focused loans which were glad to hold.
Speaker 2: Given that we seem to be moving into more of a late cycle economic environment, I'm pleased with our growth mix this quarter.
Speaker 2: Finally, I continue to be very excited about our newest partner, Progress Bank.
Speaker 2: We're well into integration planning, and it's clear that we're a great cultural group that all fit together and share a very similar approach to the market.
Speaker 2: David, I'm looking forward to having you and the rest of your team officially become part of United.
Speaker 2: And now Jefferson, how about going over more of the details for the quarter?
Speaker 3: Thank you, Lynn, and good morning to everyone.
Speaker 3: I'm going to start my comments on page eight and look at our markets a little bit and we have one of the best footprints in banking. We are excited that the pending progress merger adds some of the fastest growing markets in the Southeast in a form of Huntsville, Birmingham, and the Florida Panhandle as well as Tuscaloosa. And that our markets are growing population at 150% of the national average.
Speaker 3: On page 9, we are proud of our core deposit franchise and we think it will serve us well as race move higher.
Speaker 3: The pod is shrunk by 0.8% or $183 million in a quarter, which we believe is a natural evolution of higher rates and son-to-pod is moving to their more natural health. And son-to-pod is moving to their more natural health.
Speaker 3: our deposits, we're still up $1.4 billion year over year, excluding the deals.
Speaker 3: The combination of lone growth and our slight deposit shrinkage drove our lone to deposit ratio up to 70% from 68% last quarter. The combination of lone growth and our slight deposit shrinkage drove everybody to deposit ratio up to 80% of their steady 60%
Speaker 3: our cost of deposits was up just two basis points in the quarter and help drive our margin expansion that I will talk about on a later page.
Speaker 3: On page 10, we talk about our diversified loan portfolio and growth drivers for the quarter. Excluding PPP loan shrinkage, we grew loans at a 7% annualized pace.
Speaker 3: The growth was driven in this quarter by residential mortgage, Eiffelund mentioned.
Speaker 3: as there was a mixed change towards floating rate loans in our mortgage business this quarter.
Speaker 3: At the bottom of the page, we highlight that we have intentionally kept our portfolio very granular with low-winding limits and very diversified. It's C&I Heavy, it's light on CR-E, all of which we believe translates into less risk over time.
Speaker 3: We had record loan originations this quarter at $1.5 billion. And we ended up having high paydowns as well, and we are optimistic about loan growth for the rest of the year.
Speaker 3: I am going to skip ahead to page 12 and talk about our capital. Our ratios stayed relatively flat with a strong profitability and strong long growth. We did see a slight decline in our TCE ratio as the strong profitability was offset by 91 million dollars of higher AOCI related to our AFS securities as rates rose in a quarter of course.
Speaker 3: Moving to page 13, we discussed our net interest margin. We had 22 basis points of margin expansion in the quarter, 18 basis points of which came from the impact of higher rates. The net interest margin was 18 basis points of which came from the impact of higher rates.
Speaker 3: And five came from positive mix change in the form of lower cash on the balance sheet and the higher loan to the positive ratio that I mentioned earlier.
Speaker 3: Moving to page 14, while this rising rate cycle is certainly different from the last one, we did include a page this quarter on our experience last cycle.
Speaker 3: And we had a 24% deposit beta from the fourth quarter of 2015 to the second quarter of 2019.
Speaker 3: which we believe stands up well against peers.
Speaker 3: While we want to and will take care of our customers this cycle, we are optimistic that we will once again fare well compared to peers on this metric.
Speaker 3: Page 15, we talk about fee income. It was down from last quarter. Our mortgage business was a driver of that decrease with rates rising and the refi business falling off.
Speaker 3: We had three main drivers in the quarter that drove the decrease.
Speaker 3: One, we had a smaller MSR gain in Q2 compared to Q1.
Speaker 3: We had a 2.1 million dollar MSR gain in Q2 compared to a 6.4 million dollar gain last quarter, and this is a 4.3 million dollar difference.
Speaker 3: Also, despite being a seasonally stronger quarter, we did have a 21% decline in rate locks in Q2. We did have a 21% decline in rate locks in Q2.
