United Community Banks, Inc. (NASDAQ:UCBI) Q2 2022 Earnings Conference Call July 20, 2022 11:00 AM ET
Company Participants
Lynn Harton – Chairman and Chief Executive Officer
Jefferson Harralson – Chief Financial Officer
Rich Bradshaw – President and Chief Banking Officer
Rob Edwards – Chief Risk Officer
Conference Call Participants
Brad Milsaps – Piper Sandler
Jennifer Demba – Truist
Michael Rose – Raymond James
Kevin Fitzsimmons – D. A. Davidson
David Bishop – Hovde Group
Catherine Mealor – KBW
Christopher Marinac – Janney Montgomery Scott LLC
Operator
Good morning, everyone. And welcome to United Community Bank’s Second Quarter 2022 Earnings Call. Hosting our call today our Chairman and Chief Executive Officer, Lynn Harton; Chief Financial Officer, Jefferson Harralson; President and Chief Banking Officer, Rich Bradshaw; and Chief Risk Officer, Rob Edwards.
United’s presentation today includes references to operating earnings, pretax, pre-credit earnings and other non-GAAP financial information. For these non-GAAP financial measures, United has provided a reconciliation to the corresponding GAAP financial measure in the Financial Highlights 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 on Form 8-K with the SEC, 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 Form 10-K, as well as other information provided by the company in its filings with the SEC and included on its website.
At this time, I will turn the call over to Lynn Harton.
Lynn Harton
Good morning and thank you for joining our call today. Despite the concerns over inflation, Fed tightening and the direction of the economy, we had a solid quarter that demonstrates some of the strengths of the company and our strategy. First, our net interest revenue grew at an annualized rate of 37%, driven primarily by 22 basis point expansion in our margin. This expansion highlights the strength of our deposit base created by our service performance. We’ve included some historical deposit beta information in our deck this quarter to give you additional insight into this core advantage. Due largely to our net interest revenue growth, our operating return on assets improved to 1.17%. Our return on tangible common increased to 14.2%. And our pretax pre-provision income increased by $8 million, a 39% annualized growth rate.
Secondly, our credit performance continues to be outstanding. With net recoveries and improvements in both nonperforming assets and special mention credits. 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. While we’re not seeing significant signs of consumer or business stress, we know that increasing interest rates always flush out excessive leverage from the economy. 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.
Our loan growth was in our target range, but distributed a bit differently than normally. Our C&I loans were essentially flat. And our commercial real estate was down slightly. Equipment finance grew nicely, but at a slightly slower pace than in the past. A large part of our growth was driven by residential mortgage, where increasing fixed rates cause more of our customers to choose adjustable rates, which we have always held on balance sheet. These are all end market, United originated, relationship focused loans, which we’re glad to hold, given that we seem to be moving into more of a late cycle economic environment. I’m pleased with our growth mix this quarter.
Finally, I continue to be very excited about our newest partner Progress Bank. We’re well into integration planning, and is clear that we are a great cultural fit together and share a very similar approach to the market. David, I’m looking forward to having you and the rest of your team officially become part of United. And now Jefferson, how about going over more of the details for the quarter?
Jefferson Harralson
Thank you, Lynn. And good morning to everyone. I’m going to start my comments on page 8. And look at our markets a little bit and we have one of the best footprint in banking. We’re excited that the pending Progress merger as some of the fastest growing markets in the southeast, in the 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. On page 9, we are proud of our core deposit franchise, and we think it will serve us well as rates move higher. Deposits shrunk by 0.8% or $183 million in the quarter, which we believe is a natural evolution of higher rates and fund deposits moving to their more natural home. Our deposits were still up $1.4 billion year-over-year, excluding the deals. The combination of loan growth and our slight deposit shrinkage drove our loan to deposit ratio up to 70% from 68% last quarter.
