United Bancorporation of Alabama, Inc.

Good morning and welcome to our fourth quarter 2024 United Bank Corporation's earnings call. I'm Brian Bruley. I'll be stepping off for a moment and turning it over to Mike Benson, our Chief Executive Officer and President, David Stewart, our Chief Credit Officer, and Leanne Jones, our Chief Financial Officer. We will be taking questions through the Q&A function on your Zoom app this morning, maybe at the top of your screen or at the bottoms, but you can find it there. So we'll be monitoring those questions as they come in. So with that, Mike, I'll turn it over to you.

Brian, thank you very much. And thank you for all of you for joining us again. We appreciate your support and your interest in the bank. Wanted to spend a little bit of time, as we always do, share a little bit of insight and performance metrics from 2024. So with that, we'll just jump on in. We felt like 2024 was a good solid year for the bank. Obviously, like many banks, there were some headwinds in the credit side of the house that David will speak about. But again, very successful in a lot of the initiatives that we've had. uh, CDFI programs and the like. So I'll give you some, uh, some high level numbers and then we'll kind of walk through, uh, time permitting. Then we will have a little bit of time typically for some questions and answers as we can, uh, at the end of the session. So for the, uh, year, uh, year to date, net income totals were $26.9 million at the holding company level or an EPS of 765. Um, That is compared to $31.5 million and $8.81 for 2023. On the quarter, net income was $6.9 million, earnings per share of $2 a share, and that is compared to $10.4 million and $2.95 respectively for the prior year. Just a couple of things to note. This was our first full quarter with legacy Town Country United Bank and United Bank operating under the same umbrella, so to speak, as one institution. So we're excited to get that final piece of the puzzle post-merger done and look forward to 2024 or 2025 as we go forward. I had mentioned a few of the CDFI awards. I will kind of give you a rundown real quick on what we received. A lot of year-end numbers here. you know, kind of back end heavy on the award announcements and recognition this past year. BEA, or the Bank Enterprise Award, $64,000 was received and recognized in the fourth quarter. FA, or the Financial Assistance Award, of $1.3 million has not yet been received, but was announced and recognized in the fourth quarter. A $65 million new market tax credit allocation was announced this Now, as you recall, that is not really monetized until those credits are sold and put into transactions. But that was another successful round, another successful application for our team, and we're very proud of that. And last and certainly not least in the fourth quarter, the latest Capital Magnet Fund announcement. was $9 million, one of the largest awards to any individual institution in the country. So we recognized and received that as well in the fourth quarter. So strong results from the CDFI team. Year to date, net interest margin has remained strong, stable, 4.57% versus 2023 of 4.6, right at it where we have been operating albeit with an uptick in cost of funds. We've continued to hold that line, and we're very pleased with that. A couple of highlights for the quarter was the termination of the KSOP plan that we've had in place for a number of years. There was an announcement, obviously, that had been sent out about that, but the numbers of that are this. We repurchased 197,700, and 1,700 1,000 shares, 197,000 shares bought at $54.25 a share, total transaction cost of $10.7 million. So we were glad to get that wrapped up prior to year end. And then Leanne may get into this in a little more detail, but we also sold approximately $52 million in bonds. recognizing a $3 million loss in the fourth quarter as well, as we've continued to try to sell some of the low performers and reinvest at better rates. So I'll let Leanne speak to that in a little more detail in just a minute. So those are some of the highlights. You know, again, a good solid year. We look forward to 2025. But with that, I'll turn it over to David. Maybe speak about the credit side.