Speaker 3: Distacline and lock volume also combine with a mix change towards floating rate loans, which means more loans were going to the balance sheet and less loans were being sold. So more of the economics of the lock volume in Q2, we will realize over time.
Speaker 3: Moving on to some of the other fee income categories, we also had $3.1 million in gains from SBA loan sales, and just under $700,000 in the Vita loan sale gains in the quarter.
Speaker 3: with good loan demand, rates rising, and the NIM expanding, and a bit more uncertain pricing market, we plan to be a little more picky on selling loans this quarter, and I would expect this line item to be closer to $2 million in the third quarter.
Speaker 3: Moving on to page 16 and expenses, operating expenses were up 3.3 million dollars in the quarter. In September , toute prévision et noodoures ont donc les obligations sur le futone. you
Speaker 3: The lion's share of the increase was driven by a $2.2 million merit increase, and the quarter also included some core growth and some reliant cost savings.
Speaker 3: On a year over your basis, our expense increase was mostly driven by the acquisitions.
Speaker 3: If we adjust for the acquisitions and the cost savings that we would get and have gotten, we estimate that our core expenses were up $3.5 to $4 million over last year as we achieved the cost savings from both a cluster and rely it.
Speaker 3: Also, if you look at it another way, if you take our operating efficiency ratio...
Speaker 3: and then take it to another level and also exclude PPP fees and MSR marks, which I know a lot of analysts already do, you can really see the benefit of our deals on the efficiency ratio and profitability over the last year.
Speaker 3: This adjusted efficiency ratio, if you will, moved from nearly 58% in the year ago quarter to just under 54% this quarter, which is an improvement that we are proud of.
Speaker 3: Moving to credit on page 17, we had strong credit results in the quarter, with three basis points of net recoveries and improved problem loans.
Speaker 3: on page 18.
Speaker 3: We give you some details on special mention, substandard accruing loans and non-performing assets. All three categories were flat to slightly improved and we feel good about where we are on credit.
Speaker 3: On page 19, despite generally improving credit trend and the fact that we had $1 million in net recovery
Speaker 3: We still did build our reserve for the second time in two quarters.
Speaker 3: Part of that reserve increase is due to our solid loan growth, but our CSO model also had a slightly worse economic outlook, which necessitated another $3 million in second quarter provision.
Speaker 3: The chart at the bottom shows our reserve in dollars and percentage sent Cecil inception.
Speaker 3: that shows a COVID-related buildup and release.
Speaker 3: And now we've had two quarters of reserve build in a row with this quarter and the Reliant Deal in its related double dip last quarter.
Speaker 3: With that, I'll pass it back to lens.
Speaker 2: Thank you, Jefferson. And also thank you to the United teammates that continue to deliver outstanding performance. The United teammates that continue to deliver outstanding performance.
Speaker 2: You know, I'm working now preparing for my annual planning retreat and it always excites me to reflect as I do that on what a great organization you all have built and the opportunities that you have afforded us for future growth.
Speaker 2: So congratulations and thank you.
Speaker 2: Finally I'd like to make a tribute to Devan Ard, the founder and CEO of Reliant Bank, who passed away earlier this month.
Speaker 2: I came to know DeVan about a year and a half ago.
Speaker 2: He always did what he said he would.
Speaker 2: He was direct.
Fourth right.
and truthful.
He built a great team.
and a quality company.
And short, Devan was everything a good man and a great leader strives to be.
I and many others miss you.
Rest in peace, divine.
And now I'd like to open the floor for questions.
Thank you.
At this time we will now begin the question and answer session.
To ask a question, you may press star then 1 on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.
If at any time your question has been addressed and you would like to withdraw your question, please press star, then too.
At this time, we will pause momentarily to assemble our roster.
Our first question today comes from Brad Milsaps of Piper Sandler. Please go ahead.
Hey, good morning. Good morning. Good morning.
Maybe Lynn, just maybe wanted to start with loan growth. Certainly you guys hate your guidance. Seems like a lot of banks this quarter are really blowing away loan growth. So I wanted to kind of jump into that a little bit more. You mentioned pay down. It's just kind of curious how large those were, maybe relative to what they typically are. And then secondly is part of it.