Our cost of deposit was up just two basis points in the quarter and help drive our margin expansion that I will talk about on a later page. 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 base. The growth was driven this quarter by residential mortgage, as Lynn mentioned, as there was a mix change towards floating rate loans in our mortgage business this quarter. At the bottom of the page, we highlight that we have intentionally kept our portfolio very granular, with a low lending limits and very diversified at C&I heavy, is light on CRE, all of which we believe translates into less risk over time. We had a record loan originations this quarter at $1.5 billion. And we ended up having high pay downs as well. And we are optimistic about loan growth for the rest of the year.
I am going to skip ahead to page 12 and talk about our capital. Our ratio stayed relatively flat with a strong profitability and strong loan growth. We did see a slight decline in our TCE ratio as the strong profitability was offset by $91 million of higher AOCI related to our AFS securities as rates rose in a quarter of course. Moving to page 13, we discuss 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. And five came from positive exchange in the form of lower cash on the balance sheet, and the higher loan to deposit ratio that I mentioned earlier.
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. And we had a 24% deposit beta from the fourth quarter of 2015 to the second quarter of 2019, which we believe stands up well against peers. 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. Page 15, we talked 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. We had three main drivers in the quarter that drove the decrease. One, we had a smaller MSR gain in Q2 compared to Q1. We had a $2.1 million MSR gain in Q2 compared to a $6.4 million gain last quarter. And this is a $4.3 million difference. Also, despite being a seasonally stronger quarter, we did have a 21% decline in rate locks in Q2. This decline in lock volume also combined with a mix change towards floating rate loans, which means more loans were going into the balance sheet and less loans were being sold. Some more of the economics or the lock volume in Q2, we will realize over time.
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 Navitas loan sale gains in the quarter. With good loan demand rates rising at 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.
Moving on to page 16 at expenses, operating expenses were up $3.3 million in the quarter. 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. On a year-over-year basis, our expense increase was mostly driven by the acquisitions. 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 million to $4 million over last year, as we achieve the cost savings from both Aquesta and Reliant. Also, if you look at it another way, if you take our operating efficiency ratio, 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. 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.
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. On page 18, we give you some details on special mention, substandard accruing loans and nonperforming assets. All three categories were flat to slightly improve and we feel good about where we are on credit.
On page 19, despite generally improving credit trend and the fact that we had $1 million in net recoveries, we still did build our reserve for the second time in two quarters. Part of that reserve increase is due to our solid loan growth. But our CECL model also had a slightly worse economic outlook, which necessitated another $3 million in second quarter provision. The chart at the bottom shows our reserve in dollars and percentage since CECL inception that shows a COVID related build up and release. And now we’ve had two quarters of reserve build in a row with this quarter, and the Reliant deal. And it’s related double dip last quarter.
With that, I’ll pass it back to Lynn.
Lynn Harton
Thank you, Jefferson. And also thank you to the United teammates that continue to deliver outstanding performance. 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. So congratulations, and thank you. And finally, I’d like to make a tribute to the DeVan Ard, the founder and CEO of Reliant Bank who passed away earlier this month. I came to know the DeVan about a year and a half ago. He always did what he said he would. He was direct, forthright and truthful. He built a great team and a quality company. In short, DeVan was everything a good man and a great leader strives to be. I and many others miss you. Rest in peace, DeVan. And now I’d like to open the floor for questions.
Question-and-Answer Session
Operator
[Operator Instructions]
Our first question today comes from Brad Milsaps of Piper Sandler.
Brad Milsaps
Hey, 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 downs, just kind of curious how large those were maybe relative to what they typically are. And then secondly, as part of it, 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 run-offs at Reliant to speak of that might have impacted that. I saw Tennessee book was down a bit, but just kind of kind of curious, you have a little more color on some of the crosscurrents with loan growth this quarter.
Lynn Harton
Perfect. Great question, Brad. Let Rich start with that. And then Rob, and I’ll join in as well.
Rich Bradshaw
Good morning, Brad. We 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, there’s a little larger than we normally see, it was our largest production quarter ever in our largest payoff quarter ever. Going forward, I spent a lot of time with the state presidents in each of the geographies understanding their markets, and as well thinking about the recession, if there is one, are we — where are we in the cycle? Where are they in the cycle, most importantly, and really not seeing it. So I felt good about the growth. I think our mix will be a little different this next quarter. I think we’ll still be around that 7% mark that will be more commercial, a little less mortgage.
