Earnings Call Transcript - UCB Q2 2023

Operator, Operator

Good morning and welcome to the United Community Banks Second Quarter 2023 Earnings Call. Hosting the call today are, 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, pre-tax, 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 five and six of the company's 2022 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, Chairman and CEO

Good morning and thank you for joining our call today. Our operating earnings this quarter were $0.55 per share, down slightly from $0.58 per share last quarter. Our operating return on assets was 1% for the quarter and our operating pre-tax pre-provision ROA was 165 basis points, down modestly from 171 basis points last quarter. As expected, the current level of interest rates and particularly the pace of rate increases is influencing our results. While we were pleased with our deposit growth for the quarter, we did see continued deposit mix changes as customers move from non-interest bearing accounts into higher-yielding products. Our cost of deposits increased to 164 basis points, up from 110 basis points last quarter. This was partially offset by a 21 basis point increase in our earning asset yields, leaving our net interest margin at 3.37% for the quarter. Our overall liquidity position continues to be strong with no short-term borrowings or federal home loan bank advances. Our loan-to-deposit ratio remained steady at 78%, providing ample liquidity to continue to serve our clients' borrowing needs. Loans grew at an annualized rate of 6.3% for the quarter and we continue to be excited about the opportunities we are seeing to expand our lending team with new hiring opportunities. Our markets continue to perform well economically with all of our states having both unemployment rates below the national average and ranking in the top 10 states nationally for in-migration. Even with the strength of our markets, we are cautious about credit given the inverted yield curve and the Fed's focus on slowing the economy. Changes in our economic forecasting model caused us to build our allowance in the quarter, which now stands at 1.22% of loans. Over the past year, we've increased our allowance relative to loans by 16%. While we believe it is prudent to increase our reserve coverage, we are currently not seeing signs of widespread credit weakening. Past dues have been low and our special mention and substandard loans have been essentially flat for several quarters. However, we are seeing those credits identified as substandard become weaker as interest rates and inflationary costs are hurting their ability to recover and be upgraded. Our non-accrual loans increased this quarter as one of our senior care relationships, already identified as substandard, was placed in non-accrual. On the strategic front, the Progress Bank conversion went very well and we're excited to be operating with that team under the United brand. They have great momentum and have been an outstanding addition to our franchise. On July 1st, we closed on First National Bank of South Miami, a deal we announced on February 13th of this year. Conversion is scheduled for October and we look forward to having their fantastic team fully integrated with the company. Progress was the first partner to be converted using our new branding and new logo. We think it looks great and represents both our history and our future in a positive way. This month we will also begin rebranding Seaside as United Community. When complete, we will be excited to have all of our banking franchise operating under one brand. And with that, I'll turn it to Jefferson for more detail on our performance.

