United Bancorporation of Alabama, Inc.

Good morning and welcome to our second quarter 2025 earnings discussion. I'm Brian Bruley and we're here with Mike Benson, Leanne Jones, and David Stewart. We'll be discussing our second quarter results. We'll be taking questions through the Q&A function that's on your toolbar of your Zoom application, either at the top of your screen or at the bottom. So just look for the question mark or the Q&A icon. So we'll be monitoring that throughout the call. So if you have any questions, put those in there. So with that, I'll turn it over to you, Mike.

Great. Thank you, Brian. Once again, thank you guys for spending just a few minutes with us here this morning as we talk about second quarter results. So I guess I'll kick it off looking at Q2 net income. We were reporting $4.6 million and earnings per share of $1.36. That is compared to $8.3 million and EPS of $2.33 for the same period last year. On a year to date basis for 2025, net income of nine point three million dollars, earnings per share of two seventy eight. And that is compared to last year's same period, fourteen point eight million dollars in EPS of four fifteen a share. One of the things that's been a strength for us, continues to be a strength for us, is a strong and stable net interest margin, staying at right around 4.6. That's largely unchanged. It has been a source of strength for us as we manage that. We've benefited from pretty low cost of funds as compared to peers, so we're happy that we can keep that going. A couple of things that I'll highlight before I turn it over to David. As many of you or most of you are probably aware, we have been repurchasing shares. We announced that a little while ago. Thus far, we have repurchased a little over 96,000 shares of stock during the quarter. So we're happy to see that there's been some success in that space, as we believe that it is a good use of capital for the bank. As well, recapping, a dividend of $0.70 a share that was paid. As we've talked about before, we're constantly looking and reevaluating the dividend. knowing that we probably want to continue to to push it where we can, where it makes sense. So we were pleased that we were able to announce that dividend. And basically, most shareholders are all shareholders that I've heard from. We're very pleased and appreciative of that. So I guess with that, David, I'll turn it over to you and maybe you can talk a little bit about the loan book. Sure. Thank you, Mike.

Good morning, everyone. Glad to be here with you. So it's kind of zip through year over year growth. was right at 5.6% or $47.2 million. So quarter growth for Q2 was at 1% or 8.5%. Still seeing good growth in the multifamily construction. We've talked many times in the past about our progress and lending into the affordable housing space. That's going well. Also seeing good traction in commercial real estate. So, you know, a little quieter. I think everybody in the banking industry is seeing a little less growth in Q2 than perhaps they had forecasted. So I think that's kind of industry-wide, some of the things going on in the national economy today. Tariff talk and various other things, interest rates, that kind of thing. So I wanted to discuss non-accruals with everyone. That's a little elevated at $8.7 million. So that's a little down from where we had been. So kind of tell you, walk through what's going on there. We do have one legacy participation loan right at 3.4 that makes up a good chunk of that. We've got three smaller loans. ish farm loans. We've talked about the struggles within the farming community over the last couple of years, particularly from crop season 2023. So we do have FSA guarantees on roughly half of that amount. those amount of loans there for the farming community that are in non-accruals. And then also, uh, we have a pretty strong concentration of non-accruals in our Camden branch. That's a large, uh, consumer book of loans, uh, one of the poorest parts of the state. And, uh, we're, we're just working through some credit challenges there as, uh, think, you know, inflation and, uh, fixed incomes in that area have affected those, that book in total. So, um, Also wanted to mention the charge-off that was realized during the quarter. You guys had seen non-performing sort of balloon. We had a large CNI-related transaction that was a participation that we had been a part of that – We wrote down during quarter two roughly of $3.4 million. So that kind of rippled through a few different things that brought down non-accruals. That also was a drawdown on our allowance. So you'll see a reduction there in the allowance for credit loss. And also you'll see an increase in other real estate. So that was a drawdown. a transaction that had a direct loan component associated with it to the project and then a source loan associated with a new market structure. So, uh, that, that direct loan being written down and booking over to real estate is what caused the Oreo to increase, uh, on the balance sheet. Um, In general, past views are a little elevated. That was concentrated to one large relationship of about $5.2 million. They did make a payment second week of the month, so that's current, and they're looking to exit that investment and pay us off here hopefully fairly soon. Other things of note is I will mention that the CECL allowance coverage is at $1.36 time or $12.1 million. We spend a lot of time working on the CECL model, validating it, and getting comfort level with what we have in the allowance. I think we're in a good spot right now and looking to finish out the year. So that's all I have. So I'll pass it over to Leanne and let her discuss securities.