Sure. So good to be with everybody again. So we'd like to run through some of the highlights associated with the loan book for the bank. So year in performance, year over year growth was at 7.3%. Came out to $59.5 million, so we were pleased. That was right on top of our budgeted number. So strong year in terms of loan production and growth, right where we had anticipated we would be at year end. Q4 was strong as well. In our opinion, 1.7% growth for the quarter of $14.7 million. We've continued to see strong production out of our affordable housing group. Our multifamily construction book has continued to grow. That's been a strong performer for us. Also, year-end, we saw some increases in the municipal book, as well as our farmland. If you guys will remember, we've talked a lot about some of the ESUB funding and using those for special tranches of loans. Part of our strategy was to put that to work in multifamily, in some municipal credits, and also farmland as well. So ag and timberland continues to be part of our DNA, if you will. So our first loan here at the bank in 1904 was an ag loan, so we continue to embrace that. Continue to track pretty well on our loan to deposit. We've stayed right around just under 80% at year end. So that's been our target and seem to be managing that well while continuing to manage that debt NIM and cost of funds. Kind of the things could jump off your page, non-performing assets. So wanted to take a few minutes to talk about that. So we did publish an updated earnings release. There was a small mistake on the total non-performings. So we had stated 16 is actually 17.2. That should be outpublished on our investors' website at this point. Thank you, Brian, for having that out. That's really inclusive of three credits that make up a lot of that non-agreable balance that you're seeing in those non-performing assets. One is a large credit that we're a participant in. We're working through a Chapter 11 plan right now for those folks. We've properly reserved for what we have on the books and are optimistic we can resolve that soon. Don't have a time frame, but we are working through that credit. That's Goodness, almost 60% of that number. The other portion is two credits. One is another credit that is actually in a bankruptcy plan right now. We think that we'll exit that here soon. Goodness, probably in the next few weeks. Have that one resolved with a very small loss. And then there is the one other credit. participation credit that we're working through a restructure, trying to get some resolution. So if you net those three out, now your past use plus non-accruals goes down from 2.09% down to 0.67%. So that's under our target for non-performing assets plus past use at the bank. So we are spending an inordinate amount of time, as you can imagine, working through those relationships. Really don't see any other correlation of issues systemically at the bank. We did work through a lot of ag-related problems in 2024 related to the 2023 crop cycle. If you guys will remember, we had a basically a once-in-a-generation drought that some of our better farmers work through some carryover. So we've shored up our position. We've been very aggressive with using FSA guarantees. Those are loan guarantees for anything that we would need to renew for those farmers to help keep them farming and limit our risk. So we... First indications that year-end 2020 forest crop cycles is better than 2023. We did have quite the weather issues. We had some pockets of drought, which is understandable. Then also any of you that might follow commodity prices. Commodity prices have slid a small amount. Input prices have stayed up, so just margins for a lot of our farming community are not what they have been in the past. So we're kind of separating the men from the boys. The guys are all trying to learn how to be a little smarter and more diversified. So all in all, I think 2024 will be a pretty good year for our farmers. Not as good as in the past, but not as bad as 2023. Moving on down, you guys will have seen some charge-offs. We had a couple of charge-offs over the last six months of the year that we went ahead and elected to take those write-downs. And then we've been a little more aggressive with the allowance for credit loss, so just in terms of what we had seen in the credit book. Okay. associated some of those non-accruals that I discussed and making sure we're in good shape, uh, moving forward into the next fiscal year. So we ended the year with a consolidated CECL at 1.42% for an allowance of 12.3. So, uh, all in all good growth had some headwinds has been a while. So, um, but we feel that we have, uh, isolated those challenges and are ready to move forward into 2025. That's all I've got. So I'll pass it over at this point to Leanne.