You know, you sort of got the amount of loans you needed. You're conservative during this part of the cycle. How much of that did play into kind of the numbers that you ultimately put up this quarter? And then maybe finally, was there any kind of other runoff at Reliant to speak of that might have impacted that? I thought the Tennessee book was down a bit, but just kind of curious to have a little more color on some of the crosscurrents with loan growth this quarter. Perfect. Great question, Brad. I'll just let Rich start with that.
then Rob and I will join in as well. Good morning, Brad. You talked about on the payoffs, was there anything that kind of jumped out? And there was. We had four senior care deals pay off at about $60 million. We had another very large wealth management commercial client that jumps in and out of the market, and that was a $40 million payoff late in the quarter. So from that standpoint, that was a little larger than we normally see. It was our largest production quarter ever and our largest payoff quarter ever.
of reliant. We typically see a runoff at the beginning of an acquisition. Also, we just went through conversion and as you know, we're going through leadership transition so that, you know, no concerns there at all. Feel great about the team, feel great about the market. And most importantly, that leadership team, John Wilson, Mark Reimer, who's the commercial executive, they're feeling really good about the pipelines and the people that they have there. So...
that's how i'm kind of thinking about it we're still in the best markets in the in the country i believe
Yeah Rob, you have anything to add? I would just say in terms, I think your second question was about how much does our conservatism regarding the cycle play into it? And I would say we're continuing to be who we are. So our appetite hasn't changed, but if there's anything that's changed, I would say it's been very moderate, but we're more cautious around speculation than we have been before just because of where we believe we are in the cycle.
I would say, you know, right. Thank you. Yeah. Good. Well, I'm going to say, you know, we have seen.
The market has been a little more aggressive on the margin and we have not been. So to me we have not tightened as much as we have seen the market in general be a little more aggressive than we've seen in the past.
Great, thank you. And it might follow up maybe to Jefferson. I was curious if you might have the net interest margin for the month of June . And then I think you've mentioned in the past, maybe each 25 basis point increase being worth, kind of four basis points, probably a little more in the beginning, maybe a little less in the end. But just kind of curious if you're thinking around, those numbers had changed at all.
Yes, so our June margin, I'll give you the number, is 325, there's things that annualizing a single month, there's a lot of risk in that, I will say. But if you think about the margin going forward and think about that five basis points per 25 and some of the margin increase, we expect to see just from the rate that have already happened as well, I think that next quarter our margin will be up 20 to 25 basis points, if you got...
a 75 basis point rate hike in July , in the next couple weeks like we think.
Got it. That makes sense. I really appreciate it. Thank you.
Our next question today comes from Jennifer Demba of TreeWist. Please go ahead.
Thanks, good morning. Just curious, you said you had a 24% deposit beto during the last rate height cycle. What are you guys assuming for this one?
It's a great question. We're currently assuming a similar deposit beta to this cycle versus the last one in our forecast. We're currently assuming a similar deposit beta We're currently assuming a similar deposit beta
As you see in that forecast, or is that on the one page, the new page in our deck, it starts off really low. The first 100 basis points was eight basis points last time. This quarter we were just three, and then it starts moving up relatively quickly, and then it would go beyond, it went beyond that 24 for total rate hike. So a lot of it depends on how long this rate cycle goes, but for now we are using 24% in our modeling.
Okay, great.
And
Can you guys talk about...
What kind of, are you seeing any...
I guess more, you said you may be seeing a little bit more aggressive lending behavior in recent months. Can you get a little more detail of that? Can you get a little more detail of that?
I mean, hey Jennifer, it's Rob. I would just say I think other people are more comfortable with speculative scenarios than we have been traditionally and than we currently are.
So there's a number of different products you have in lending. One example would be warehouses. There's a lot of people doing spec warehouses. There's a lot of people doing spec warehouses.
And those worked out really good for the last 18 months.
But the environment is likely to change.
The announcement of Amazon that they're kind of out of the warehouse business was a little bit of reason to be cautious.
