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

Good morning, and welcome to our fourth quarter United Bank earnings call. I'm Brian Bruley and joined by our panelists, President and CEO, Mike Vincent; Chief Credit Officer, David Stewart; and Chief Financial Officer, Leigh Anne Jones. We'll be taking questions through the Q&A function of your app this morning, whether at the top or bottom of your screen, and we'll be monitoring that feature throughout the call. So with that, I turn it over to you, Mike.

Great. Thank you, Brian. Good morning, everyone, and thank you for joining our call once again. This is our Q4 2025 recap. We'll go over some of the high points for the fourth quarter and for 2025. So for the quarter, United Bank reported net income of $3.7 million, and that's an earnings per share of $1.15. That is compared to $6.9 million and earnings per share of $2 for the same period last year. On a year-to-date basis, that is net income of $17.2 million, earnings per share of $5.23, and that is compared to the prior year of $26.9 million and earnings per share of $7.65. We'll get into some of the details of that throughout the call. But one thing that you'll hear as you compare year-over-year numbers is some of the differences in the CDFI programs, some of the grant programs that we were able to participate in, in 2024 that were not available in 2025. One thing that we're happy to report is the continued strong and stable net interest margin of 4.55%. That has been a hallmark of this bank for quite some time and our ability to continue keeping strong margins. One highlight that we wanted to recognize is our continued stock repurchase program. During the quarter, we acquired 176,000 shares. That's a total of 328,000 shares during the year overall. And then one last highlight regarding UBCD, one of our subs, was their award of $75 million in new market tax credit allocation. That's a number of years in a row for that group, and we're very pleased and excited that they're able to continue some of the good work that they've been able to do so far. So 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. Good to be with you all again. Just a little summary, year-over-year growth was right at 2.4% or $20.9 million, down a little bit from the last couple of years. A few things were going on, particularly in the fourth quarter. If you guys were watching that multifamily construction budget, that declined by about $10 million. I think we've talked about that in the past. We have a very active affordable housing group that does a lot of construction lending for those low-income housing projects. We got caught where we have several projects coming to stabilization in the fourth quarter of the year and going out to the permanent financing with housing tax credits. So that reported that significant decline that we saw. Also, if you were watching sort of buckets between call codes, you saw some vacillation. There was a cleanup that we did internally in credit during the fourth quarter of moving some of the call codes from the construction bucket over into the commercial real estate perm loan bucket. So there was a pretty big swing that you might have noticed, and that was related to some of the call code cleanup to make sure we have everything aligned properly within those buckets. But all in all, decent year. We're looking forward to next year. We did have strong closings in the fourth quarter for some construction-related items with the affordable housing group. So we're looking forward to good things and also good news with the new markets allocation for UBCD and the associated loan growth we typically see with funding those allocations in those projects as well. A couple of highlights that I wanted to note. Nonaccruals was up. That was related to two large relationships we put on nonaccrual at the end of the year. We're sort of back in that range where we were towards the end of 2024 in Q3 and Q4 of 2024. So nonaccruals are higher than we would like them to be. However, that's allocated to 3 large relationships, which make up about 89% of that nonaccrual total. we're actively working through those credits and seeking resolution. Also nonperforming as well, nonperforming assets was up related to the same thing as well. NPA ratios at 1.12 net of the government guarantees. So we're going to be spending a lot of our time focusing on that in Q1 and Q2 to bring those down for the bank. In terms of ORE, it's remained unchanged at 1.3. Again, that's a focus of mine, working those through. We've got some things that are out being marketed and spending a little dollars to in terms of some advertising to make sure those get moved off the balance sheet. Last highlight, just wanted to the allowance for credit loss remains good at 1.32% or $11.7 million. We spend a significant amount of time working through the CECL model each quarter and are confident that result in that reserve. So that's all I have from my seat, Chief Credit Officer. So I'll pass it on to Leigh Anne for the securities overview.