Jefferson Harralson, CFO

Thank you, Lynn and good morning to everyone. I'm going to start my comments on page eight and go into some more details on deposits. As Lynn mentioned, we had deposit growth in the quarter up $249 million. And excluding broker deposits and public funds, we grew deposits by $109 million or 2.3% annualized. Year-to-date, our customer deposits are up $533 million or 5.1% annualized. We did see increased price competition in the second quarter that drove our cost of deposits up 54 basis points to 1.64% and took our cumulative total deposit beta to 32% since the fourth quarter of 2021. We also saw continued deposit mix change in the second quarter as our customers are reasonably moving some liquid dollars into CDs and higher-yielding money market accounts. This quarter our DDA as a percentage of deposits moved to 31% from 34% and conversely the percentage of CDs moved to 17% of deposits from 14%. On another note, we have a very granular deposit base as represented by the graph on the lower right. We turn to our loan portfolio on page 10. We grew loans in the second quarter by $270 million, which is 6.3% annualized and similar to the dollars at which we grew deposits this quarter. On page 10, we also layout that our loan portfolio is very diversified and generally less commercial real estate heavy as compared to peers. Finally on page 10, you can also see our manufactured housing slice of the pie at 2%. You will recall that this business came with the Reliance transaction in early 2022. After the deal, we had said we would take some time to evaluate the business and after some time of looking at it, we have decided that it doesn't fit into our model and we have stopped originating new loans and we will wind down the business. We will continue servicing the existing book while it runs off over time. Turning to page 11 where we will highlight some of the strength of our balance sheet. First, with similar dollars in loans and deposit growth, our loan-to-deposit ratio was flat at 78% in the quarter. On the bottom are charts of two of our capital ratios, our TCE and our CET1 ratios, they were flat this quarter and remain about 100 basis points higher than peers. On page 12, we take a deeper look at capital and we show a tangible book value waterfall chart. Our regulatory ratios remain above peers and generally increased slightly as compared to last quarter. Moving on to the margin on page 13, the margin increased 18 basis points year-over-year, but fell 24 basis points from last quarter. Our loan yield increased 17 basis points in the higher rate environment as new loans are being put on in the high 7s, but our cost of total deposits was up 54 basis points to 1.64%. The main driver of the cost of total deposits increase was a tougher competitive environment in the form of higher deposit rates. 18 basis points of the margin decrease came from the impact of us moving rates higher. In addition to the higher rates, we had a continuation of mix change away from DDA to higher cost money markets and CDs this quarter that contributed another five basis points of higher deposit costs, which is similar to the run rate of last quarter. So, we have the benefits of loan yields moving higher and a positive mix change on the asset side that was more than offset by higher deposit cost and a negative mix change in deposits. On page 15, our fee income was up $6.2 million compared to last quarter. The increase was driven by higher service charges, an increase in mortgage income and greater gains from SBA and Navitas loan sales. We did have two notable non-recurring items including a $1.6 million gain from the sale of a small commercial insurance and corporate benefits business and we also had a $1.4 million MSR gain this quarter. Expenses on page 15 came in at $128.8 million, down $2.4 million from last quarter. The main drivers of the improvement are listed on the page. Moving to page 16 and on the topic of credit, we set aside $22.8 million to cover $8.4 million in net charge-offs and built the allowance for credit losses to 1.22% of loans. A main driver of the increase was a decrease in the forecast for the CRE price index, which drove a $7 million increase in the provision. NPAs increased to 60 basis points in the quarter, mainly due to the movement of a single senior care loan into non-accrual. For the quarter, Navitas had just $2.5 million in net charge-offs or 69 basis points. That said, we expect Navitas losses to be higher than typical in the third quarter and then to moderate in the fourth and end up in the 90 to 95 basis point range for the full year. With that, I'll pass it back to Lynn.

Lynn Harton, Chairman and CEO

Thank you, Jefferson and many thanks to the United team for your tremendous focus and drive to perform and your heart for our customers. And now I'd like to open the floor to questions.

Operator, Operator

We will now begin the question-and-answer session. Our first question comes from Catherine Mealor of KBW. Please go ahead.

Catherine Mealor, Analyst

Thanks. Good morning.

Lynn Harton, Chairman and CEO

Good morning Catherine.

Catherine Mealor, Analyst

I thought I'd just start with the margin. Jefferson, could you just walk us through your thoughts on outlook for the margin over the back half of the year? Do you see some stabilization? Or do you think we'll still see some further compression after this quarter's decline? Thanks.

Jefferson Harralson, CFO

Thanks Catherine. I think we're at or near a bottom with the margin modeling down by five basis points for my model for the third quarter, and I think you see increases from there. Some of the main drivers there are the mix change, we're seeing a little less mix change through June and into July. So, hard to predict, but it feels like it's stabilizing. The exception pricing has been out there for us as again something that's hard to model. But again, we're getting less request there, so that feels a little better as well. We've got some tailwinds with First Miami, First National Bank of South Miami closing to get the rate hike that helps a little bit too, although we're pretty neutral now. And then I mentioned earlier that the new loan yields are coming in the high 7s and we get mix change on the asset side as well. So, I think we're at or near bottom and increasing from there.