Sure. Thanks, David. So not a lot to report on the securities front. You know, our portfolio restructurings at the end of 2024 and 2023 continue to serve us well. The increased income from those transactions are helping to offset some lower rates on our interest bearing deposits. They also have improved our yield on the portfolio, which is really about three and a half percent, give or take. So in the process of those restructurings and changes in the portfolio, you know, the weighted average life of the portfolio is a little over seven years and the duration a little over five years. You know, we have probably a 20-80 mix on floating and fixed rate in the portfolio. So the portfolio continues to do well and has been a definite benefit over the last couple of years. Kind of switching gears to deposits, you know, as you can see, In our release, year-over-year deposit growth has been about almost $30 million, or 2.6%. A lot of this growth has come during the second quarter of the year and in the form of time deposits. Our strong margin has allowed us to be able to maintain some higher time deposit rates to attract more deposits, and we are seeing some success in that area also. So we probably have experienced more growth in the time deposit space than in some of the other deposit types. But overall growth has been positive and roughly, you know, 3%. You know, that said, too, we still have a lot of competition in our markets for deposits. We have seen some easing on rates in the 12-month space and longer, but those shorter-term deposits still remain about 4%. And obviously, this growth in deposits has been helpful to our liquidity position. our cash to asset ratio is just shy of 12%. So we still maintain strong liquidity also. And so that's all I have on the securities and deposit side. And I'll Turn it back over to Mike to talk about the margin.

