Earnings Call Transcript - UCB Q1 2026

Lynn Harton, Chairman and CEO

Good morning, and thank you for joining our call today. We've got a lot to cover. I'm going to start with our quarterly earnings update, and then we will close with the details of our acquisition of Peach State Bank headquartered in Gainesville, Georgia. We had a great start to 2026. For the first quarter, we realized net income of a little over $84 million, translating into EPS of $0.69. On an operating basis, our EPS was $0.70, representing a 19% increase from the first quarter of 2025. Annualized loan growth of 4.5% for the quarter and an expansion of our net interest margin of 3 basis points helped to drive these results. Credit also performed very well this quarter with total charge-offs of 22 basis points, only 10 basis points, excluding Navitas. Nonperforming assets as a percentage of loans were 50 basis points, down 1 basis point from Q1 2025, and special mention in substandard loans totaled only 2.9% of total loans, down 2 basis points from Q1 of 2025. Our operating return on assets was 122 basis points, an 18 basis point improvement year-over-year, and our operating return on tangible common equity was 13.1%. Given our high capital levels, we continued to return capital to shareholders, both via a $0.25 quarterly dividend and the repurchase of $37 million of our common stock. We also announced the intention to redeem our remaining $100 million in subordinated debt in the second quarter, only 20% of which qualified as Tier 2 capital. Even with the dilution from our repurchase activity, tangible book value per share grew at an annualized rate of nearly 6% for the quarter and by 10% year-over-year. We were also excited to have been recognized by J.D. Power as the top-ranked bank for retail client satisfaction in the Southeast during the quarter. This is the 12th time the United team has received this recognition. I'm very proud of the dedication and genuine care that our teams across the footprint demonstrate every day. It's because of them that we are the most recognized bank for customer satisfaction in the Southeast.

Jefferson Harralson, Chief Financial Officer

Thank you, Lynn, and good morning to everyone. I will start on Page 5 and talk about our deposit results. On an end-of-period basis, our customer deposits grew by $237 million or 4% annualized, mostly driven by DDA growth in the quarter. We were also very pleased that our cost of deposits moved down 9 basis points to 1.67% and that our cumulative total deposit beta stands at 39% in this down cycle, which exceeded our goal. On Page 6, we turn to the loan portfolio, where our growth continued at a 4.5% annualized pace. Our growth came primarily in the HELOC and C&I categories, which are two of our current areas of focus for growth. Turning to Page 7, where we highlight some of the strengths of our balance sheet. We believe that our balance sheet is in a good position from a liquidity and capital standpoint to be ready for any economic volatility. We have very limited broker deposits and very limited wholesale borrowings of any kind. Our loan-to-deposit ratio remained low and was unchanged at 82% this quarter with a solid end-of-period deposit growth. Our CET1 ratio was flat at 13.4% and remains a source of strength for the bank. On Page 8, we look at capital in more detail. As I mentioned, our CET1 ratio was 13.4% and our TCE was also flat at 9.92%. We were active in our buyback again in the first quarter, buying back $37 million in shares, which equated to 1.1 million shares in the quarter or just under 1% of our shares outstanding. Moving on to spread income on Page 9. Spread income was down in Q1, mainly due to having two fewer days in the quarter. On a year-over-year basis, our spread income was up 10%. Our net interest margin increased 3 basis points in the quarter to 3.65% and up 29 basis points compared to last year, and the first quarter is the fifth quarter in a row of margin expansion. We continue to experience a margin tailwind from our back book repricing and from the mix change towards loans away from securities. In the next year, using just maturities, we have about $1.4 billion of assets paying down in the 4.63% range. And because of this continued impact, I would expect the margin to be up between 3 and 5 basis points in the second quarter. Moving to Page 10. Noninterest income was $43.7 million in the quarter. This included a $5.2 million gain on an interest rate cap that was hedging a subordinated debt issuance that we intend to redeem on April 30. Excluding the cap gain, noninterest income benefited from a strong mortgage quarter and was offset by seasonally lower service charges. And we opted to sell fewer Navitas loans than usual. Last quarter, we sold $41.6 million in Navitas loans compared to $8.3 million this quarter. Our GAAP expenses were $157.3 million in the first quarter, and our operating expenses were $151.6 million. We had a small amount of our normal merger charges, but we had two more unusual and offsetting non-operating expenses. First, we had fully accrued for the FDIC special assessment that came after the Silicon Valley failures. That said, the FDIC refilled this bond faster than expected and is not asking for the full assessment. We had taken the original assessment as a non-operating loss, and so the release of the assessment of $1.9 million comes through non-operating as well. We also had another non-operating charge in the first quarter related to a change in our payroll process necessitated by changes in legislation. We had paid our employees on a current basis, and we changed this to paying our employees in arrears. As a result of the transition in payroll timing, some of our employees would have gone nearly a month without a paycheck, so we paid an additional check to bridge the gap. Aside from the one-time items, expenses were $151.6 million, relatively flat compared to the fourth quarter. Moving to credit quality on Page 12. Net charge-offs were 22 basis points in the quarter, improved from last quarter and flat to last year. We also saw relatively flat NPAs and a nice improvement in past dues as credit quality remains strong. I will finish on the quarterly results on Page 13 with the allowance for credit losses. Our loan loss provision was $10.9 million in the quarter, which was in line with our net charge-offs. With the loan growth, our allowance coverage of credit losses moved down slightly to 1.15%. With that, I'll pass it back to Lynn.