Catherine Mealor, Analyst

Could you provide some insights on the senior care loans? They represent only 2% of our total loans, which is relatively small, but we've discussed them quite a bit in recent years. Are there any other loans in that sector showing signs of decline similar to what we observed this quarter? I'd also like to hear your thoughts on the overall credit trends within that sector and the wider commercial real estate portfolio. Thank you.

Rob Edwards, Chief Risk Officer

Thank you, Catherine. Regarding the senior care portfolio, it's notable that the credit which moved into non-accrual had previously been considered substandard for a while. The $106 million designated as substandard includes $32 million now classified as non-accrual. One of these credits entered non-accrual in the first quarter, and another followed in the second quarter, leading to a total of three facilities in non-accrual amounting to $32 million. We haven't seen much new credit entering the substandard category. Over the past two years, the total in the criticized and classified category has decreased from $240 million to $200 million or $214 million. We feel that there hasn't been significant change, although we are currently managing about six relationships within the substandard and non-accrual categories. Some of the $100 million in substandard accruing loans may shift to non-accrual, and we will navigate through those changes. We believe we have accurately classified the portfolio and are seeing some improvement with recent upgrades and payoffs, while others have yet to recover. Regarding the industry outlook, it largely depends on market developments, such as a new hospital being built nearby one of our substandard properties, which we believe is a positive change. Overall, while some properties are improving and gaining momentum, others are slower to do so. This summarizes the situation with senior care, which is a key factor in our investment portfolio. As for the broader commercial real estate sector, we are currently experiencing strong and consistent performance across our portfolio, aside from the senior care segment.

Catherine Mealor, Analyst

Great. Thank you. So, that increase in the reserve, would you say that's directly tied to this portfolio or just kind of general CECL qualitative factors?

Rob Edwards, Chief Risk Officer

As it pertains to CECL, the factors influencing it are charge-offs, loan growth, and the economic forecast. Specifically, for this quarter, the key elements affecting the economic outlook were the CRE price index, along with a more modest anticipated decrease in business investment. The significant shift was primarily linked to the CRE price index, while the expected decline in business investment also contributed to an increase in the allowance for some categories, including C&I and equipment finance.

Catherine Mealor, Analyst

Got it. Okay. Great. Thank you for the color.

Operator, Operator

Our next question comes from Stephen Scouten of Piper Sandler Companies. Go ahead.

Stephen Scouten, Analyst

Hey, good morning, everyone. Appreciate the time. I guess, if I could maybe dig back into the margin guidance a little bit more. Jefferson I know you said maybe five basis points down next quarter, but could you give kind of updated thoughts on where you think that cumulative deposit beta might go for the full cycle and kind of how you're thinking about the floor on non-interest bearing deposits as a percentage?

Jefferson Harralson, CFO

Yes, thank you, Stephen. Those are great questions. Regarding the total deposit beta, we believe it may fall within the 36% to 38% range, which is our current projection. We're also seeing continuity in the asset beta that may help balance that out, with both expected to increase for the remainder of this year and into next year. As for the DDA percentage, we anticipate it continuing to decrease, potentially by another 100 to 200 basis points. In the past decade, we've seen much lower DDA percentages, but our bank has significantly evolved with a more substantial mix of commercial and industrial deposits since then. Therefore, I don't expect us to return to those historical levels. I believe we are getting close to stabilization. Once rates stop rising, we should see the DDA percentage begin to stabilize, and I feel we have already started to see that trend. While we are modeling it to decrease, I don’t anticipate it reverting to the levels from 2015 or 2012.

Stephen Scouten, Analyst

Yes, that makes a lot of sense, Jefferson. Appreciate that. And then just kind of conversely on the asset side, is the repricing of fixed rate loans, is that kind of the dynamic that makes you think the NIM could bottom here in the third quarter? And do you have any sort of numbers for how much of that book will reprice maybe in the fourth quarter or in 2024, what have you?

