United Bancorporation of Alabama, Inc. (UBAB) Earnings Call Transcript & Summary

Good morning, everyone. I appreciate once again you all taking the time out of your day to join us here for a few minutes as we recap some events from Q1 and give you guys an opportunity to kind of hear what's going on at United Bank. So at the end of the first quarter, we reported net income of $4.8 million. That is an earnings per share of $1.42. That is compared to $6.3 million and $1.75 for the same period last year. The net interest margin continues to be right on the money, right where we have been reporting at 4.56%, strong and stable, right where we were the prior year and the most recent quarter as well. So pricing remains disciplined. And as we still kind of work in an uncertain environment, we've done a pretty good job of keeping that margin where we would like to see it. Alongside of the returns that we've just reported, and David will speak to this in just a moment, we did make a $2 million provision during the first quarter, and David can get into the specifics of that. And then lastly, reporting a 1.55% ROA. So all in all, a good solid quarter. Good start to the year. Lots to do, and lots going on around here that we'll get into as the call goes on. But I guess with that, I'd like to turn it over to David to let him talk about the loan book just a little bit.

Sure. Good morning, everyone. We appreciate you tuning in. So I just kind of go through some highlights on growth initially. Year-over-year growth from last year this period was 6.9% or right at $57 million. So pleased with the growth. Q1, a little slower than we would have liked, but we're hitting our stride again. Q1 growth was 1.3% or $10.9 million. So still showing a pretty good pipeline. As we've talked about previously on these calls, our affordable housing group continues to do well. We've seen some traction with our new markets group as well, continuing to have good pipeline opportunity. Growth for the first quarter, again, multifamily, as I just mentioned. And also, we are in the planning season, initial stages for ag production. So we saw some of our farmers draw down on their ag production loans in Q1. A lot of those guys have land rent that becomes due. They have various and sundry chemicals and seed costs that they acquire. So they draw down those production lines. And then saw some modest growth in C&I lending for the quarter. So multiple lines of business showing okay growth. And as I mentioned, good pipeline looking forward. Loan-to-deposit ratio has improved. So we've been kind of bouncing around that 80%. So we ended the quarter at 81.38%, which is a good target. Pleased with that number. So kind of getting into the nonperforming. So although you guys may have some questions about that side. So nonperforming were down a little bit between Q4 of last year and Q1, we dipped down to 15.3%. That was driven by the sale of a piece of OREO. So we had our old Pace branch that we have been holding in OREO for about 2 or 3 years now. So we consummated the sale at the end of Q1. So good to move that over and convert that to cash for the bank. Nonaccruals did show a slight increase. That was driven by a timber-related relationship. So it's a legacy relationship. We've been working through some challenges that went over into nonaccrual. I feel like we're in good shape there. We'll continue to work through that relationship. As I've talked about in the past, those nonaccruals are concentrated primarily in 3 large relationships. One was a legacy participation. One is related to manufacturing and then another related to farming. Not seeing a lot of consistency in terms of one market segment. There seems to be no systemic issue we're seeing there, just kind of the same that we've talked about in the past, no correlation. Kind of as a result of those nonaccruals and nonperforming, the Texas ratio is at 7.57%. And then one of the things I did want to talk about for just a few minutes for you all was the allowance for credit loss. As Mike mentioned a moment ago, we did put an extra $2 million, about $2.3 million in the reserve. In Q1, that bumped up our allowance to 1.66% right at $14.6 million. So that is an increase up from $12.3 million at the end of the year. One of the largest credits we have that we're working through resolution, I mentioned the manufacturing facility has exiting bankruptcy first quarter, and we're working through, that's going to actually come into -- there's 2 parts to that credit. Part of it will be related to new markets. Part of it will be related directly to some real estate debt. So we'll be -- we have an eye towards resolution for that credit, and that's the reason for the increase in the reserve. So we're confident right now with where we have the reserves, particularly related to that credit. We feel like we're well covered for the write-downs we'll need to take for it and be working through a resolution here pretty soon for that. Other item I did want to mention to you all is past dues were up slightly, a good chunk at the end of the quarter. That was primarily due to one large relationship at $5 million that carried at month end. Pleased to announce that, that is actually current now. There's a tenant for that facility. So there's operating cash there. That was an industrial warehouse site that had a tenant back out at the last minute. No reserves there in order to carry the interest. So they were negotiating the lease right at the end of the quarter and hope to have that initial payment coming in, and that didn't actually happen until the first part of Q2. So we resolved that large credit, and it's in good standing now. So lots of work, good growth, some resolution on the backside with special assets we're working through, but I feel like we can start to pivot in Q2 and start focusing on growth and concern less about some of those resolutions of credits.