In terms of Reliant, we typically see a run off at the beginning of an acquisition. Also, we just went through conversion. And as you know, we’re going through leadership transition. So that no concerns there at all, feel great about the team, feel great about the market. And most importantly, that leadership team, John Wilson, Mark Ryman who is 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. And we’re still in the best markets in the country, I believe.
Lynn Harton
Yes, Rob, do you have anything to add?
Rob Edwards
Brad, 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.
Lynn Harton
Well, I’ll just say 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.
Brad Milsaps
Great, thank you. And as my follow up, maybe to Jefferson, I was curious if you might have the net interest margin for the month of June. And then that 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 are thinking around those numbers had changed at all.
Jefferson Harralson
Yes, so our June margin, I’ll give you the numbers 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 rates that have already happened as well. And 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 of weeks like we thank.
Operator
Our next question today comes from Jennifer Demba of Truist.
Jennifer Demba
Thanks. Good morning. I’m just curious, you said you had a 24% deposit beta during the last rate hike cycle. What do you guys assuming for this one?
Jefferson Harralson
It’s a great question. We’re currently assuming a similar deposit beta this cycle versus the last one in our forecast. As you see in our forecast, or is that on the one page, the new page on 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 it starts moving up relatively quickly, and then would go beyond, went beyond that 24% for total rate hikes. So a lot of it depends on how long this rate cycle goes. But for now, we are using 24% in our modeling.
Jennifer Demba
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 give us a little more detail on that?
Rob Edwards
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 then 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. 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 businesses was a little bit of reason to be cautious.
Operator
Our next question is from Michael Rose of Raymond James.
Michael Rose
Hey, good morning, everyone. Thanks for taking my questions. I don’t know if I missed this in the beginning. I am just getting on the — I was on another call. But can you just dig into the mortgage dynamics. If I exclude MSR in both quarters looks like it was down pretty healthy. I know, there’s the loss timing and everything like that. Can you just walk us through some of the dynamics and then obviously there’s inventory constraints in some of your markets. But on the flip side of that, I mean, rates have come in a little bit, you still have positive in migration. 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.
Jefferson Harralson
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 or anything he might want to add. So yes, 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 held-to-maturity loans, that was down 44%. So the piece that we’re generating again, on sale on was down 44%, quarter-to-quarter. Now we’ll have significantly more floating rate loans going onto the balance sheet, we’ll get that economics over time. But from a pure this quarter mortgage fee income number that held-to- maturity rate lock volume is a main driver. Now I’ll pass it over to Rich to talk about the business and the forecast.
Rich Bradshaw
Sure. In terms of expectations for Q3, we’re expecting volume to be down another 15% from this quarter, and probably on the fee side somewhere around the 20% mark lower as well.
Michael Rose
Okay, that’s helpful. And then maybe just circling back to the loan growth commentary, obviously, very good production this quarter, a lot of moving pieces with Aquesta and Reliant and not sure what the run off looks like there. But it would make sense that the beta payoffs, particularly in the crease phase, should slow as rates have risen, not trying to pin you down for an exact outlook for the back half of the year. But this quarter’s core loan growth of 6% to 7%, is that what we should at least kind of contemplate as we move into the back half of the year, just given kind of some of the puts and takes.
Rich Bradshaw
Yes, this is Rich. As I mentioned earlier, I think that numbers a good way to think about it. I think I said that mix will change a little bit with mortgage down a little bit more and a little bit more up on commercial.
Jefferson Harralson
What they inherit, a lot of loan growth we got this quarter was late in the quarter. So our average loan growth was lower than our end of period long 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.
Michael Rose
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 understand that the drivers 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 best presented some opportunities for not only revenue higher, but maybe also on the client side. Thanks.
Rich Bradshaw
Sure, this is Rich. Including this discussions are obviously going on throughout the footprint. We’re currently talking in Nashville about middle market position, because we see that market is such a great opportunity. Also there might be an opportunity for CRE 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 we 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 multistore owners. And this will team well with what we do in the Navitas and SBA. And so we’re very excited about that.
