United Bancorporation of Alabama, Inc.

Good morning and welcome to United Bank Corporation's third quarter 2025 earnings call. I'm Brian Bruley. I'm joined today by Mike Benson, our president and CEO, Leanne Jones, our chief financial officer, and David Stewart, our chief credit officer. We'll be taking questions through the Q&A function of the Zoom call, and you'll find that Q&A function on the button either at the top or bottom of the screen. So we'll be monitoring that function throughout the call. So with that, Mike, I'll turn it over to you. Pretty good.

Thank you, Brian. And good morning, everyone. We appreciate you joining us once again for a quick call just to highlight some of the activities for the third quarter. So let me just jump right in. For Q3 2025, we are reporting a net income of $4.2 million and earnings per share of $1.29. That is compared to $5.1 million and earnings per share of $1.45 for the same period last year. Year to date, we are showing net income of $13.5 million and EPS of $4.07. That is compared to $20 million and $5.63 for the same period last year as well. Thus far, we talk about this almost on every one of these calls. Our net interest margin has remained strong as it has in prior quarters. This quarter was no exception. Year to date, we're reporting 4.59%. on the margin. One thing I'll highlight that we may touch on this a little bit later in the call, we do continue to repurchase shares. We have acquired 56,000 shares during the quarter. And I will tell you for the year to date, that's 163,000 shares that we have been able to repurchase thus far. So just with those few highlights, I'll turn it over to David Stewart, our chief credit officer, let him talk a little bit about the loan book.

Sure. Good morning, everyone. Glad to have you this morning. Year-over-year loan growth has been right at 46.5 million or 5.4%. Lung growth in Q3 was right at 1.4% or $12.3 million. Kind of the same story we've been along, same storyline we've been on for the entire year and most of last year. That's driven by multifamily construction. Continue to see good production within that book as we exploit our specialty within the affordable housing space. And we've also seen good growth in commercial real estate. So pleased with what's going there. You will notice that non-approvals decreased in Q3 by 1.2 million to 7.5 million. Doing a little cleanup work. I think we've talked about this on prior calls. The Camden portfolio, Wilcox County, continue to see some adjustments there we're having to make associated with some cleanup work, frankly. That's a forest county in the state of Alabama, a heavy book of consumer loans. So we're just sort of working through resolution in that book. Also, you'll see that the charge-offs for the quarter were right at $1 million. That's related to that book and taking some marks on a couple of other credits as well. On the positive side, you will notice that ORE did decrease by just over almost 701,741. We had a piece of property that had been in the bank's inventory for quite some time. We had possibly held for branch expansion. We decided to go ahead and market that and take that off the books. So that kind of tells you a story on the decrease in ORE. um did want to just highlight non-performings are still a little higher than we would like to they've come down quarter over quarter uh they were at 70 basis points and then past views ticked down a little bit as well um you know hovering around two percent that's primarily driven as we've talked about some sticky larger credits they're just taking time to resolve uh we do have one that's got a you know a resolution in our target. I don't have an estimated time frame. The associated government shutdown has slowed down some of that. And then we've got some other kind of larger credits just working through resolutions. Spent a lot of time there. But... I think we are optimistic right now. As you guys know, we have a pretty sizable ag portfolio. We've had pretty good weather through Q3, so everybody's crops look good, yields look good. So we're hopeful on that front as long as prices on commodities hold up. So that's all I've got on the loan book. So I'll pass it over to Ian for securities discussion.

Sure. Good morning, everyone. So the securities book still maintains a book value of about $316 million with a yield of about 3.64%. The weighted average life fluctuates a little bit, but that is 6.7 years at the end of September. and the duration just under five years. We still have about 20% of the book is floating on the security side. Switching gears to talk about deposits, year-over-year deposit growth has been about 3.9% or about $42 million. So we still continue to see growth there, primarily in time deposits, and we have a train coming through. So bear with us here for a second. All right. Anyway, the time deposit rates, we've maintained those yields a little bit higher to be competitive in the market and to continue to attract new depositors into the bank. And the competition does still remain strong in our markets. This has all supported our liquidity position. Our cash to asset ratio is 11.15%. And we still, you know, continue to monitor liquidity on a daily, monthly basis. And that's really all that I have. So I'll turn it back over to Mike now.