Okay, thank you.
Our next question is from Michael Rose of Raymond James. Please go ahead.
Hey, good morning everyone. Thanks for taking my questions.
I don't know if I miss this in the beginning. I was on the call, but he's digging to the mortgage dynamics. I don't know if I'm going to be able to get on the call. I don't know, the solution is going to kill the mortgage dynamics. This is actually going to be a code?? sonsom tomato that contains social debt. timestamp X.
If I exclude MSR in both quarters, it looks like it was down pretty healthy. I know there's the law of timing and everything like that. You can just walk us through some of the dynamics. Then obviously there's inventory constraints in some of your markets. But on the flip side of that, any rates have come in a little bit. You still have positive immigration. I'm just trying to get a better sense of what happened this quarter. And then what the expectations might be for the next couple quarters. Thanks.
It's a great question Mike. I'll start with what happened this quarter, and I'll pass it to Rich on next quarter and how we're thinking about it or anything he might want to add.
So yeah, we were down a lot in mortgage revenue this quarter if you look at the rate lock volume It was down just over 20%
And with the mix change towards floating rate loans, if you look at the lock volume of our health and maturity loans, that was down 44 percent. So the piece that we're generating a gain on sale on was down 44 percent quarter to quarter. Now we have significantly more floating rate loans that are going onto the balance sheet. We'll get that economics over time. But from a pure this quarter mortgage fee income number that held a maturity.
rate lock volume is the main driver. Now I'll pass it over to Rich to talk about the business and the forecast. Sure, in terms of expectations for Q3, we're expecting volume to be down another 15 percent from this quarter and probably on the fee side somewhere around the 20 percent mark lower as well.
Okay, that's helpful. And then maybe just circling back to the longer of commentary, obviously very good production this quarter. A lot of moving pieces with, you know, Acquesta and Reliant and not sure what the runoff looks like there, but it would make sense of the payoffs. It would make sense of the payoffs.
particularly in the creed space should slow as rates have risen. I'm not trying to pin you down for an exact outlook for the back half of the year, but this quarter's core long growth of 67 percent, you know, is that what we should at least kind of contemplate as we move in the back half of the year just given kind of some of the puts and takes. Yeah, and this is rich. As I mentioned earlier, I think that number is a good way to think about it. I think this said that the mix will change a little bit with mortgage down a little bit more and a little bit more up on commercial.
One thing in there, a lot of the loan growth we got this quarter was late in the quarter, so our average loan growth was lower than our end of period loan growth. And so from an average loan growth standpoint for next quarter, we're starting off at a nice spot given the strong end of quarter volume that we had.
Perfect. And maybe just one final one for me, just as we think about expenses, especially salaries were down a little bit Q on Q. Obviously, I understand that the driver's there, but can you just give us an update on the hiring plans and what's going on with some of the dislocation from some of the more recent acquisitions that's presented some opportunities for not only revenue hires, but maybe also on the client side. Thanks.
Sure, this is Rich. Recruiting discussions are obviously going on throughout the footprint. We're currently talking in Nashville about the middle market position because we see that market is such a great opportunity. Also there might be an opportunity for a Cree person there and we may have found that person. And we're also looking for middle market in Florida as well. I will tell you that we're...
looking at a lift out right now that looks fairly promising. Additionally, we just brought on Corey Boyd as head of syndications and corporate banking for us and I think we're of that size now and we can start taking on some of those larger strategic relationships and he brings 21 years of experience out of Truist and BB&T. And then lastly, we just brought on a leader in the franchise space, particularly for the larger multi-store owners.
and this will team well with what we do in Nevada and SBA. And so we're very excited about that.
Okay, great. So, it sounds like continue to be a little bit more surgical with your hiring as opposed to just.
Bring on a bunch of people at relatively higher costs. Just give more wear out of the cycle. Appreciate it guys. Thanks so much. Thank you. Thank you.
Our next question comes from Kevin Fitzsimmons of DA-Davidson.
Our next question comes from Kevin Fitzimmons of DA Davidson. Please go ahead.