Lynn Harton, Chairman and CEO

Thank you, Jefferson. Now let's move into a discussion of our Peach State Bank announcement, and I'll start with a bit of history. United began de novo in Gainesville, part of Hall County in 2005. Over the past 20 years, we've enjoyed strong organic growth there with now $827 million of deposits in the county. Peach State was founded that same year, 2005, and has also enjoyed strong organic growth. Total assets for the company are $788 million as of the end of the first quarter with $713 million in deposits. Hall County is a rapidly growing part of the overall Atlanta MSA. And after this transaction, the combined bank will have the #1 deposit share in the county. Culturally, we fit well together. We know each other personally. We work in the community together. We go to school together. We go to church together. Peach State shares the same passion for customer service as United. There's a tremendous amount of mutual respect between the two teams, and I'm very excited to see them come together and continue to win in this market.

Jefferson Harralson, Chief Financial Officer

Okay. Well, first, Peach State has approximately $800 million in assets or about 3% of our assets. The deal value is about $100 million and will be a 50-50 cash stock mix. We are paying 1.9x tangible book value and 6x cost saved earnings. Given our overlap, we are estimating 40% cost savings. While the deal is 50-50 stock and cash, we plan on repurchasing the $50 million in shares issued by year-end. As structured, we estimate the deal to be $0.09 accretive in 2027. And with the planned buybacks, we estimate the deal to be $0.12 accretive. With that, I'll pass it back to Lynn to conclude.

Lynn Harton, Chairman and CEO

Thank you, Jefferson. This is a great example of what we want to do in the M&A space. It is in market, manageable size, a history of strong performance, great upside potential, and an attractive way to leverage capital and continue to grow our business and our brand. I'd like to now open the call to questions.

Operator, Operator

Our first question today comes from Russell Gunther from Stephens.

Jake Morton, Analyst

This is Jake Morton on for Russell Gunther. My first question is on deposit costs. How would you expect them to trend from here in an interest rate scenario where the Fed remains on pause on a stand-alone basis and including Peach State? Is there room for you to bring these down further? Or should we expect some pressure going forward?

Jefferson Harralson, Chief Financial Officer

I'll take that one. Thanks for the question. I would expect our deposit cost to be relatively flat. We have some tailwind from CD maturities, but we are seeing competition out there, and we do want to grow our deposits this year. So I think if you layer in relatively flat deposit costs, that's a good place to start. And the deal being only 3% of our assets doesn't change those numbers meaningfully.

Jake Morton, Analyst

Got it. I appreciate the information. My second question is about the spot cost of deposits at the end of the quarter. Can you also discuss the competition in your market? Where is it most aggressive, which specific products are affected, and who the competitors are?

Jefferson Harralson, Chief Financial Officer

Yes. Thanks. Great question. The spot cost is relatively close to the quarterly average, so not a major difference in spot versus quarterly average. I may pass to Rich to talk about deposit competition of what we're seeing.

Richard Bradshaw, President and Chief Banking Officer

In terms of competition, in terms of past quarters, I would say, it's slowed down a little bit. We're not getting a lot of special requests on pricing from the market. So I'd say it's kind of normalized. And we really don't have it. We're in six states. So we have a lot of different competitors, no single one.