Thank you, Leanne. I'll interject as well. That is our local economic barometer, I suppose. So the frequency of trains going by is actually a good thing, although maybe not as timely as we would like. So let me speak a little bit about The margin I mentioned earlier that we've been able to maintain a pretty robust and strong margin year to date at 459. That is pretty comparable to 2024. We're reporting 457. Earning assets at 578 versus 563 for prior year. Cost of funds 140 versus 124 versus prior year. So So all in all, pretty strong numbers, and we work very hard to maintain those levels. Quarter to date, margin of 458. So that's pretty well in line. You may see a few basis points tick up, tick down, but all in all, I think we're in pretty good shape. Looking at some forecasted impact of the rate environment that we find ourselves in, you know, when we kind of shock the balance sheet down 100 basis points has an impact on net interest income of about 5%. Down 200 is about 9.6, 9.7%. So, you know, we recognize, you know, kind of what the interest rate environment looks like. Most likely, assuming a gradual 100 basis point decrease over a 12-month period, does show a income decrease of about $400,000. So we are managing it, I think, very closely, knowing what rates are likely to do over the next 12 months or so. One thing we've talked about with anybody that we've met with individually or we've had group conversations, this year's been a little bit different than many others. What you see in bank performance has pretty well been core bank activity. There's been very little impact from some of the CDFI programs that we have historically participated in. I will say UBCD, UB Community Development, our CDE entity, recognized $560,000 in new market tax credit fee income during the quarter. So that is one thing I did want to point out to you as well. On the non-interest expense side, obviously we've carried some elevated expenses higher than previous year. Much of this is related to the core conversion that we've talked about. Upgrading our cloud environment comes at about a million dollar cost. Consulting fees to get us through the conversion. about a half a million dollars in cost. Miscellaneous, and I'll say miscellaneous, it's a very big number for miscellaneous, but $480,000 in various conversion-related expenses as well. So, you know, some of that, much of that is, I would say, is one-time hits. When you look at a kind of a go-forward run rate, some of these obviously will remain, you know, the cloud environment kind of is where we are, but But a lot of this we will be glad to see in the rearview mirror and have behind us. On a capital perspective, tangible book increased to $45.06. That's up from $43.07. Priced the tangible book at $1.23. You know, dividend is something that we continue to talk about. We focus on it. We've been focusing on it for a couple of years more strategically. with a yield of right around two and a half. So all that being said, that gives us an ROA of 145, return on tangible equity of 12.3. I'll touch on ESIP. I know, in fact, I think I saw an ESIP question, Leanne, I may enlist your input on this a little bit too. So obviously, we have signed, as we've talked about before, we've signed the ECIP option agreement outlining early disposition. You know, we continue to measure and monitor. Obviously, with what's been going on with the government shutdown, there's been a lot of, I guess, a question and about what's going to happen, when it's going to happen. You know, Leanne and her team continue to monitor and to measure what we're doing from a lending standpoint. Leanne, I don't know if there's something you may want to contribute from that perspective about how that's going.

Sure. You know, we are required to report quarterly to the Treasury regarding our lending in the various categories of deep impact and qualified lending. So we are looking at that in relation to repurchase. I think that repurchase, according to the lower guidelines, as far as being able to repurchase through the mission-aligned nonprofit, you know, it looks, looks pretty favorable at this point. It's still kind of early to tell. Um, we're very focused as Mike said on, on lending and what we can do to, um, ensure that we are able to repurchase, um, the capital in a timely manner and at the lowest rate possible.