Hey, good morning, everyone. Good morning.
Just, you know, we've seen from a lot of banks so far this shift of deposit balances declining and then in turn the excess liquidity shrinking on the balance sheet. And just, you know, we've seen from a lot of banks
curious if you could give us you know what that change means I know it
you referred to an improving deposit mix going forward and some of this is just really leaving the bank and leaving the system. But what that means for future outlook for purchasing securities, does it make the deposit beta accelerate more than you might have said last quarter? And then at the end of the day, you're still confident that, you know, versus the prior few years, we've been driving NII growth.
via the balance sheet while the margin was being compressed. And are we? And are we?
We're shifting now and reversing where it's being driven by the percentage margin, but you still confident that'll be able to drive NII growth even if average earning asset growth is a little lower than it's been. Thanks. Thanks.
It's a great question, something that I think about a lot, and the outlook for our anti-high growth is very strong.
But I'll tell you some of the intricacies and some things I'm thinking about, right? So if you have
I think our deposit outflow was one of the least I've seen of other banks, but it's something that you worry about when you had over a billion dollars, $1.4 billion of inflow over the last year. So we realize that you might get some deposit outflow for the rest of the year. We have been growing our securities book very rapidly, and we are at $7 billion right now, and I think you're going to see that stay at $7 billion. One reason is to hold cash if or if there is a deposit outflow.
The other reason is if you got, it's where in such a volatile rate environment, rates may go up another 200 basis points. And I like the size of our security's portfolio now. So the deposit outflow, the potential for it has probably led into keeping the security's portfolio relatively flat here. Now on to the positives.
you know we we just had a meeting yesterday and we just looked at competitor
deposit pricing, and it hasn't really changed a lot. It may change in late July when we get 75 basis points or 100 up. The one thing I mentioned to the committee and one thing Rich and I have been talking about is if you're seeing this kind of loan growth from some of our competition, you've seen some really big deposit outflow from our competition, that we may well see higher rates from them. We haven't seen that yet. We're still planning for the 24% deposit beta. We're still planning for the 24% deposit beta.
But it is something that we're thinking about when we're doing our deposit committee. So could it have an impact? Yes. But the big picture I think is this rate change and having us be right around 50-50 unfolding rates, us having one of the most core deposit bases we believe in the country is going to translate to very significant margin expansion. And I had mentioned 20-25 basis points that I think we'll get next quarter.
Great, thanks Jefferson. Just one.
Follow on Lynn on and by the way, Lynn, I just wanted to mention thank you for those comments on Devan. I was fortunate enough to get to know him and covered stock. So I really appreciate it that
One question regarding M&A.
just if you guys still feel good about progress closing in fourth quarter if that still seems on schedule and longer term on M&A I would assume you guys want to get that closed and integrated so probably not top of mind in the near term but longer term given the shifting environment to does M&A
become a little more focused on gathering deposits like it has traditionally, but maybe not so much in prior years for the industry, just curious of your thoughts on that. Thank you. Sure, so, and thank you for the comments on the van. We get it right now on progress. We do, I mean, we are very cognizant of, you know, kind of change in regulatory leadership and more uncertainty about timing of deal closures.
So we're certainly cognizant of that. We are progressing as we normally would. We still don't have any reason to believe we wouldn't be able to close on our fourth quarter schedule. But with that said, it's a different environment that we've been operating in, and so we've also got contingently plans in case it does extend out. So we'll wait and see on that. In terms of M&A in general, I think.
For the near term, you know with
kind of prices down in the industry, there's just not a lot of activity going on. I wouldn't expect to see much announced, you know, can always get surprised. You know, the conversations that we're having are just long-term relationship building conversations and with the same kind of banks that we've been focused on. You know.
750 to $3 billion banks in growth markets in the Southeast. You know, there's not a lot of those left. We're continuing to work on building relationships with those and we think if you look out another nine months or so, we think maybe at that point is kind of when the market opens back up, but we'll see. So I think we'll be in a quiet period for a while as an industry and certainly for us. And I think for us that's helpful actually to help build relationships with FX.
to get progress in Reliant fully integrated. Okay. Thank you, Lynn. Thank you, Lynn.