Thanks, David. Good morning, everybody. I'm going to touch on securities, deposits, and liquidity. You know, as Mike alluded to earlier, we did sell about $60 million over the course of the year in bonds and took a little bit over a $3 million loss for the year. And a portfolio restructure. If you recall, we did the same thing at the end of 2023. And that was a tremendous benefit to us because of right now at the end of 2024, the book value of our bond portfolio was just under $300 million. And we have about a 3.2% book yield there. which exceeds many of our peers, particularly our Alabama peers, and puts us up with the national averages. So we think that that has been a successful move on our part. We've really been able to restructure about 30% of the bond portfolio over the last year, year and a half. And in the course of doing so, transitioned out of lower yielding bonds, yielding less than 3%, been enabled to repurchase in the 5, 5.5% range. So that will be a huge benefit as we move forward into 2025 and 2026 and beyond. So as you can imagine, in getting these higher yields, we have taken on some more extension risk. The weighted average life of the portfolio is about 7.3 years and the duration 4.84 years. So we have also increased our floating rate securities. So they represent, you know, about 22 percent of the portfolio versus 18 previously. On the deposit side, as you can tell by our balance sheet, deposits have remained relatively stable and relatively flat. Little to no growth over the course of the year. You know, we have a lot of competition amongst other banks for deposits. And, you know, we are not one to always pay the highest rate on deposits. So we've been able to maintain our deposit balances at a little over a billion dollars without having to really pay up on yields. And you can see that also in our margin and our cost of funds. So maintaining these deposits have also been a good source of liquidity for us. Our cash to asset ratio is about 13, a little over 13% at the end of the year. So we maintain strong liquidity as we're going into 2025 and looking out at loan growth and other opportunities for us. So that's all I have, and I'll turn it back over to Mike.

Right. Thank you, Leanne. So speaking through some of the other metrics, we touched on margins a little bit ago. That is something that this has not happened by accident. There's a lot of discipline that's really baked into what we do to maintain discipline. margins where they are, but about 4.6, like I said earlier, in line. Earning asset yield of 569, which is up from 523 from prior year. Cost of funds obviously is also up, up to 128, really almost double from the prior year. But again, maintaining margin discipline is a constant discussion around here. Oftentimes, we're asked about our mixed variable rate assets. Just kind of give you a couple of metrics on that. 33% of the loan book would be a variable rate, and that really is probably even a little bit low because in the fixed rate side, there will be some automatic rate resetting that is built into some of those structures, so it would even be a little bit better than that. 22% of the securities book would be variable as well. And just in the way of a reminder, David spoke about ag lending a little bit earlier. Ag production loans, which oftentimes make up a healthy percentage of our loan book, you know, for example, you know, right now, roughly $50 million loan. Those will reprice annually. Those are typically 12-month production lines of credit, so they would reset periodically, automatically. Just a bit of a forward-looking snapshot as we contemplate rates and where they are going to be going over the next 12 months, the impact of a couple of down-rate scenarios, 100 basis points, downward movement would be an impact of about $2.5 million downward on net income, 200 basis point decrease of about $5.1 million. So that gives you kind of a sense of the impact of upcoming potential rate changes. You know, one of the things that we talk about here often are non-interest income, non-interest expense. We talked about some of the CDFI awards that we had received So, during the quarter alone, that's $10.3 million in CDFI award income. You know, we're asked oftentimes about the timing of those various programs. They're all on their own application cycle, so it's hard to really say. You're at the whim of the responsiveness and the timing from the CDFI fund and from Treasury on when those things are available, when they're announced, when they're received. And just as an aside, right now there's also a little bit of uncertainty with some of the programs and the timing. Under the new administration, we've got some questions sometimes about the timing and what's going to happen with some of those. So more to come, I'm certain, on those. New market tax credit fee income, $480,000. And then Leanne had mentioned the sale of the securities program. resulting in a $3 million loss for the quarter. A couple of things that we've continued to experience over the course of the year in non-interest expense. Obviously, there was a one-time $2.5 million impact accounting for the KSOP unwind. Again, a one-time event. And then as we continue to go through a core conversion process, There's a lot of expenses, deconversion and then the transition to our new core provider, Jack Henry. That is going to be an ongoing event impacting the bank through August. So, you know, it'll be it'll be. pretty much all hands on deck working on that project over the next seven or eight months. But we're excited about where that will take us. So everybody will then be on what I consider to be the flagship core system of Jack Henry and Associates and will put us in a much better place as we continue to grow, needing that additional functionality. On the capital side, Tangible Book increased to 40.05 from 39.85. dividend yield of approximately 2.1, and that is using the most recent dividend that was announced and paid of 60 cents a share, a yield of 149 for actual paid dividends on the year, ROE of 1074, ROA of 2.02. So, good solid metrics again, and we're very pleased with that. On the ESIP side, obviously, we've begun paying our preferred dividend, as Leanne had mentioned. So, again, 2% with the possibility of getting that rate lowered depending on lending thresholds. So, We have paid just a little over a million dollars in preferred dividends to this point. And one other note, and I'll kind of tie it in because I've seen one of the questions that's come over about the ESIP purchase option agreement outlining the exit of the program. We have executed that purchase option agreement. We did that along with most banks, most that I've spoken to have executed on that. The unknown obviously is, will you be able to hit the thresholds that impact how you can exit the program? I will tell you that as of now, we do not and have not hit the lending thresholds, which simply means that we just keep working towards that. There will be an exit at some point in the future, but it's not as simple as, well, if I've met the thresholds, I can get out right away. There is going to be a period of time with which you have to show consistent meeting of lending activities, of meeting the 60 and 80 percent thresholds that they have put out. That's got to be done over a period of successive quarters, depending on which level you're talking about. And then there obviously still is ongoing reporting for a period of time. So it remains to be seen. I will tell you the unknown kind of wild card in my mind and is, you know, what happens now under a new administration? Does, you know, does that agreement come about? But certainly we wanted to have that agreement executed prior to, you know, prior to any change in Washington, because we just, you know, you're just not sure about what's going to happen next. So, yeah. There was also a question, are we, you know, I think there was, are there some banks that are looking to retire ECIP? And we at this point don't have any intention to do that. You know, the dissolution, the unwind of the program would be meaningful to us. I will tell you, we've worked to try to put ourselves in the position that if we can hit those thresholds, that we will do it, that we would like to be able to do it. We have a mission aligned nonprofit already in place. Um, and so we will continue to, to manage, to monitor, to see what we can do as far as attempting to hit some of those, the feedback that I've gotten from consultants, um, that I've spoken with at the larger, the bank, the more difficult it's going to be, honestly, to hit that stuff. But, but we, we know where we have to get to, um, at this point, we're just going to keep, keep kind of working on it. So, um, so with that, um, thought that we have a few minutes, we could jump into a few of the questions. David, I guess I'll turn this one to you.