Michael Rose
Okay, great. So sounds like continue to be a little bit more surgical with your hiring as opposed to just bringing out a bunch of people at relatively higher cost to get more around on cycle. Appreciate it, guys. Thank you so much.
Operator
Our next question comes from Kevin Fitzsimmons of D. A. Davidson.
Kevin Fitzsimmons
Hey, good morning, everyone. Just 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 curious if you could give us what that change means. I know it, you’ve referred to 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 versus the prior few years, we’ve been driving NII growth via the balance sheet while the margin was being compressed. And are we — are shifting now and reversing where it’s being driven by the percentage margin. But are you still confident that we’ll be able to drive NII growth, even if its average earning asset growth is a little lower than it’s been? Thanks.
Jefferson Harralson
So it’s a great question. It’s something that I think about a lot, and are the outlook for our NII 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 outflows was one of the least I’ve seen of other banks, but it’s something that you worry about when you had over billion dollars, $1.4 billion of inflow over the last year. So we realized that you might get sound 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 — for if there is a deposit outflow. The other reason is, if you got it, it’s — we’re in such a volatile rate environment and rates may go up another 200 basis points, and I like the size of our securities portfolio. Now so the deposit outflow, the potential for it has probably led into keeping the securities portfolio relatively flat here. Now on deposit betas, we just had a meeting yesterday, and we just looked at competitor deposit pricing, and it hasn’t really changed a lot and 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, and 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. 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 having us — having one of the most core deposit base as we believe in the country, that’s going to translate to very significant margin expansion. I’d mentioned that 20 to 25 basis points that I think we’ll get next quarter.
Kevin Fitzsimmons
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 appreciated 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.
Lynn Harton
Yes. Sure. So and thank you for the comments on DeVan. Right now on Progress, we do, I mean, we’re very cognizant of kind of change in regulatory leadership and more uncertainty about timing of deal closures. So we’re currently 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 contingency plans in case it does extend out. So we’ll wait and see on that.
In terms of M&A in general, yes, I think, for the near term, 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 can always get surprised. 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. So $750 million to $3 billion banks in growth markets in the southeast. 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 is helpful actually to get Progress and Reliant fully integrated.
Operator
Our next caller is David Bishop of Hovde Group.
David Bishop
Yes, good morning, gentlemen. Thanks 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, and that 3% to 4% rate I think year-over-year on core basis is, is that — should that be the expectations sort of near term and maybe into 2023? Excluding some of the impacts of the Progress deal? Just how are you thinking about inflation impacting the rate of expense growth?
Jefferson Harralson
It’s a great question. Expenses for this quarter came in a little higher than I was expecting. If you go back and look through, it’s, 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 will continue to grow expenses will 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 $3.3 million last quarter, I think it’ll be half or less of that in Q3. We’re expecting some pretty significant efficiency ratio improvements in the back half of the year. And I’m looking at, it’s early, but I’m 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 laid out where I think in the near term.
David Bishop
I appreciate that. And then maybe a high level question maybe for Lynn, 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 are in obviously some good strong population infra markets. Do you think that I mean, does that feel like the appropriate rate of growth or a good rate of growth for the overall macroeconomic backdrop just curious like what you’re seeing and maybe that backdrop that gives you comfort at that level? Thanks.
Lynn Harton
Yes. So I’ll start and Rich can jump in. But I certainly feel comfortable that 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 6% to 9% kind of range. I’d be very comfortable with right now. I don’t know, Rich, if you’d have anything to add?
Rich Bradshaw
I would agree. And I’m the sales guy. I think I like the discipline approach, especially as we’re still talking about uncertainties that we don’t know in here in the near future. It certainly feels like we’re doing the right things in the right back blocking and tackling and I think it’s the right approach.
Operator
Our next question is from Catherine Mealor of KBW.