Right. Thank you, Leanne. So we touched on the margin just a minute ago. So 4.6 compared to prior quarter, 4.56. Year-to-date, 24 was 4.65. So we're glad that we're able to maintain that, as we've probably talked about a number of times. You know, our cost of funds, when you compare it to peers, look very favorable. A large part of that is due to the retail network that we have, some of the branch locations that we serve do a really nice job of attracting low-cost deposits. And that has always been a strategy for us and a big means to achieve that margin that we achieve. So hats off to the team, hats off to David's group for pricing accordingly. and maintaining margin discipline. When you look at earning assets, yields at 575, which is up over same period prior quarter. And cost of funds, to put a little finer point on that, at 1.36%. Very nice. And I've got a lot of jealous peers, I will say, when we have discussions amongst greater groups. You know, obviously, you know, we're on the cusp, we think, of a downward rate push, you know, as we look towards now to the end of the year. You know, estimating kind of the balance sheet mix, 100 basis point down, has about a 5.5% drop. downward adjustment on net income while still maintaining pretty solid margins at about four and a quarter. But obviously, that's something that we, along with everybody else, are going to be monitoring over the next several months for sure. On the non-interest income side, one thing that I do want to point out is We have historically had some unevenness, I guess, in the reporting periods due in large part to CDFI programmatic awards. What you see for 2025 year to date is pretty much down the middle. It is, for the most part, core banking activities. There's not really been much recognition of any kind of CDFI awards or anything. UBCD did recognize $420,000 in new market fee income during the quarter. But beyond that, there's really no programmatic awards that have changed the mix too much at all. Non-interest expense obviously is something that we are watching very closely. Salary expenses up over the same period last year, about $880,000. That is a combination of a few things. One, the addition of of staff, obviously repricing in a competitive work environment to retain talent. It is it is something that we are always looking at and always kind of chasing, you know, to a degree. So it's something that just has to be proactively managed. One thing that I will highlight is the ongoing core conversion that we have. And I'm happy to tell you that we are about a week and a half away from that core conversion happening for a whole host of reasons, not the least of which is the expense associated with that conversion. is ongoing. Year-to-day expenses related to that conversion are about $600,000 as you look at the total. So from a cost standpoint, from a productivity standpoint, we'll be very, very happy to get that behind us. And probably most importantly, we'll be happy to get that done just from a customer service perspective and an employee efficiency going forward perspective. We're glad that that will be behind us. Looking at capital levels, tangible book value increased to 4307. That's up a little bit from 4252 as of March. Price to tangible book at the end of the second quarter was at 122. So we're happy about that. We still say that the stock is is a good purchase as evidenced by the fact that we are ongoing purchasing stock. The dividend that I mentioned earlier provides a yield of about 2.65%. So that again, as I said, is something that we're actually an actively trying to, to manage as well. ROA of one and a half return on tangible common equity at 13.18. So, so all in all, some, some good numbers there. A couple of things that I'd like to point out on the ESIP front. Again, we did sign the purchase option agreement at the end of 2024, which basically outlines options between us and Treasury to exit if we meet certain criteria. That is an ongoing process, I will tell you. There's a lot of discussion about how and when that might be able to happen. I will tell you when it comes to meeting some of the metrics that are out there that It is a challenge for a bank our size. The larger the bank, as a general statement, the larger the bank, the harder it is to hit some of those lending thresholds. So we, along with other banks our size, are we're proactively managing to it. But I will just tell you, it's hard to hit those measures, not to say that we can't. We're not far off, but it is something that we're going to have to continue to work towards to hit those threshold levels. But as you know, capital continues to grow organically just through normal business operations. So we are uniquely positioned to do a lot of different things. I'll mention M&A as we sit here. You know, M&A, I know, has picked up. more nationally than it has maybe here in Alabama. I think we're on hopefully the cusp of a little bit of a breakthrough if we believe that rates might move in September. I think that will go a long way towards being helpful. I was at a conference last week and spoke to several in the industry, in the M&A space, and that was kind of their take on it as well, that You know, while you're seeing more deals, Alabama is still pretty dry with that kind of thing. Conversations are being had and we've reported basically similar similar things over the last two years. It's you know, it's something that still is on our forefront. We're still having conversations. I still say it would be something that we would we would want to do if we find the right partner. But until until the buyers and sellers can get on the same page when it comes to, you know, bond marks and AOC issues, it's still going to be a challenge. So a couple of other things. On the CDFI front, I'm asked about that from time to time. What does some of the stance from the current administration mean as far as the CDFI fund, what's going to happen there? There's not been a ton of update in that world, as most of you probably know. So I sit on the board of the CDBA or the Community Development Bankers Association. So we're pretty plugged into what's going on in Washington in that area. There has not been a ton of feedback other than some frustration that OMB is basically at this point holding some award funds and new funding rounds. You know, NOFAs that are that are basically shelved right now are impacting the CDFI space. It's something that we talk about. CDFIs are speaking to their congressional members to try to see if they can help and break the logjam issue. But until something breaks loose a little bit in Washington, there's going to be some delay in some of this stuff, which is maybe part of the reason why, as we mentioned earlier, what you've seen thus far, um, in 2025 is really core bank activity. There's not a lot of, of anything else that's, that is included in those numbers. One thing that has happened, um, that I will note is for years, honestly, um, CDFI banks and people in the space have been advocating for permanency of, uh, new market tax credits. Um, you know, that, that program has been out for a while. It has to be re-approved periodically. Um, And, you know, I don't think there's any question that the program itself has been successful. I think it's supported by people on both sides of the aisle. And we were glad that within the big, beautiful bill that was recently passed, the permanency of new market tax credits was was included in there. What that means is, one, we can you know, we can at least know with certainty that these programs will continue to. One one, I guess, side effect, I'll say to something like that happening is that you will likely see new players in that space. That's already very competitive. People that were probably unlikely to devote time, talent and resources to programs that they were not certain were going to remain. Now we'll likely do that. So we'll see how that plays out. but that program is now made permanent. So with that, I'll kind of transition a little bit to some Q&A that we've got. Some of this we have already touched on. I guess, Leanne, I might start with you on one question about what are your thoughts on funding costs and new core deposits, where you think things might be heading there?

Sure. We talked about that a little bit earlier. We've been very successful with our CD strategy and attracting new deposits through that mechanism. I think we can believe that we will continue that for the rest of this year. and see what kind of traction that we get going into next year, and just see what happens with the right environment and what we're able to do there. Obviously, the margin is important to us, and we will continue to monitor that and make sure that the impact is minimal on that front.

David, a couple of loan questions that we've got. Maybe you can share a little bit of color on some of the consumer loans in Camden. Sure.