Thanks, David. Good morning, everybody. Going to talk about securities and deposits and liquidity real quick. So the securities portfolio continues to perform nicely. It has a weighted average life of about 6.5 years and a duration of about 4.75 years. We continue to see solid cash flows coming out of that portfolio and has little extension risk and rates up, and we continue to see improvement in AOCI as I'm sure most other institutions are seeing as well. On the deposit side, year-over-year deposits increased about 4.3% or about $47 billion. A lot of this growth came in the second half of the year and really in the CD space as our net interest margin has allowed us to keep slightly higher rates on the CD side to be more competitive and attract more customers, and we continue to see success with that strategy. Although competition does remain strong, we're still seeing short-term rates on CDs in about the 4% range, give or take. So obviously, this is all impacted on liquidity. Our cash-to-asset ratio is just about 13%. So we remain very liquid and very agile going into 2026. And that's all I have. So I'm going to turn it over to Mike. Go ahead.

Thank you, Leigh Anne. So we mentioned one of the strengths of the bank being our margin. That has always been, we like to say around here, kind of your secret sauce a little bit. Low-cost deposits has always been something that we have prided ourselves on. So as I mentioned earlier, the year-to-date margin of 4.55, that's compared to 4.58 for 2024. So we've been pretty well able to maintain what we were expecting, earning assets yielding at 5.75 and cost of funds sitting at 1.41. So some of that stuff, obviously, the cost of funds has ticked up a little bit. We've had -- when you look at the deposit mix and an increase in time deposits. But certainly, in the markets that we operate in, we do a pretty good job of attracting good low-cost deposits. That puts us in a situation where down rates, if we contemplate further rate cuts over 2026, would certainly have an impact on net interest income, reducing 100 basis point reduction would make a reduction of 3.83% or a little over $2 million. So we obviously are watching it. We've budgeted for some levels of rate reductions, and we will manage it accordingly as we've always done. One question I'm asked a lot about is noninterest expenses. Certainly, for 2025, those expenses were up from where we would like to see them. A number of things impacted the increase in net interest expenses, core conversion being probably the main one of those things. We, as we've reported before, have gone through a core conversion, converting to Jack Henry SilverLake platform. That went live around August of '25, but there was a lot of work, obviously, that went into that. Upgrading our cloud platform, certainly, it was an impact of about $1 million. One thing we committed to do was to try to make this conversion as seamless as possible. We brought in a consultant to help with that, to help with the transition, working with the staff, being on the calls and making sure that all questions were answered and all details were handled. But that obviously comes with a price. And the consultants, while expensive, did really help us make it a very successful conversion. So we're excited about that. So when you look at kind of our go-forward run rate, I would say the expectation is to probably model about $12 million a quarter. That is still higher than we would like, but I feel like we've put some infrastructure in place as the bank continues to grow, that allows us to scale a little bit with some of the infrastructure already in place. From a capital perspective, tangible book continues to improve, increasing to 45, 48 from -- which is up a little bit from the prior quarter. Price to tangible book at about 1.17. So that's one thing that we certainly are focused on is increasing the book value of the stock, and we've been able to do it slow and steady year-over-year. Dividend yield of approximately 2.5%. That is also up from prior years as we've made that a focus of trying to reward our shareholders as best we can as the bank continues to grow. ROA of 1.38 and a return on tangible common equity of 12.36. So all good numbers, and we're excited to report all of that. I will touch on ESIP for just a moment. As you remember, we did accept ESIP capital of nearly $124 million. That is -- that was at 0% interest for the first 2 years. We are now paying dividend to treasury of 2%. There's been a lot of talk and a lot of questions about disposition of ESIP and what banks are going to do, who can qualify and who cannot qualify. That is something that, obviously, we model, we report. We are not in a position as a bank to exercise ESIP disposition at this point. But we are working towards those goals. And we are strategically structuring things as best we can to kind of help us get to that point. But it certainly won't be this year and not next year, I don't believe that we would qualify for that, and we can maybe provide a little bit more color if you'd like. But other than that, we're excited that the capital that we have is growing organically, and I think we're doing a pretty good job of putting our bank in a position to go forward. So a lot of positives, a lot of positives in 2025. All of these things that we've talked about are -- they're a good core part of our business. I'm asked often about CDFI and kind of what the status of that fund is? What's happening with the programs? And I will tell you, it's a process working through treasury, working with our legislators. We certainly do a lot of advocacy work with our senators and our house members, making sure that they understand the good that these programs do. As you may have seen, the 2026 appropriation for CDFI was approved. We will see when that money is released. So a lot of things, I think, are positive signs, but we just got to work through some wrangling, I guess, in Washington, I guess, I would say, regarding the release of some of these funds. But we're very excited about where things are going in that perspective. David mentioned earlier, again, our group that manages our new market tax credit program, has got ample projects, ample work to do. They're still fulfilling allocation from prior awards as well. Our group that administers the Capital Magnet Fund program, affordable housing projects throughout the Southeast, they have got an abundance of projects that they are working on. And David, I don't know if you maybe can speak to their kind of their pipeline or what they're thinking, but they've got a lot coming in this year, too.