Um, so let me give you just some, I guess some high level comments, um, on the quarter itself. Um, we've mentioned core conversion multiple times. So that was, uh, Finally, put to bed, and I say put to bed, at least the actual conversion itself. It went about as well as I think a core conversion can go. Obviously, there's always going to be some hiccups here and there. You try to minimize the customer disruption, any kind of issues from a customer facing perspective. But I think all in all, that went extremely well. We are working on what we are calling day two items, things that were not part of the initial conversion weekend. We've got teams working on things like consumer lending efficiencies, that sort of thing, online activities. So there's more to come. There's more efficiencies to be gained. But all in all, having that behind us, one, from a cost perspective and two, from an employee standpoint. uh, focus perspective is a very positive thing. It's been, uh, it's been a heavy lift as you would expect for a whole lot of people. And we're glad to, uh, to get that behind us. Um, I do want to speak a little bit about CDFI and, um, kind of what, what we hear, what I know and what this means for us. So obviously, um, all year long, there has been some uncertainty regarding the fund itself, funding for the various programs, um, you know, what support do you have or not have on a congressional level? So I will tell you this year, it's really no different than other years, but we've certainly focused on congressional advocacy. making sure that we're in front of our leaders, both in the House and the Senate, making sure that they understand the importance of these programs, which they do. They have understood it. But it's an interesting time right now, obviously, in Washington to try to get certain things done. Overlaying this, the government shutdown certainly did not help. working through some of these issues. The employees at the fund themselves received a reduction in force notification, so that put a lot of things at a standstill. Now that the CR has been approved and people are back to work, what that means about recertification applications, the various programs, the funding and that sort of thing, still remains to be seen to a degree, You know, the experts in that area seem to think that they would likely consider some extension to some deadlines. As we sit, there's a 1231 deadline on recertification applications. Being being shut down for as long as they were obviously has put them well behind the eight ball and they've got a lot of a lot of ground to make up so. What happens with that deadline remains to be seen. From our perspective, we have tried to take it as business as usual. We have continued to administer the funds as we were supposed to. We are doing all the reporting as we're supposed to, and we'll go from there. As far as funding that is waiting to be, I guess, given out, that is a function of what can get pushed through OMB. We've had conversations with the Treasury Secretary, with others, and frankly, that process has just got to play itself out just a little bit, I think. As far as our group in Alabama, though, everybody seems to be really on board with what we're doing and they understand the importance, so much so that the greater amount of our delegation did, in fact, actually sign a letter to Treasury and to OMB advocating for the program and the funding to be released. So we keep on fighting and keep on making the calls and doing the things that we need to do. Running concurrently with all of that, though, interestingly enough, is the new market tax credit program itself being made permanent through the big, beautiful bill. It's something that we, along with many others in the space, have been advocating for for quite some time. So we're excited to see that that is going to happen. And as you might expect, those groups, our new markets group, our affordable housing group, they've got... They've got ample deals. They've got more deals, frankly, to get them through next year than we can really report on here. So it's not as if things have come to a grinding halt because they do have prior awards that they're trying to work through as well. So from that perspective, that's kind of where things are. So we've got a little bit of time, so I thought maybe we could – kind of go through some of the questions. We do have a few in the queue here. So let's see if we can address some of this. I have a question about repurchase of shares, given our capital levels and what are we expecting in 26 on buybacks and capital allocation, generally speaking. So good question. We have tried to keep a buyback program in place. I'm pleased. that we've been able to make up some ground this year and find shares to repurchase as we obviously feel like it's a good value and a good investment for us. I have no plans on changing that. We continue to find, albeit smaller blocks, that's fine. That's perfectly fine with me. So we continue to be in that space looking for sellers if they exist. As far as just capital allocation in general, yes, it's really no different than what we've been doing. I think the M&A space certainly has picked up and gained a little bit of momentum. Maybe not so much in Alabama, but we do know that... Any momentum is a good thing as far as as far as that is concerned, if you are a potential buyer. So we continue to to kind of work our contacts, work with as many people as we need to and have those discussions. And we continue to do that. So I think that's certainly well in play. Leigh Ann, there is a question in here. You may have touched on it just a little bit, but I'll ask you if you have any comments about the outlook for deposit pricing and just general cost of funds.

Sure. So I guess thinking about deposit pricing, how we're thinking about it is we do have a strong margin right now. So we feel like we do have a little leeway on deposit pricing, you know, to continue to try to grow and attract new customers, as I said earlier, with some higher rates and establish those relationships. So that's kind of our thought process for this year. You know, and we'll see how things kind of go into next year. You know, we are anticipating some lower rates and so we will be, you know, reviewing our deposits and pricing, you know, accordingly. So I guess I would expect deposit pricing to remain steady to, you know, fall slightly depending on what, you know, happens with Fed funds and markets. You know, competition, as I said earlier, still remains pretty strong in our markets for deposits and rates still remain on the higher end. by some of the more local banks. So thinking about that, we're just having to be strategic about how we're pricing it and thinking about that.

Okay. David, I wanted to hear from you maybe to speak about the level of the allowance to loans. comparing to what it looked like earlier in the year, that sort of thing?

Sure. As discussed, we have taken some charge-offs and non-accruals off the table with the Camden book. So we were a little heavier on the allowance previously as we saw that there were some emerging issues there we would have to address. And also we've had some larger credits with kind of work towards resolution as well in the legacy United Bank book. So... And we're confident with the allowance where it is. I don't predict any substantial changes at this point. We proactively, on a monthly and quarterly basis, identify specific credits that may have some impairment. We reserve accordingly. So we've also been very proactive in ensuring that we've got sort of a forward-looking view of any credit challenges. So short of the long, I feel like we're in a pretty good spot where we are. It is down from where it has been in the past. But like I said, we've taken some of those credit issues and working through to resolution. So that's kind of why you're seeing a little lower amount.