The question is, how does the bank compete effectively with co-op lenders in the ag space? They're essentially like competing with the credit union, and they'll have the tax liability and some of the regulatory burden that we have. So they're able to offer lower-cost funds a little longer. With us setting up those buckets through the ESIP program, those tranches of money utilizing that fixed-cost funding, we were able to be aggressive in that space to take a little extension risk on interest rates and be aggressive on those yields to – frankly, to compete with those guys. Also, anybody that's worked in ag lending and agriculture in general, it's a niche market. We understand it. Our lenders on that team have a lot of experience. Many of them grew up in farming, so it's just part of who they are. So they're trusted resources for their farmers. They know what makes the farms work. They know how to help advise them in tight times or ways to help them increase their margins. So I would like to say that our ag team is trusted advisors to their farmers, so that helps give them an edge on the competition when providing some ag production lending and advice.

Yeah. I mean, it's a fight we fight every day, but we've been doing this for a long time. And I think we're we're probably the number one institution in this. Oh, yeah. In the markets. No question. David, while you're speaking about the loan book, I'll throw this one to you as well. This is a question regarding the loan pipeline forward looking. How do you expect are you thinking about loan growth as compared to the seven and a half percent growth from 24?

Good question. Fair question. Yeah. Of course, we're always working to build our pipeline. I think we'll continue to see success in the multifamily. We do have a new markets allocation that we received last year. So in that space, we continue to forecast growth, utilizing those new markets we got over at UV Community Development as sort of a foot in the door for projects throughout the Southeast. And then our traditional lending footprint, like I said, with the ESIP dollars, we're aggressive in ag and timber. We've got some dollars to lend in the municipal market, which If anybody's ever lent money into that, it's kind of interest rate risk. There's not a whole lot of credit risk as long as you're dealing with good municipalities and counties. So we'll continue to take a little extension risk there and have low costs to get those closed. So optimistic for the upcoming year. Don't want to make any forward-looking statements, but we feel that we can continue to make progress.