Sure. Yes. So that's been a prolific driver of loan growth in the past. We like that business. Number one, it's pretty low credit risk. Number two, we have some experts in the field that run that shop. It is kind of a cyclical-type business. So we saw those declines in the fourth quarter of last year that drove loan growth a little lower than what we have seen in the past. So that was sort of a driver of those lower balances. However, we did have a number of closings in Q4. Those are all construction projects, so not a lot funded at closing, but as those projects go vertical during 2026, we're optimistic for loan growth and have a healthy pipeline associated with those projects.

Great. So David, there's a couple of credit-related questions, and I'll let you take.

Sure. Kind of dovetailing on that expectation for loan growth in the affordable housing space, expectations for loan growth in general. We've got conversion behind us, which is a good thing. We've put some infrastructure in place with a new loan origination system as well as that new platform operating system. I think that our lenders are very focused now on growth. We've put the conversion behind us. So we are -- have an aggressive budget for the year in terms of loan growth, and we're committed to making those numbers. So I would say that I'm strongly optimistic about growth, putting it something possibly what we've seen in the prior years, '23, '24, back to what I would consider a normal growth period for us in our business model. Another good question here, and I appreciate that ask on expected losses for the associated nonaccruals. So we have reviewed those credits for any specific impairment. I can say without any hesitation that of those 3, I know 2 of the 3, there's no impairment there or a very small impairment. The third, we are assessing right now. We've got some possible suitors for the projects that would just assume the debt structure. So any kind of loss that we may incur associated with those is already built into our allowance model.

All right. Thank you, David. There is a question that we've got regarding the Capital Magnet Fund and our expectation for additional awards over the coming year, I guess, I would say. Anything that I would tell you would be speculation, I will say. We -- our team is diligently working and they've gotten a number of awards. You may recall in 2024, it was $9 million that they were awarded through the Capital Magnet fund. They've got a number of projects, and David spoke to kind of how some of that stuff works. What will happen in the coming year is a great question, and I don't know that I have an answer to it, to be honest with you. We have, frankly, more questions and answers on some of these things right now. We we have actually been able to -- with some of the capital that we've had, we've been able to give them additional funding as well. So they can continue to do some of the affordable housing work that they do, which, one, means that we don't have kind of a lag in the activity that they're doing. Two, it provides them with an additional record of loans that they can put into future applications. So I am eternally optimistic when it comes to these things because I think these programs are too important. Now there's one, I guess, unique piece about the Capital Magnet Fund is the funding source is a little bit different than some of the other CDFI programs. These really come out of proceeds from Freddie and Fannie. So it's slightly different on how they're funded. But I just think the need is too great and there's too much support. And I stand by that now. It's been a road to hoe, I think, to get some of these appropriated funds released. And I'm, again, optimistic that maybe in the short term, we can get kind of the dam broken here a little bit. But that is my hope anyway. And Brian, with that, I don't see any other questions.

Well, thank you for joining us this morning. If you do have any other questions, you can send them to me, [email protected]. With that, have a great rest of your week.