Leigh Anne, I'll turn it to you.

Sure. Thanks so much. So on the securities front, we have not been very active in the investment portfolio. So not really much change there. The book value of the portfolio is just over $300 million with a book yield of just shy of 3.25%. The weighted average life is about 7 years and duration just shy of 5 years. So that's kind of what the portfolio is looking like. It's providing cash flow for us currently as well as some yield. Switching over to deposits. Deposits continue to be flat on growth at just over $1 billion. We are starting to see -- well, we've had some competition with regard to rates as we kind of stay in this slightly elevated, not sure if we're going to see a decrease in rates later on this year, but that's allowed us to still offer some attractive rates, which is starting to yield some results for us. So we're starting to see some growth on the deposit side. And all of that, of course, is providing additional liquidity, securities and deposits for us. At the end of the quarter, our cash-to-asset ratio was 11.41%. Maintaining liquidity is -- continues and always will be a priority for us as we manage deposits and deposit concentrations. And that's really all on that front. So I'll hand it over to Mike.

Thank you, guys. We spoke a little bit about the margin earlier. To give you a little color to that, we've talked about this a number of times on the call. Margins of 4.56% prior quarter was 4.60% and year-to-date last year was 4.54%. That leads to -- really as a result of cost of funds where we find ourselves as at 1.33%, that is a function of, in large part, the retail network that we have. Our branch network has always done a good job in the markets that they serve, attracting low-cost deposits. We've been very fortunate to have that with no real deposit concentrations at all to speak of. So it served us well. And as I talk to peers around the country, I think most people would be willing to change places with us when it comes to our cost of funds and our performance historically in that area. We do have -- when we look at our variable rate assets, 33% of loans, 21% of investments. And David has talked a little bit about ag lending on several calls. And that's always a good piece of business, sometimes countercyclical to the commercial book. But that's also very short-term lending. Those things will turn in usually a year's period of time. So at any given time, we may have $80-plus million in that book, and we can certainly reprice that as the market dictates. So we find ourselves, I think, in a pretty good shape. Noninterest income has always been kind of a big item for us in the CDFI world and some of the programs that we participate in. We did recognize $1 million in the first quarter in new market tax credit fee income. These are not programmatic awards. These are just the monetization of the credits and fees that we get off of deals that we do. So that was nice to see. And David mentioned the sale of some properties, and we did show a slight gain on that as well. So that served a couple of purposes and it was nice to see some of that stuff get done. We look at noninterest expense. Obviously, salary expense is -- and technology expense are big ticket items for us. Salary expense was a little more than the same period last year. That's not a surprise and not unexpected. One, just the cost of talent has gone up. Two, as the bank continues to grow, we do continue to bring in more and more talent as well. So we kind of expected that. Maintenance expense, that's one of those things -- it will ebb and flow a little bit. It's slightly higher than last year, but nothing extraordinary. And obviously, the big item for us right now is the core conversion. We are converting, as you may recall, from a Finastra Phoenix system to a Jack Henry SilverLake system. That is in full gear right now. We have a lot of people spending a lot of hours making sure that, that process happens smoothly and efficiently. The target date for that conversion is August. So we are a few months out now at this point. So we are excited about getting that behind us and getting that done. But obviously, that does carry some costs associated with this that may ebb and flow. Some things come in a little bit sooner than we think, some things may be a little bit later than we think. But all in all, it's an exciting time for us to get that done. On the capital side, I'll run through a couple of metrics and then maybe give you a few updates as well. Tangible book increased to $42.52. That is up from $40.05 as that was the number at December of last year. Price to tangible book at 1.25%. Dividend yield, that's something we obviously look at a great deal, now just north of 2% ROE, at 8.09% ROA, as we said earlier, 1.55%. On the ECIP front, we, I think, have reported on this call before that we have executed the purchase option agreement. We did that before the end of the year, outlining a potential exit plan. I know we're asked from time to time, what does that exit plan look like? And what are the options or what are the odds of us actually being able to hit the metrics that are included in those exit plans. It's something we look at, as you might imagine, very consistently. Our preference would be if we can hit the metrics, looking at the levels of what they label as qualified lending or deep impact lending, it depends on what part of the footprint in specific areas that you're making loans into. But those are metrics that we have to hit over a fixed period of time. You have to do a certain level of deep impact lending over a certain number of consecutive quarters or qualified lending over a certain number of consecutive quarters. Obviously, we track that. We monitor that. We're -- to be honest with you, we're reasonably close to it. Our sense of that has been the larger the bank, the harder those metrics are going to be to hit. We will be putting, as you would guess, proactive procedures and targets in place to try to help us hit those metrics. It's not going to happen by accident. So we've got to be determined and focused about where we're putting our efforts. But I think it's possible to get there. We would like for that to be done. That is obviously the cheapest way to exit the program. We already have a mission-aligned nonprofit in place if that's the vessel that we so choose to make that purchase happen. So -- but it's going to be a while. It cannot happen for a number of years at this point. Leigh Anne, if I missed anything on that, is there anything from the ECIP standpoint that...