Operator, Operator

Our next question comes from Michael Rose from Raymond James.

Michael Rose, Analyst

Just wanted to start on loan growth. Obviously, really strong results in both C&I and commercial real estate. You did have some continued paydowns on the construction side. I guess my question is, are we getting towards the end of the kind of more accelerated paydowns here? Because it seems to me, just given the growth that you've had and the momentum you've had in both C&I and CRE, that loan growth could actually accelerate from here. So I just wanted to just better understand that? And then if you can talk to some of the competition just given all the dislocation in and around your markets from the deal activity that we're seeing.

Richard Bradshaw, President and Chief Banking Officer

Sure. I'm writing these down. Let's start with yes, so we are pleased with Q1 loan growth. It's typically a seasonally low quarter for us, so we're very pleased. In terms of geography, South Florida led with Matt Bruno, followed by South Carolina and Coastal Georgia, with North Florida in third place. The commercial lines of business that performed best were middle market, ABL, and Navitas. Lastly, on the retail side, HELOCs were notable. Regarding paydowns, we observed the largest amount in hospitality, which we view positively, so we don't anticipate a significant increase. Ordinarily, we engage heavily in construction CRE lending, so this is just the normal flow, and I don’t expect a material change there. Looking ahead to loan growth, we remain optimistic, estimating it will be in the 5% to 6% range, assuming no unusual developments occur in Iran. Additionally, we've discussed hiring, which is impacting things. In Q1, we experienced a net increase of 10 revenue producers and aim for 10% annual growth by 2026. We have 9 more to reach that goal, and we believe we’ll achieve it or come close by the end of Q2.

Michael Rose, Analyst

All right. Really, really helpful. Maybe just as a follow-up, just on expenses. If I exclude kind of all the moving parts, it looks like you guys had really good kind of expense control. Maybe you can just talk about some of the hiring efforts that you guys might have in place as we contemplate the next couple of quarters. And then if you could just touch on maybe some early investments on AI and what you guys are doing and what we could expect there from an expense build.

Jefferson Harralson, Chief Financial Officer

All right. All right. Great. Rich just spoke about the kind of the numbers of the new hires that we're very excited about. I think if you think about our expense growth, we're targeting this 3.5% range, but now we have these hires that you might add on to that. I think the hires could add about $1 million to $1.2 million a quarter. We're not factoring in the better growth that could happen later in the year, but that should happen sometime late '26 or early '27. So we're excited about our ability to grow our producers and it could have some effect on expenses in the near term.

Richard Bradshaw, President and Chief Banking Officer

Yes, I would agree that there is a slight delay with the new hires. We anticipate that their impact will begin around 5 to 6 months after hiring. Therefore, we expect to see some contributions in late Q2 from the hiring in Q4, which is generally a strong quarter for hiring.

Lynn Harton, Chairman and CEO

Michael, you mentioned AI. So far, our investments in AI have been very beneficial and yield a strong return. Currently, most of our AI is sourced from vendors. All of our vendors involved in fraud prevention are using AI extensively, and as a result, our fraud losses have decreased by 50% over the past two years, partly due to these efforts. This does not even take into account the additional benefits for our clients. In our contact center, where we utilize chatbots and other AI tools, we are able to manage more calls without increasing the number of agents. Similarly, in our programming, we are accomplishing more work without hiring additional programmers due to AI assistance. As we consider future opportunities, there is potential for Agentic AI to improve some of our routine processes, such as flood management, where we could gain advantages from AI. This is still in the conversational stage. However, I believe that any increase in expenses associated with this will lead to more than offsetting savings based on our past experiences.

Operator, Operator

Our next question comes from Gary Tenner from D.A. Davidson.

Gary Tenner, Analyst

I just wanted to touch on M&A for a second. You guys have talked about being pretty focused in-market, small banks. Obviously, Peach State fits the bill there. Given the environment we're in, do you see a pipeline of activity where you could potentially sort of announce another deal in lockstep with this one? Any reason to think that this would take you out of the market for any period of time?

Lynn Harton, Chairman and CEO

Thank you for the question. I don’t foresee any issues with pursuing another deal while Peach State is still active. However, considering the size, regulatory environment, and our history, if a suitable deal emerged with similar metrics and conditions to Peach State, I would be open to moving forward with it.