Yeah. So just so you guys know, the geography of Camden is Wilcox County, Alabama. One of the kind of over in the Black Belt region is it's a poor part of the state. So what we've seen is as we acquired that bank, Town & Country, a national bank, and then converted them and rolled them into the United Bank is – They're different credit profiles, so we're sort of working through sort of cleaning up some of the loans that are due, come and matured, and a different credit philosophy that we're implementing. So working through past dues associated with that consumer book. To the question, it is a mix of unsecured loans, of loans secured by automobiles, some Smaller transactions, smaller loans, anything from a couple thousand dollars to $10,000, $15,000. Also, one of the challenges in that market is it does have a rather active portfolio in the logging industry. That industry has struggled of late. So we're working through some of the challenges for our folks in the logging industry, you know, not directly related to ag, but very similar type situations where compressed margins, you know, difficult to move product, not as much need for what they're doing. And frankly, some of the tariff conversations have not helped that industry at all. So that kind of wraps up Camden, I'd say.

David, one other question is, what is the possibility of slowing new CDF items?

Yeah, so the Big Beautiful Bill was, as Mike mentioned, made new markets permanent. So that's good for us. We've developed the reputation of being the go-to new markets company. experts in the state of Alabama. We've been very successful with prior rounds of allocation for new markets. We feel like we've got a strong application in for this next round. So it's in that portfolio related to CDFI related loans, it's kind of twofold. It's both those standalone new markets deals that we've talked about, but we also create loan pool transactions and And those loan pools are, as with any book of loans at a bank, they're constantly turning over, paying off, paying out, that kind of thing. So we still have that subsidized interest rate that we can offer to our customers. So that gives us competitive edge. So to your question, yeah. I don't see any loans directly related to CDFI slowing down. I think the industry as a whole has slowed down. It's lost a little bit of momentum. But I think that competitive edge, number one, from being the experts with new markets in the state, and then number two, those subsidized interest rates for the loan pools where we can go out and solicit, you know, provide funds to a borrower where a little sub-market rate are going to continue to help us move along.

David, one question that we've received is really more related to our community housing team. So asking about how those loans come to pass, where they're located, how they fit in, and kind of the structure, permanency of them on the balance sheet.

Sure, sure. So it's a little different model. Those are often... Sort of twofold. So, as you guys have seen in the past, we've been the recipient of capital magnet funds. So those are funds directly from the Department of Treasury through the CDFI fund. Those dollars are meant to be used and lent back out into affordable housing projects. It's very competitive because we have a very low cost of funds, basically nothing. So we lend those back out as soft loans, if you will, into low-income housing, affordable housing projects. So they're usually smaller. They're anywhere from $500 to $1 million. But the great part about those low-cost funds, getting those into the capital stack for the project, is we often get our foot in the door for the construction and sometimes the permanent financing of those multifamily projects. So... To your question about any credit concerns there, no credit concerns. Affordable housing projects in the state are typically taken out by low-income housing tax credits. So it's sort of a churn industry in that you're booking a loan, you're funding up the loan, monitoring construction draws, waiting for it to hit stabilization, and then you're taken out by the tax credit investor for permanent financing. So pretty low risk there. affordable housing projects uh that we have permanent uh debt in uh they're very low loan to value they typically have a tax credit investor behind us um occupancies stay very high in the high 90 range of those projects just because of the need in the state so of all the credit quality um concerns i have in the bank that one's very low on my on my my uh

Yeah, probably one of the hallmarks of David's loan book is the diversity within. So we've got the affordable housing team. We've got the ag team. We've got a host of other areas that we operate in, the footprint that we work in. They're all diverse. While geographically close, they're economically different. They provide opportunities in one area that we don't necessarily have in another area. So it's always served us well. There have been ag challenges over the last couple of years, but offsetting that is the success that we've had in this area. So we've been able to to put together a portfolio that kind of cohesively works well in most economic scenarios. So that we are very, very thankful. With that, I don't see any other questions and I know we're running low on time. So Brian, I will kind of let you wrap it up for us.

Very good. Thanks, Mike. Thank you, team. If you have any other questions as they arise, if you will email them to me at brian.brewley at unitedbank.com and I will get them to the team. Thank you for your attendance today.