Jefferson Harralson, CFO

We might need to conclude our discussion on that point, but I do have some information. It appears to be decreasing by about 4.5% and increasing to around 7%. I need to check on the actual amounts involved, but that is one factor contributing to it. Additionally, we are aiming to increase the proportion of variable rates now, so the combination of variable and fixed rates is currently in the high 7% range. Navitas is coming in at just below 10%. I had considered a combination approach, but we can certainly evaluate the fixed rate on its own. I understand it is decreasing at 4.50% and increasing close to 7%.

Stephen Scouten, Analyst

Okay, that's great. And maybe just last thing for me, you guys hold a little bit more capital than peers on the average. It sounds like continued hiring is probably in the plans, but can you give me some thoughts on just capital priorities as you look out maybe over the next year or two kind of longer term?

Jefferson Harralson, CFO

Yes. Organic growth will be our top priority, as it always has been. Dividends will be second, and share buybacks will come in third, though they're quite a distance behind. Mergers and acquisitions will be a fourth priority, also lagging behind organic growth. We prefer having more capital, especially during times like these. We have repurchased a modest amount of preferred shares. We see value in buying back preferred shares while they are under $25, having spent less than $300,000 this quarter on such buybacks. This approach allows us to achieve a small gain on the tangible common equity. Regarding growth, you mentioned hiring. Should we discuss that with Rich?

Rich Bradshaw, President and Chief Banking Officer

Sure. This is Rich, and I want to highlight that we conducted another lift-out in East Tennessee that was successful in attracting six commercial professionals. Since our last earnings call, we have appointed Kelly Key as our State President in Tennessee, which we are very excited about. He brings 25 years of experience from a super-regional bank in Nashville. Alongside the lift-out in East Tennessee and our other hiring efforts, we have received 14 confirmations in the commercial sector, with 11 individuals already started. We are enthusiastic about these developments in addition to our two lift-outs in the first quarter. We are being very selective with our hiring; currently, we don’t have any active initiatives planned. Our goal is to ensure we get this right, but we are extremely optimistic about the opportunities in Tennessee.

Stephen Scouten, Analyst

Great. Thanks so much for all the color. Really appreciate it.

Lynn Harton, Chairman and CEO

Thank you, Stephen.

Operator, Operator

Our next question comes from Brandon King of Truist. Go ahead.

Brandon King, Analyst

Hey, good morning.

Lynn Harton, Chairman and CEO

Good morning.

Brandon King, Analyst

So, I wanted to talk about Navitas and I appreciate the guidance. It seems like losses were lower this quarter and expected to trend higher next quarter and then moderate in fourth quarter, but could you give us some context as to the cadence of the losses for this year? And what gives you confidence that losses will moderate towards the end of the year?

Rob Edwards, Chief Risk Officer

Hey Brandon, this is Rob. Regarding Navitas, we purchased the company in 2018 and initially anticipated a 1% loss rate. Since then, we have seen two key developments. Firstly, they have improved their customer selection, and secondly, we benefited from favorable economic conditions. We believe that their customer selection has enhanced over the past four and a half years, although they have faced challenges in a specific segment of their transportation portfolio over the last 18 months. They have identified about $35 million in long-haul tractor/trailer loans that have declined in value, coupled with reduced revenues and shipping costs. As a result, they foresee higher than normal stress in this particular pool during the second half of the year. This situation is what is driving the projected losses. Although it is a small portfolio, its size is why we expect a decrease in performance later in the year.

Jefferson Harralson, CFO

So, I'll just add in that we like that 90 to 95 basis point range for the year, but it's just going to be higher in the third quarter and lower in the fourth.

Brandon King, Analyst

Okay, okay. So, this is kind of coming with the small subset of loans and just kind of a normalized rate going into next year?

Jefferson Harralson, CFO

Yes.

Brandon King, Analyst

Okay. And then on expenses, Jefferson, what are your kind of expectations for the run rate with First Miami coming online in the third quarter and back half of the year?