Gary Tenner, Analyst

And then just the comment around the accretion in 2027 kind of adjusted for share repurchase. I guess it's sort of semantics, but I mean, the repurchase shares, presumably, that would be over and above what you would plan to do anyway, right? So how do you kind of balance that if that question is fine.

Lynn Harton, Chairman and CEO

Well, and I guess I'll start with that. And the reason we presented it that way with showing the effect of the repurchase. Our original intent was to do the entire deal all cash. In our view, and I understand it's different than a share repurchase. But at the same time, if I'm evaluating a share repurchase at 11, 12x earnings versus buying a bank at 6, hey, why not buy the bank at 6x earnings. So I guess that was in our mind, and that's kind of the way we presented it.

Jefferson Harralson, Chief Financial Officer

I think that's well said. I don't have a lot to add to that, but I will say we have $63 million left on our authorization. We have been active in the buyback already with $67 million over the last two quarters. So it's a great question. But I think Lynn hit it on how we're thinking about the deal as a use of capital.

Operator, Operator

And our next question comes from Catherine Mealor from KBW.

Unknown Analyst, Analyst

This is stepping in for Catherine Mealor. Congratulations on the acquisition. My first question is a follow-up on the buyback activity. You bought back around $30 million in shares in the past two quarters. With the merger announcement, you mentioned that repurchasing shares could offset the dilution. Could you provide some insight into the timing and amount of buybacks we can expect moving forward?

Jefferson Harralson, Chief Financial Officer

That's a great question. I believe we will buy back the $50 million by year-end. We are somewhat price-sensitive, so I can't guarantee that we'll buy back shares in any specific quarter. I'm not sure if I would include that in the model for Q2. However, I do think we're generating about $30 million of excess capital each quarter, which is the amount we would consider for purchases in a given quarter. It will depend on the price and other factors we have at play, so it may not happen every quarter. Unfortunately, I can't provide much assistance on the modeling there, but I do think we will reach the $50 million by year-end.

Unknown Analyst, Analyst

That's great. And then my other question is about your fee outlook. Your fees came in strong this quarter, and I was kind of wondering where you expect fees to go from here.

Jefferson Harralson, Chief Financial Officer

Right. I expect a modest growth rate in our fee income. We have some nice growth businesses within here. Our treasury services have been growing well. We've made relatively significant investments in our wealth area that we're very excited about. Our mortgage business has been going really strongly. We also have seasonal strength coming in mortgage and Navitas as we go into the second quarter. So I think you will see a nice growth rate off of this seasonally low first quarter.

Operator, Operator

Our next question comes from Stephen Scouten from Piper Sandler.

Stephen Scouten, Analyst

A couple of follow-ups maybe to some conversations that have already been covered to some degree. But Lynn, you said this was kind of like the exact type of deal you guys would look for given culture and deposits and so forth. How about from a size perspective, I mean, would you guys lean towards these smaller types of deals moving forward still? Or would you like to do something a little more sizable if that were available? What would be your preference there?

Lynn Harton, Chairman and CEO

Yes. We have typically done deals 10%, probably at the most, 15% or less of our size. We just find that the institutions of that size, they tend to align with us better on employee experience, client experience, community involvement, and we can be more additive. So yes, if Peach State had been twice as large, would we be excited about it? Absolutely. There's just a limited number of those larger, call them, $2.5 billion to $3.5 billion banks. But certainly, we would be interested in those as well. This one is, I think, really unique, again, given the history of the two companies together, the growth in Hall County and this really rapidly growing county, #1 job-creating county, I believe, in Georgia. And so to be able to have that kind of team together and to share together made it really attractive.

Stephen Scouten, Analyst

Makes sense. I appreciate that. And then on the hiring target, I think if I heard Rich correctly, you guys might actually kind of hit your stated target for the year by the end of Q2. So would you anticipate ramping up that plan further? Or would it more be, hey, let's let these people ramp up over that 5- to 6-month timeline before we add incremental expenses on continual hiring?

Richard Bradshaw, President and Chief Banking Officer

Steve, that's a great question. I mean, certainly, we want to hit the goal, but we would be opportunistic. If we saw the right people out there with the right experience and the right-sized portfolio, we would certainly look to do that.