There was a question here, and I'll, I'll speak to this and then maybe land. I'll see if you have any comments about it regarding salaries and benefits expense line item up from similar period from 2 years ago. substantially less than that over that same period. Asking for guidance on what this may look like in 2026. So I will say a couple of things about salaries and benefits. One, obviously the cost of attracting and retaining talent continues to go up. It's obviously something that we look at very closely on a monthly and quarterly basis. We have made some strategic hires as well. knowing that the bank is growing, we're moving into new areas. And then I think the roll-in of the branch in Camden came with a little bit of, I guess I'll say, maybe not the efficiencies that you might've expected to see with something like that. I do expect that to stabilize a little bit. I mean, as we go into 2026, that's been a very hot topic of discussion as far as controlling salary and benefit expenses, making sure that if we bring somebody else on that they are going to be somebody that can contribute to our revenue generation and not really wanting to add to overhead expenses as much as possible. I mean, Leanne, I don't know if you've got maybe a different perspective or some thoughts on that.

No, I mean, I think you touched on all the things, you know, like Mike said, that's been a hot topic and we've been very focused on salary and benefits and where that number is and, you know, just trying to manage it. So I think you should start to see some gains and some efficiencies, you know, to next year, I think as we focus on that.

A question about the M&A environment. I hope I've answered that, but I'll just say that in Alabama specifically, It has not been as robust as other areas. I work and I have conversations with a number of groups that are advising, counseling, helping us consider our options. Certainly, when we look at growth, it's going to come from either organic growth within the footprint, which is not off the table, We look at some of our existing markets and think, where can we bolster the franchise? And we've got some opportunities there. I look at our franchise in the Florida Panhandle, and oftentimes we talk about Alabama and we don't talk as much about the Florida markets, but I think there's a lot of opportunity there. Obviously, in some of these areas, there is a glut of competition there. you've got the overlay of the credit unions and that sort of thing and what that means from the M&A space. But I will say I'm not less optimistic. I won't say on the call that I'm more optimistic, but I, you know, Sometimes, you know, patience will pay off, I think, with this kind of stuff. And as long as you've got conversations in the works, and I think we as an organization are probably respected as much as anybody about how we have done things in the past. And certainly we will have a seat at the table whenever there's opportunities that are there. There is a question about Thoughts on receiving a Capital Magnet Fund Award in 2025? Leanne, you can tell me to hush, but I don't see a Capital Magnet Fund Award in 2025.

Yeah, I would not count on it.

No, I don't think so. And I just... With, frankly, the backlog of what's going on right now, I just don't know how they would even get to it if they really wanted to try to get it done. Now, what that means for 2026, I don't know. But obviously, it's an impactful difference when you look back at prior years and you see capital magnet fund awards of $9 million. I mean, you're going to see, obviously, a definite impact on the balance sheet and the income statement. Yeah. You know, we will keep advocating and keep communicating, I guess, regarding what we hear from the CDFI Fund and these various programs. But until something moves in Washington, I don't know that... these awards. So if nothing else, you know, I'm asked often, what does the bank look like if you strip back some of this other stuff? And I think 2025 is going to be a good example of that. In what ways are we using AI in the organization? That is a great question. And one that we wrestle with almost daily at this point. You know, We know that AI is immensely powerful from a banking organization strategy perspective. It is, I won't say dangerous, but it's something that we better understand how we're using it. certainly from a back office, non-customer facing perspective, if you can gain efficiencies either with meeting minutes, with policies and procedures and things like that, then I think it's immensely powerful. But what I will say is we are committed to making sure that we are at least, I won't say on the cutting edge, but at least on the front end of how AI can be used in the banking space. Right now, I have got Our head of our IT department that is going through a certification program, if you will, it's basically an AI strategist designation to try to help us determine what our options are, what makes sense. Certainly, we've got to have conversations with regulators and make sure that they understand how we're using AI. but I recognize the power of it and I recognize the necessity. If you don't figure it out and if you don't use it to the extent that you can, you're gonna get left behind. And certainly from a cost control perspective, it's something that we just have to have. So that is a great question. It's very timely and it's one that we are wrestling with really on a monthly basis right now. So that is something that we'll talk more and more about going forward, I'm sure. I don't know that I've missed any questions. So if there's nothing else, Brian, I'll turn it back over to you.

Thank you. If you have any other questions or think of something else you'd like to ask the teams, you can send them to me at brian.brewley at unitedbank.com. B-R-I-A-N dot B-R-U-L-E-Y at unitedbank.com. Thank you for joining us today.