Our next caller is from David Bishop of Havvy Group. Please go ahead.
Good morning gentlemen, thank you for taking my question. Jefferson, maybe a question for you. You mentioned in the preamble the containment of operating expenses, maybe on a core basis in that 3 to 4% rate year over year on a core basis. Should that be the expectations in the near term and maybe into 2023 excluding some of the impacts of the progress deal? How are you thinking about inflation impacting the rate of expense growth?
That's a great question, expenses.
for this quarter came in a little higher than I was expecting. If you go back and look through, there's some seasonal types of things in there. There's some invoice timing things in there. There's some project timing things in there. I think we'll continue to grow expenses. There'll be a lot slower than what we grew them this quarter. I think it'll be less than half of the growth of this quarter. So we grew three point.
$3 million last quarter, I think it'll be half or less of that in two, three. We're expecting some pretty significant efficiency ratio improvements in the back half of the year and looking at, it's early, but looking at July . And looking at July .
Early expense reports I've been looking at it looks like this forecast. I feel more confident in this forecast with what I'm seeing in July as well. So I think that...
kind of 4% target is a reasonable target.
and for over time and I'll lay it out where I think in the near term.
I appreciate that. Maybe a high-level question for Lynn and you all. It doesn't sound like you're seeing much credit stress there, the 7% rate of growth. As you talk to market presidents out there, and obviously you're in some good, strong population info markets, does that feel like the appropriate rate of growth or good rate of growth for the overall macroeconomic backdrop?
just curious what you're seeing and maybe that backdrop that gives you comfort at that level. Thanks. Yeah, so I'll start in rich and jump in, but I certainly feel comfortable at 7% range. And particularly when you look at the additions that we've made to the sales staff, et cetera. We've been very focused, we continue to be very focused on concentration management. Those sorts of things, if you look at our markets, I think that's a very comfortable growth rate.
somewhere in that, you know, 6 to 9 kind of range. I'd be very comfortable with right now. I don't know if you'd have anything to... Yeah, I would agree, and I'm the sales guy. I think I like the discipline approach, especially as we're still talking about, and certainties that we don't know in here in the near future. It certainly feels like we're doing the right things and the right back blocking and tackling, and I think it's the right approach.
Appreciate color.
Again, if you have a question, please press star then one.
Our next question is from Kaplan Mealer of KBW. Please go ahead.
Thanks, good morning. A follow-up for you Jefferson on your 20 to 25 minute outlook for next quarter.
What kind of balance sheet grows? Are you assuming in that? Are you assuming more of a deployment of excess cash? And I think you mentioned that the security will make kind of flat. I'm assuming that. But I guess it's really just the excess liquidity. How are you thinking about deployment of excess liquidity and how much that contributing to the higher NEM God versus just yields?
Great question. We have a flat to slightly down balance sheet in Q3 that's going into that margin.
So that would be relatively flat securities, are very flat securities, and then flat to down cash. This is one thing of our Q3. This is one thing of our Q3.
Great, okay.
And then your commentary about NVIDA fees coming down, you mentioned a $2 million number. Is that relative to the $3.8 million line that includes SBA, USDA, and NVIDA? Correct. Is there a outlaw for the act that is being called an undergroundaggerary green we saw
And let's just talk about that line item a little bit because it may well be in that $3 million range. It could be even as high as last quarter but...
I think $2 million is the number that makes the most sense. And how we're thinking about it is, and we have significant margin expansion coming, we have significant spread expansion coming. I'm sorry, an interest income growth on the way. We feel good about our long growth outlook. And what we're seeing is, in the pricing of these markets, you're seeing volatility is moving up and down, and I don't want to be...
No, the right word is forced, but I don't want to be committed to selling loans no matter what the price is For the second half of the year and that's kind of where we are and most of the most of the quarter The pricing was complete was fine But I don't want to be committed to that no matter what the price is in Q3
And so then if there needs change to your origination volume for NVIDA's or is it just that you might hold more on balance sheet and sell less? And so then that respect we might see actually higher or lower because you're just keeping more NVIDA's on balance sheet. That's correct. And so NVIDA's was growing at a really nice pace. And we were to hold, and right now we're at 8% of total loans of NVIDA's. As you know, we have the limit, self-imposed limit of 10. And if we keep a little more NVIDA's on balance sheet, that's just up well for...