Jefferson Harralson, CFO

Thank you for the question. The expenses we reported this quarter are indicative of our ongoing run rate. While they decreased, we successfully managed to offset the natural merit increases during this period. We anticipate a slight growth rate alongside First Miami. We've been closely evaluating our expenses, particularly within our branch network, where 60% of our costs are personnel-related. Over the past three years, we've closed 16 branches, with five more set to close at the end of July. We plan to revisit this in our upcoming management meeting. Our focus on productivity is paramount because we are now experiencing what we call a hiring chill. This isn't a hiring freeze; we will continue to seek talented individuals but will approach hiring with greater selectivity. Consequently, we expect fewer new hires. On the mortgage front, we've had multiple staff reductions due to decreased volumes linked to higher rates. These are the considerations regarding our expenses. We anticipate expenses remaining relatively flat with a slight growth rate. To add, as our margin has decreased, our efficiency ratio has risen. Our strategy to lower this ratio involves some of the growth and new hires mentioned earlier, aiming for loan growth in the mid-single-digit range while keeping expenses stable and enhancing our efficiency ratio.

Brandon King, Analyst

Got it. And then last one from me, Jefferson, do you happen to have the NIM in the month of June?

Jefferson Harralson, CFO

I don't have that information. I have it, but there are so many non-recurring items that annualizing them doesn't make much sense. However, if I were to estimate the run rate based on the June margin, it would be very similar to our current level. I believe our margin has likely reached its lowest point.

Brandon King, Analyst

Yes. Totally understand. Thanks for taking my questions.

Jefferson Harralson, CFO

All right. Thanks.

Operator, Operator

Our next question comes from Michael Rose of Raymond James. Go ahead.

Michael Rose, Analyst

Hey good morning guys. Thanks for taking my questions. Jefferson, maybe just to go back to the margin briefly, I know First Miami just closed. Can you give us a sense for what the total amount of accretable yield is now with First Miami and then what you would expect the accretion to kind of run out over the next couple of quarters just on a scheduled base? Thanks.

Jefferson Harralson, CFO

That's a great question because we're about to finalize our marks. The figures I'm sharing could change as we complete that process. Excluding First Miami, we have $40 million of accretion to consider. Initially, we expected First Miami to contribute another $40 million on top of that. Before First Miami, we saw $4 million of accretion. Currently, for the third quarter, we are modeling $6 million, although we still need the final mark. It's challenging since the rates haven't fluctuated much since we announced First Miami, so that $40 million mark might hold. Right now, I'm projecting $40 million for my forecast, but this is subject to change as we approach the final mark. For now, I anticipate we're at approximately $80 million, but we expect to receive the final mark in a month or two.

Michael Rose, Analyst

Okay, perfect. That's very helpful. And I think you said that the margin was kind of nearing a trough. I think you said down about five basis points or so was your expectation for the third quarter. I assume that's on a core basis correct without the impact of accretable yield or is it all in, just want to clarify?

Jefferson Harralson, CFO

So, they're very close because the addition I'm using for the third quarter is $2 million. So, those numbers are very close, but I was thinking about it with, but the difference isn't super huge at $2 million of increase I'm expecting for the third quarter.

Michael Rose, Analyst

Okay, perfect. Appreciate it. Maybe just switching gears a little bit. So, you guys have been very kind of active with M&A over the years. I know your target size is kind of $1 billion to $3 billion is kind of what you've, kind of, targeted. You guys have pretty good currency. There's a lot of chatter about M&A out there. Obviously, many people can't do it loan marks credit, but interest rate marks are prohibitive, but just wanted to get a sense for, are you guys still open for business as it relates to M&A and are you actively engaged with anybody at this point? Thanks.

Lynn Harton, Chairman and CEO

So, yes, Michael, this is Lynn. So, I would say we're continuing to be actively engaged in terms of talking to people, building relationships. I feel like we are in the selection set of those people considering selling. So, from that perspective, we're active in terms of actual transactions. My expectation is not much happens over the next several quarters, really, for the reasons you mentioned. The math is difficult, marks, prices are not what some sellers are expecting. So, I don't know. I do hear chatter about deals getting announced, but I would personally think that we don't see that pick up until maybe the middle part of next year or something like that.