I think you covered it.

So that will be a quarter-by-quarter update. I'll be happy to give you guys a consistent update. And we've had some investors and some others that have called us offline. If you want to talk specifically about the nuances of the exit strategy or the possible exit of that plan. Love to sit down and chat with you about it. It's complicated and there's still some uncertainty in it. But we do know that the target is worthwhile to strive for. So we are working towards that. Capital continues to grow organically just based off of the operations of the business. One of the questions that we talk about a great deal our capital allocation, what are we going to do with the growing capital that we have. We've talked about M&A in here a number of times. M&A is still on the radar and is still aspirational for us. But it is also still a very tight market, very little activity happening. We keep saying and we keep hearing that, well, it's going to turn, and I believe that, that is still true, but it has not turned here in these markets. And so potential sellers have still not really emerged in these markets, but we continue to have the conversations. We continue to look and to try to vet possibilities when we can. But that's kind of where the M&A market is. One of the other things that we've talked about a number of times is the potential for a stock repurchase. So I don't know if anyone has seen anything on The Wire this morning, but I will tell you that yesterday at our Board meeting, the Board authorized us to repurchase up to 10% of outstanding shares. So that repurchase program is in place. It is in place for a calendar year, and I'll be very curious and hopeful to see what presents itself. But we are looking forward to investing back in ourselves. We still believe, obviously, right now, with the stock trading where it is, that it's a very good value. It's a very good value to where it was trading last year, I believe. So we're going to continue to look for blocks here and there or whatever presents itself, but we do have that authorization in place. So as of now, that buyback is back in place. A lot of the things that we're talking about investment, we did mention the core conversion. So new telephone systems, new cloud, the things that we feel like we need to have in place to be competitive and to stay viable and to stay top of market as we go forward. Lending activities, and David, I don't know if you want to touch on that in any detail. We have put some of those lending programs in place as a result of the money and so...

Yes, sure. I think you're seeing the growth that we're achieving are part of putting that money to work. We've talked about kind of the new markets in the affordable housing space. We continue to see good growth in that multifamily space. The growth we saw in Q1 in the C&I space was somewhat related to those new markets. Related dollars could be traced back to those deals getting our foot in the door by leveraging the new markets allocations that we have. And we just continue to work diligently in the ag space, isolating opportunities in that area. So ag has been a little bit of a bumpy ride of late last few years. So we've talked about in the past on 2023 having a drought and then 2024, you see a lot of their input costs up higher than they've been in most people's memory. But I think having those low-cost dollars that we can put to work in farmland and timberland, we're able to cherrypick some of the market and put good business on the books and continue to utilize those lower dollar ECIP capital pools to grow the book.

All right. So with that, we'll see if we have any questions in the queue. The only one that I actually see at the moment is regarding ECIP, and what terms may look like. So Leigh Anne, if we were able to hit some of the metrics that we talked about, the deep impact in the qualified lending, the repurchase terms would be in the neighborhood of what, the $124 million.

We were repurchasing it via the mission-aligned nonprofit. I mean, it would be really a repurchase of less than 1%, 0.5%. And if not, then it would be a present value calculation, which still would be beneficial to us.

Right. So really, the eye-popping numbers are just that. If you can do it via the mission-aligned nonprofit, then you're talking -- I mean, you're talking under $1 million to bring that program in. Yes, that's right. That's right. So question about core conversion costs, how much has gone into it and a reasonable amount kind of a run rate, what's going to be the delta post completion of that initiative?

I'll [ answer ] the question. So core conversion costs really haven't come along. We just had some initial expenses. I think a lot of the expenses will start hitting in the second half of the year. And so I really wouldn't -- I mean it's really going to be changing out one set of systems for another. We did get, I think, a better deal on the core that we're going to now. So I would expect to see some decrease going into the last half of the year, particularly the fourth quarter. Maybe looking on an annual basis, probably $1 million, give or take, would probably not be going -- expenses renewed going into 2026, and that would be in round numbers.