Catherine Mealor
Thanks. Good morning. Follow up for you, Jefferson, on your 20 to 25 bps NIM outlook for next quarter. What kind of, I guess, balance sheet kind of growth are you assuming in that? Are you assuming more of a deployment of excess cash? And I think you mentioned that the securities portfolio will remain kind of flat. So I’m assuming that but I guess it’s really just the excess liquidity. How are you thinking about the point of excess liquidity and how much that contributing to the higher NIM guide versus just yield?
Jefferson Harralson
Yes, great question. So we have a flat to slightly down balance sheet in Q3 that’s going into that margin. So that would be relatively flat securities or very flat securities and then flat to down cash is [Inaudible] for Q3.
Catherine Mealor
Great, okay. And then your commentary about Navitas, these coming down, you mentioned a $2 million number. Is that relative to the $3.8 million line that includes SBA, USDA, and Navitas?
Jefferson Harralson
Right. 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 is we have significant margin expansion coming, we have significant spread expansion coming, and I’m sorry, net interest income growth on the way. We feel good about our loan growth outlook. And if what we’re seeing is in the pricing of these markets, you’re seeing volatility is moving up and down. And that is I don’t want to be, I don’t know the right words for us. But I 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 them, 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.
Catherine Mealor
And so then, is there any change to your origination volume for Navitas? Or is it just that you might hold more on balance sheet and sell less. And so then in that respect, we might see actually higher loan growth because you’re just keeping more Navitas on balance sheet.
Jefferson Harralson
That’s correct. And so Navitas is grown out a really nice pace. And if we were to hold and right now we’re at 8% of total loans on Navitas. As you know, we have the limit, self-imposed limit of 10%. And if we keep a little more Navitas on balance sheet, it sets us up well for 2023 and the loan growth in the near term. So it’s a, I think it’s a better long- term strategy to hold a little bit more of the Navitas loans and the SBA loans.
Catherine Mealor
Great. And you’ve said in the past, you have about a six month insight into and kind of churning credit in Navitas, any commentary there and anything you’re seeing in that business? [Multiple Speakers]
Rich Bradshaw
Okay. Yes, so actually talked to them yesterday, and really not seeing our expectations. So we went from nine basis points losses in Q1 to 30 basis points a losses in Q2, pre-pandemic sort of in normalized times, they were running in the 70 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. They’re still very, very low compared to where they were pre-pandemic. So we’re not seeing anything unusual at the moment, but just would expect it to return to a more normalized level.
Operator
Our next question comes from Christopher Marinac of Janney Montgomery Scott LLC.
Christopher Marinac
Thanks. Good morning, Jefferson and team. I wanted to drill down further on liquidity. I know you gave some great information on an earlier answer. How do you think about using the existing securities book to harvest? Or even use it further as collateral? I know there’s a bunch of capacity on both angles. So 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?
Jefferson Harralson
Yes, that’s a great, it’s a great question, Chris. Something I think about, I think the deposit growth will drive that because, say, our deposit growth is flat for even three years. I think we’ll — we have the funding on our balance sheet and 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 the way I think about it too the $7 billion securities book. I mean, I will be completely fine using to over time, we have the cash to fund this now. But over time, for you is $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 my capital growth, I’m completely fine with that. So I just, 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.
Christopher Marinac
Right, thanks for that additional color. Appreciate it. And then just too kind of, I guess, a follow up on the whole beta conversation. If we think about betas on the asset yield side, should Navitas perform similar to the rest of the UCBI portfolio, or will it be different just because of the nature of how those loans are originated.
Jefferson Harralson
So Navitas will have a lower beta, and maybe even a much lower 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. Navitas was very helpful to us and remained helpful to us in an up rate environment too, but very helpful in the downright environment. But 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 are going to be at closer to 53% folding or becoming more variable in the whole book as rates move higher. So I still think you’re going to see a good alone beta from us, but it’s just not going to come from Navitas.
Christopher Marinac
Got it. And given the change in interest rates here in the last several months, and it is, is there any pricing change in the betas at all? Will something be passed along by the end of September?
Jefferson Harralson
Yes. So they are definitely passing along rate hikes. But it takes longer and they’re a little more uncertain because it’s a competitive environment.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Lynn Harton for any closing remarks.
Lynn Harton
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.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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