Michael Rose, Analyst

Okay. So, perhaps an M&A fill is similar to a hiring fill in that it has a post.

Lynn Harton, Chairman and CEO

Yes, that's right. I'm telling our technology team this is the opportunity to drive some of those projects a little quicker than we've been doing, which we're kind of excited about. We've got a lot of great things on the path for that.

Michael Rose, Analyst

Perfect. Maybe just finally for me. I know it's hard to predict, but the Navitas SBA gains were up a little bit. Just can you kind of describe the environment and what we might be able to expect in terms of loan sales here in the next couple of quarters? Thanks.

Lynn Harton, Chairman and CEO

So, I'll pass to Rich on the SBA gains and we'll talk about that. I'll follow-up on the Navitas ones.

Rich Bradshaw, President and Chief Banking Officer

Sure. The SBA, it's timely because we sold SBA loans yesterday. And I would say the market was a little bit up. So, I feel good about that. It's kind of a countercyclical product. And one of the things I wanted to mention in this call today is looking at that first of all, we are fully staffed in that which is rare because there's always a lot of demand for that product and people. But we are anticipating that that product will be up for us about 25% this year. So, it's been really good for us and we're excited about that.

Lynn Harton, Chairman and CEO

And I'll add in that third quarter is usually a little bit seasonally stronger than second for SBA gains. So, I don't know, flat to higher maybe on the SBA side. No, I think it would be up because our inventory will be up too with regards to the 25% greater production and the market for Navitas loans seems stable. So, I would expect that to be relatively flat. So, the category together I would expect to be slightly higher in the third and fourth quarter, just following seasonality and the volumes that we're seeing.

Michael Rose, Analyst

Thanks for taking my questions, guys.

Lynn Harton, Chairman and CEO

Thank you.

Operator, Operator

Our next question comes from Kevin Fitzsimmons of D.A. Davidson.

Lynn Harton, Chairman and CEO

Hi, Kevin.

Kevin Fitzsimmons, Analyst

Good morning, everyone. I want to follow up on your comments about manufactured housing. I'm curious if there is something in the current environment or economy that affects it, or if in an ideal economic situation it would still not be suitable, or if it's a mix of different factors. Thank you.

Lynn Harton, Chairman and CEO

Let me start with that, and then Jefferson and Rich can contribute. First, for any of these businesses, we assess whether it can be significant enough for us to want to make an impact. As we examined that business, we appreciated the team; they are knowledgeable, but the competition is intense. It's subprime and consumer-focused, which adds to the typical risks over time, and it operates within our market. So, it wasn't just one factor; we considered whether we could scale it from $300 million to $1 billion. Given those reasons, we decided it's better to wind it down and allocate our resources elsewhere. Those were the key considerations. Jefferson, would you like to add anything?

Jefferson Harralson, CFO

I'll just add that we applied the same reasoning when we sold the corporate benefits insurance business and the healthcare insurance business. They had very little overlap with our existing customers, similar to MH. In this situation, the revenue was even smaller, less than $1 million, and there wasn't much overlap with current clients. We use similar reasoning for that business as well. We'll continue to evaluate our businesses, especially the smaller ones, with that perspective. It wasn't anything specific to the portfolio or any issues we identified; it's more about an overall business strategy question.

Kevin Fitzsimmons, Analyst

And that was a business you guys were in and it was just imperative from Reliance, correct?

Lynn Harton, Chairman and CEO

That's correct.

Kevin Fitzsimmons, Analyst

So, do you stop originating loans and let them mature, or do you actively try to sell them? I'm not sure if there's a market for that.

Jefferson Harralson, CFO

I think with rates moving higher, I think the idea is just to let them mature over time. If rates move down and there is a better market or if you can sell them without a loss, then maybe you accelerate the exit of the business, but our plan currently is just to service the loans and let it run down.