2023 and the little growth in the near term. So it's a...
It's a, I think it's a better long-term strategy to hold a little bit more of the Navitas loans than the SPI wants.
Okay, great. And I know you've done the past you have about six months. And I know you've done the past you have about six months.
insight into and have any turning credit. And Navidas, any comment here there? And I think you're seeing.
in that business.
So, actually talked to them yesterday and really not see our expectations. So we went from nine basis points of losses in Q1 to 30 basis points of losses in Q2. Pre-pandemic, you know, sort of in normalized times, they were running in the 70s to 80 basis point losses. So we would expect that to continue to normalize. I would expect something sort of north of 50 basis points going forward in losses, but still...
are the early stage delinquencies there are still very very low compared to where they were pre-pandemic. So we're not we're not seeing anything unusual at the moment but just would expect it to return to a more normalized level.
That's great. Thank you so much.
Our next question comes from Christopher Maranac of Jenny Montgomery Scott LLC.
Our next question comes from Christopher Maranac of Jenny Montgomery Scott LLC. Please go ahead.
Thanks, good morning Jefferson and team. I wanted to drill down further on liquidity. I know you gave some great information on the earlier answer.
How do you think about using the existing safaris book to harvest or even use it for the rest collateral? I know there's a bunch of capacity on both end. Also just curious how you think about that. Would you keep this current size or would the environment lead you to change or just do something different than you have?
That's a great question, Chris, something I think about. I think the positive growth will drive that because...
Say our deposit growth is flat for even three years. I think we have the funding on our balance sheet in cash to fund that, but then we can also fund it with securities over time as well and just have a mix change here. So I think what you're going to see is just not a lot of balance sheet growth, but a mix change towards loans over time. So that's what we'd hear from you on the show. Thanks.
So the way I think about it too, the $7 billion securities book, I mean, that would be completely fine over time. We have the cash to fund this now, but over time, if we use $2 billion of that to fund loan growth and take our loan-to-deposit ratio back up to a more normal level of 80% and let capital grow, I'm completely fine with that. So I don't think you're going to see a lot of balance sheet growth for the next 12 to 18 months, and then you're going to see...
Again, cash decline and then maybe ultimately a handful of years out you'll see securities ratio or securities being funded.
or loans being funded by securities as well.
Great, thanks for that, and this is my color. I appreciate it, and then just to kind of, I guess, to follow up on the whole data conversation. If we think about data on the asset yield side, should the Venus perform similar to the rest of the UCB portfolio, or will it be different just because of the nature of how those loans are originated?
So, Nevita will have a lower beta, and maybe even a muscle or beta than the rest of the book. They're making fixed rate loans. And when you're passing on rate increases, it takes a longer period of time. So if you look at this quarter, that beta was very low, and I would expect it to stay very low. Nevita was very helpful to us, and it remains helpful to us in an up rate environment too, but it was very helpful in the down rate environment. But it's not gonna be...
it's not going to be very adjustable in the higher rate environment. That said, if you look at last quarter, we had just under 50% of our loans being floating. With one more rate hike, we're going to be at closer to 53% of floating, so we're becoming more variable in the whole book as rates move higher. So I still think you're going to see a good loan beta from us, but it's just not going to come from the VITAS.
Got it. And given the change in interest rates here the last several months, is there any price and change in the BTS at all? Will something be passed along by the end of September ?
Yeah, so they aren't definitely passing along rate hikes, but it takes longer and they're a little more uncertain because it's a competitive environment.
Got it. Great. Thank you very much. Appreciate all the color.
This concludes our question and answer session. I would like to turn the conference back over to Lynn Harton for any closing remarks.
Well, great. Well, thanks again for joining the call and for your questions. And we look forward to any follow-up information that you might like to see. And otherwise, we will talk to you soon. Thank you so much.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.