Lynn Harton, Chairman and CEO

Yes. And I would just say, too, the seasonality as you get in the year, just with bonuses, those kinds of things, first quarter, second quarter are strong, starts to slow down in the third and fourth quarters; it's more difficult. So I think Rich getting out to an early start has been a great thing.

Stephen Scouten, Analyst

Yes. That cadence makes a lot of sense. Okay. And then maybe just last thing for me would be kind of overall NIM trajectory from here, maybe for Jefferson. I know you said spot cost deposits were kind of the same as the quarterly average and maybe expect them to stay flat from here. So would you expect a little bit of incremental upside on the loan repricing? I think you called out $1.4 billion in fixed-rate assets.

Jefferson Harralson, Chief Financial Officer

Yes, I believe we'll see a margin expansion of 3 to 5 basis points in the second quarter. We are somewhat asset sensitive, and since there's no expectation of rate cuts, this doesn't negatively impact us. While we are relatively stable, we do show slight asset sensitivity. The trend of repricing existing assets continues, and we are shifting our mix towards loans instead of securities. Thus, we anticipate a broader margin throughout the year, with a solid expectation of 3 to 5 basis points in the second quarter.

Operator, Operator

And our next question comes from Christopher Marinac from Brean Capital.

Christopher Marinac, Analyst

I want to go back to Peach State Bank for a second. Would you only buy banks that have excess deposits, and that seems like an attractive feature of this transaction? And is that something that will guide your M&A interest going forward?

Jefferson Harralson, Chief Financial Officer

I would say no to that question. We like to have a low loan-to-deposit ratio. We think we can put those deposits to work. But that's one good thing of many of having an 82% loan-to-deposit ratio is that we can also buy banks, small banks that are loaned up as well and give them some more capacity for growth. So that was a nice to have in this acquisition. We also think we can help out high loan-to-deposit ratio banks as well if that type of bank came about.

Richard Bradshaw, President and Chief Banking Officer

Certainly, on the loan side, we are requiring a depository relationship whenever we do a loan, so we'll start there. But these people all have existing clients. And so we're hoping that the first thing they can bring over is the deposits. It's easier than the loans. So we see that pretty fast, and that's all part of the package.

Operator, Operator

Our next question comes from Kyle Gierman from Hovde Group.

Kyle Gierman, Analyst

This is Kyle on for Dave Bishop. Just wanted to follow up back on fee income. I wanted to go into mortgage banking, saw some nice trends there. I was wondering how sustainable that might be going forward? And any initiatives in place to enhance that line item?

Jefferson Harralson, Chief Financial Officer

I'll begin and then hand it over to Rich regarding the initiatives. As we enter the second quarter for mortgage, we have positive and negative factors at play. On the positive side, mortgage rates fell to around 6% at the end of February, which sparked a brief refinancing surge that benefited us this quarter. However, we are also entering the second and third quarters, which typically see strong seasonal activity for mortgages. So, there is a bit of a balancing effect as we move into Q2. Now, I'll hand it over to Rich for the initiatives.

Richard Bradshaw, President and Chief Banking Officer

I'd say on the mortgage side, we are expecting a stronger second quarter. The challenge with mortgages is that interest rates influence much of it, which makes it somewhat difficult to predict. However, we do have a few more shorter on-balance sheet products that have generated some interest, and we will continue to explore that.

Kyle Gierman, Analyst

And maybe a final question. Saw a slight uptick in NPAs this quarter. I was wondering if you could provide some color on what drove that? And then maybe just a broad view of the credit quality trends.

Rob Edwards, Chief Risk Officer

Yes. This is Rob. Thanks, Kyle, for the question. So I sort of anticipate asset quality to be stable. And I would expect NPAs to kind of fluctuate up and down. If you look back, maybe 10 basis points up or down over time. There wasn't any one credit that moved into NPA this quarter that's a highlight or anything. It's just a standard movement in and out of non-accrual.

Operator, Operator

And ladies and gentlemen, with that, we'll be concluding our question-and-answer session. I would like to turn the floor back over to Lynn Harton for any closing remarks.

Lynn Harton, Chairman and CEO

Great. Thank you, and I appreciate everybody joining the call. And again, any further questions, reach out to Jefferson or myself, and we look forward to talking to you again soon. Have a great day.

Operator, Operator

The conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.