Kevin Fitzsimmons, Analyst

Okay, great. And then just a quick follow-up on your strong capital. There's been some discussion about whether banks might consider selling some of their underwater securities and reallocating that capital at higher rates or paying down debt. Is that something you're considering, or I would imagine that with every acquisition like First Miami coming in, you're gaining some of that through their securities portfolio? I'm just curious about your thoughts on this.

Jefferson Harralson, CFO

We have considered this issue, and we will not be undertaking a restructuring of that nature. This quarter, we decided to swap $700 million of our securities from fixed to floating rates. The primary goal was to safeguard TCE and capital against potential higher rates. We reduced the duration of our AFS portfolio from three and a half years to two and a half years, increasing the floating portion from about 20% to 60%. While the initial benefit of 150 basis points was not the main reason behind this decision, moving to a shorter duration does provide some advantage. Consequently, we expect the securities yield next quarter to be around $2.80, depending on rate movements. A rate hike would yield additional benefits, while a decrease in rates could work against us. Our main objective was to effectively allocate risk and protect TCE and unrealized losses in a rising rate environment.

Kevin Fitzsimmons, Analyst

Okay, great. Thanks.

Jefferson Harralson, CFO

All right. Thank you.

Operator, Operator

Our next question comes from David Bishop of The Hovde Group. Go ahead.

Jefferson Harralson, CFO

Hey David.

David Bishop, Analyst

Hey, Jefferson. I appreciate the information on the hires in the Eastern Tennessee market. But I'm wondering if I missed something. Does that change your outlook for expected loan growth this year? Will it have an inflationary effect in the second half of the year? Are you still confident in that mid-single-digit growth outlook?

Rich Bradshaw, President and Chief Banking Officer

Hi, David, this is Rich. To answer your question, I think we're still looking at mid-single-digit loan growth. Clearly, we've tightened credit criteria for both commercial and mortgage as we move forward. I expect Q3 to resemble Q2 in terms of both loan and deposit growth. I'm hopeful that can happen, but understand that these individuals have just started in the last 30 days. It will take a quarter for them to see some results. What we're really anticipating is that things will be running smoothly by January 1st, and we're truly excited about that.

David Bishop, Analyst

Got it, understood. From a credit perspective, I appreciate the insight on the office portfolio in the segment. However, does it seem like there's any pressure from debt service? As you look ahead, have there been any changes quarter-on-quarter regarding your borrowers' ability to manage higher rates as their loans come up for renewal and maturity?

Rob Edwards, Chief Risk Officer

Yes. Thanks David, this is Rob Edwards. So, we've done several analysis both at a sort of special stress test at the top of the house that sort of focuses on CRE. We've gone through some fixed rate variety of CRE products and looked at top 50 and re-amortized at new rates and we're actually doing another one of those tests right now. So, we're sort of in an ongoing sort of stress. The portfolio from different angles and so far we haven't seen anything that really identifies as when the rates change, these people aren't going to be able to make payments. Really the first test we looked at was fixed-rate borrowers maturing in the next 24 months because I think you sort of go back in time and like, well, their rates are going to change the most, but we had one borrower that we would have rated special mention after the analysis, but as it turns out they were already rated special mention. So, we just didn't see anything that forecast a need for a change or any downgrading.

David Bishop, Analyst

Got it. I appreciate the color.

Operator, Operator

Our next question comes from Russell Gunther of Stephens. Go ahead.

Russell Gunther, Analyst

Hey, good morning guys. Just a couple of quick follow-ups at this point. On the office topic, I appreciate the recent remarks. Do you guys have a maturity schedule that you could share for that sector?

Lynn Harton, Chairman and CEO

We could create one. We have looked at the maturities in a few different ways. I was thinking it was a maturity in the K; I need to verify that or the Q possibly. I will get back to you on that, Russell.