All right. Thank you, David. Leanne, the question about securities, it was we've said we've been reinvesting, selling and reinvesting into something. Can you maybe speak a little bit about what you've been buying? Question really specifically kind of hones in on duration and that sort of thing. So maybe you could speak to that.

Sure. So we've been buying really a... you know, mixed variety of bonds. Mortgage backs, agencies, and SBA pools. On the mortgage backs, I believe this question really was asking about have we been buying new issues? And we really have not. They've been seasoned issues and discount. So we don't expect to have a lot of impact on duration or price risk. And with regard to that, And the SBA securities, like I said, are floating rates, mostly equipment pools. And so, you know, while that will obviously fluctuate with Prime and Fed funds, you know, the spread there is still, you know, significant enough to kind of carry us through in a lower rate environment.

Okay. One question, and actually this is going to be more of a clarification. Brad, thank you for catching me on that. Yes, I did, in fact, mean – Net interest income, if I said net income, I apologize. So yes, net interest income impact as we look at those down rate scenarios. So that's exactly correct. Thank you for catching me on that. One question, and I wanted to make sure that we have time to kind of address this. The question is about capital allocation. You know, that is kind of the million dollar discussion around here all the time. We were, frankly, that the case up unwind took a lot longer than I had hoped that it would. So that impacted kind of what we were doing on the tender slash buyback space. Yes. Like I said before, I want to have some mechanism in place at all times to Because of the size of the block and the regulatory requirements for me to buy that much back, we pretty well put a pause on some of the other avenues. But yes, we still want to have... something in place to provide a little bit of liquidity for those that want to sell. And frankly, we still believe in the stock. We still believe in the value of the stock. And as much as I can get my hands on, honestly, I'm interested in that. On the flip side of that, I will tell you, we've talked about M&A recently. geez, for a couple of years now. And I believe that that is about to start moving. There's been so little activity over the last couple of years. But I think now, obviously, AOCI issues and bond marks and all of that at other institutions maybe haven't significantly changed. But I do believe that there are potential sellers out there that are reaching the point where They're not going to be able to wait for the amount of time that it may take for those to rectify themselves on their own. I will tell you, we're having more conversations now. than we have had at any point in the last couple of years. And I'm finding more receptive potential sellers now than at any point in the last couple of years. Obviously, it's got to be the right mix. Obviously, the culture's got to be there. Obviously, it has to add to the value of the franchise, both in a core banking activity perspective and in the CDFI perspective. you know, it matters whether or not they're an ESIP, uh, holding bank to me or not, um, as obviously that would impact, um, the accounting metrics of the deal. Um, so yes, we, we know that capital levels are still there and we are looking to allocate them. Um, we've been patient, but my, my, I will tell you, my patience is starting to wane a little bit on, on some of that. So, um, I hope that we can have continued conversations over the course of the year about what we're doing. But, yes, on all fronts, quite honestly. Leanne, just as a clarification, I think the question was the one-time KSOP expense just an accounting item.

Yes.

Okay. All right. Okay. The only other question, David, and I don't know if you'll know this off the top of your head, but regarding the total amount of upstream loan participations that we may have.

Sure. So off the top of my head, of course, participations purchased somewhere around $43 million. Of course, we have some other buckets of special money that we use in terms of new markets and multifamily. So Some of those deals are not included into that participation number, so that's actual participations purchased. And then on the flip side, the participation sold, I think it's right around 102 million year ends where the number was. So, yeah, we're pretty active in working with other community banks in the Southeast, you know, particularly CDFI banks. So, yeah. Because as we all know, some of those transactions can get a little larger. So it's nice to have some of the partners along and help share the credit load.

Very good.

Thank you, Dave.

Brian, with that, we are out of time and out of questions at the same time. So we'll turn it back to you. Thank you, Mike. Yes, if you do have other questions, please feel free to send them to me. I'll get them to the group. That's brian.brewley at unitedbank.com. Thank you for joining us today.