One question is out here, and I should -- I failed to mention this, so I'm glad that this was brought up. Aaron, thank you. So what have we heard regarding future funding of CDFI programs? Obviously, that's a big -- that is a big point of discussion right now. We are members of the CDBA, the Community Development Bankers Association, and I serve on their Board. And we've had a number of calls. In fact, we have a membership call this afternoon as well. The budget that was proposed by the President obviously left that funding out, which was not necessarily a surprise. That's happened twice during President Trump's first term. So 2 of the first 4 years he was in office, that was left out of the budget as well. Ultimately, it is a congressional decision as far as what they want to fund. We are still optimistic because of the support that we have gotten from our congressional members nationwide. It's a bipartisan issue, and I think it's widely supported on both sides of the aisle. We continue to have those conversations. We continue to reach out. We'll be doing some advocacy in Washington. In just a few weeks, we'll be in D.C. for a series of visits and meetings to talk about these exact issues. I am still optimistic about what this will look like. The reality at the CDFI fund is that there may be some pared back of their staff, which might impact their service levels and their ability to turn these things around. But I do believe that these programs will continue. That is me in my opinion. But it's something that, as you can imagine, we watch this one very, very closely. So we look forward to continue to report on this thing, but there's not been a ton of news. I will say that there's not -- it's not been a lot that's been coming out. So we shall see. There'll be more to come. But other than that, for us, it is still kind of business as usual. We have our recertification application that's in their hands now that we still have not heard back on, and that should be forthcoming here sometime soon, I would suspect. So that's a great question, and we'll continue to give updates on that as we hear anything. Leigh Anne, there was a question about a decrease -- 100 basis point decrease to net interest income. I think we've got that here.

Yes. I mean -- so we're asset sensitive. So obviously, decreasing rates affect us and affect us negatively. I say that. And so in a down 100 basis point scenario, I mean, we would be expecting probably something in the neighborhood of $3 million decrease in the net interest margin. We still maintain a strong margin over 4%, maybe a quarter difference from where we are now. It just kind of depends. That's something that, obviously, we're looking at and looking at ways to mitigate that decline.

There is a question about future fees related to unwind of loan pools. David, I don't know if you have some of the specifics.

No, good question. I don't have an actual estimate on top of mind as those loan pools do unwind, as we've talked about in the past, there's a back-end gain associated with those. Leigh Anne, I don't know that we've got any coming up until maybe next year. I don't think we have any this year because what you would find is you correlate back the rounds of allocation to the associated loan pools. And I think if you trace that back that year that kind of this was a dry year, 6 or 7 years ago, we didn't have an allocation awarded to us. So we would not have a correlated loan pool from 7 years ago to unwind. So we continue to use those loan pools prolifically. That gives us lower cost of capital for a part of the transaction. So it gives us a little bit of a competitive edge in the market if it's in the right census track. So we continue to use those dollars and recycle them in the existing pools.

Yes. You'll find most years going forward, there'll be something unwinding. And it's a function of what happened 7 years prior. So the amount of the fees associated with those are going to vacillate a little bit. I mean, I think the last one was roughly $1 million, and it's going to be probably in that ballpark going forward. But you won't see that in 2023.

That's what we're dealing with right now. We've got some of the initial new markets transactions that we put together are coming to their maturity. So we've got, I guess, 3 this year. They were stand-alone transactions. They were not loan pool deals. That's where the actual qualified low-income borrower receives the benefit of the unwind associated with the new markets transaction. So good for our clients and good to see some of those come to -- go through compliance and come to unwind.

So is there any other questions, guys, that you've seen that's out there? Okay. What I would -- I guess I would summarize it as this -- it's been an active first quarter. Obviously, we have had to handle some credit challenges. The credit challenges are, I would say, isolated to a couple of things. There's a few larger commercial credits that had to be dealt with. The Camden market has had a series of consumer credits that have been problematic, mostly small dollar stuff, but it's -- it causes the team to spend a great deal of time trying to do some cleanup and some work there. But that market continues to come along. We're in uncertain economic times from a rate perspective, from an ECIP perspective, from a CDFI perspective. But I believe that our model has proven itself to be able to weather the ups and downs of economic issues. Political forces aside, we expect these things to continue. And if we hear something otherwise, then certainly, we'll talk about it as we can. But all in all, I think it's been a good solid start to the year, and we look forward to the rest of 2025. So with that, Brian, I think I'll turn it back to you.

Thank you, team. If you do have any other questions, please feel free to send them to me, [email protected], and I will get them to the team. Thank you for joining us.