Russell Gunther, Analyst

Okay, no worries. And then just last one, on the deposit side, any color you guys can share in terms of retention out of progress in First Miami?

Lynn Harton, Chairman and CEO

So, I'll pass this to Rich because it's a hard question, but First Miami just closed, so we don't really have a lot there. But talk about progress.

Rich Bradshaw, President and Chief Banking Officer

Sure. I think the challenge early on was that we faced a lot of pressure and had a conversion. The good news is that the conversion is now behind us. After speaking with David Nast, our State President, he is optimistic about this quarter. We experienced strong loan growth last quarter, and he is forecasting additional loan growth this quarter as well. With our pricing strategies and the conversion completed, there is also excitement as he was the first to receive the new logo.

Jefferson Harralson, CFO

And I can give more detail, exact numbers for you there on what progress deposits have been since we bought in that.

Operator, Operator

Our last question comes from Christopher Marinac of Janney. Go ahead.

Christopher Marinac, Analyst

Thanks. Good morning. Jefferson, as you look at the deposits and kind of new customers that have come in this year and just existing customers doing more, what is the average life of those relationships? Is it something north of three years? Is it longer than that? I just kind of want to recast kind of franchise value for the organization as you've expanded?

Jefferson Harralson, CFO

That's a great question. We've been thinking a lot about it. We have a discussion later today regarding this issue because what we've observed is that as rates have risen, our asset durations have increased while our liability durations have decreased. Currently, there's a shift from what you might normally consider the longest duration product, which is DDA, towards CDs that have a specific duration attached to them. So, you're seeing some mathematical changes in the mix affecting the duration, along with price competition and customers moving around. I still believe our liability duration is longer than four years, possibly around four and a half years. We're calculating surge and trying to determine new durations for each product while monitoring the changes in DDA. Overall, I think we're at approximately four and a half years, which is longer than our assets. However, this topic requires a more in-depth off-site discussion to cover all the changes we believe are occurring. Overall, in terms of actual customer life, it remains very long and has not changed, and we are adding a significant number of new customers.

Lynn Harton, Chairman and CEO

And I'll add one more thing with that rule change of lens of how we're thinking about it. But I look at our net new ratios every month and our year-over-year net new and look at every market and our new customers are well ahead of the customers that we lose. And then when you see the deposits growth or shrinkage, it's usually within our existing customers that are continuing as existing customers. It's just that maybe they've moved some money to treasuries or into other non-bank things. So, from a customer life standpoint, it's very long and hasn't changed and we're adding a lot of new customers.

Christopher Marinac, Analyst

Good stuff. Thank you both for that background. It's really helpful. I just had a quick follow-up kind of a joint question for Rob and Rich which is just to maybe delineate the difference between senior care and senior housing and are there still opportunities in senior housing down the road?

Rob Edwards, Chief Risk Officer

So, I think we don't have a separate category for senior housing. You're talking about 55 plus, Chris?

Christopher Marinac, Analyst

Exactly, yes. Yes.

Rob Edwards, Chief Risk Officer

We categorize senior housing within multifamily in our reporting, though I don't have a specific breakdown for that. In our Investor deck, senior care includes independent living, assisted living, and memory care.

Christopher Marinac, Analyst

Got it.

Rich Bradshaw, President and Chief Banking Officer

And on the over 55, we have started to see those for that product, but it's probably limited to a handful.

Rob Edwards, Chief Risk Officer

Yes, I would say less than five.

Rich Bradshaw, President and Chief Banking Officer

In the whole footprint. So, we are interested in it, but cautiously.

Rob Edwards, Chief Risk Officer

Yes, that's good.

Christopher Marinac, Analyst

Got it. Great. Good stuff. Thanks again.

Rich Bradshaw, President and Chief Banking Officer

Thank you, Chris.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Lynn Harton for closing remarks.

Lynn Harton, Chairman and CEO

Well, once again, many thanks for being on the call. Great questions. Be glad to follow-up with anything that you need, just give us a call and hope you have a great rest of your day. Thank you.

Operator, Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.