United Security Bancshares (UBFO) 8-KUnited Security Bancshares Reports 3rd Quarter Financial Results

United Security Bancshares Reports 3rd Quarter Financial Results

Results of Operations

Noninterest income for the quarter ended September 30, 2024, totaled $2.0 million, an increase of $1.9 million from the $114,000 in non-interest income reported for the quarter ended September 30, 2023. The increase is primarily attributed to a gain of $661,000 recorded on the fair value of junior subordinated debentures for the quarter ended September 30, 2024, compared to a recorded loss of $811,000 for the quarter ended September 30, 2023. Noninterest income increased $506,000 from the $1.5 million reported for the quarter ended June 30, 2024. This was primarily due to a gain of $661,000 on the fair value of junior subordinated debentures for the quarter ended September 30, 2024, compared to a loss of $225,000 for the quarter ended June 30, 2024.

Noninterest expense for the quarter ended September 30, 2024, totaled $7.1 million, reflecting a $517,000 increase over the $6.6 million reported for the quarter ended September 30, 2023, and a $169,000 increase from the $7.0 million reported from the quarter ended June 30, 2024. The increase between the quarters ended September 30, 2024, and 2023, resulted partially from increases of $263,000 in data processing expenses and $150,000 in salaries and employee benefit expenses.

The efficiency ratio for the quarter ended September 30, 2024, decreased to 52.47%, compared to 54.63% for the quarter ended September 30, 2023. This amelioration was due to a combination of an increase in noninterest income resulting from a gain on junior subordinated debentures offset by increased noninterest expenses.

The annualized average cost of deposits was 0.91% for the nine months ended September 30, 2024, compared to 0.63% for the nine months ended September 30, 2023. Average interest-bearing deposits decreased 5.9% between the periods ended September 30, 2023, and 2024, from $664.1 million to $624.7 million, respectively. The annualized average cost of funds was 1.25% for the nine months ended September 30, 2024, compared to 0.83% for the nine months ended September 30, 2023. The increase was primarily due to increases in rates paid on deposits and short-term borrowings.

Net interest income before the provision for credit losses for the nine months ended September 30, 2024, totaled $35.0 million, a decrease of $2.3 million, or 0.91%, from the $37.4 million reported for the same period ended September 30, 2023. The Company’s net interest margin of 4.27% for the nine months ended September 30, 2024, decreased from 4.32% for the nine months ended September 30, 2023. The decrease in the net interest margin is due to increases in average deposit costs and short-term borrowing costs and was partially offset by increases in yields on investment securities and loans. Loan yields increased from 5.70% to 6.01% between the two periods while the cost of interest-bearing liabilities increased from 1.40% to 1.97% between the two periods.

Noninterest income for the nine months ended September 30, 2024, totaled $4.6 million, an increase of $2.0 million when compared to the $2.6 million reported for the nine months ended September 30, 2023. This increase resulted primarily from a gain of $573,000 recorded on proceeds from life insurance and a $694,000 change in the fair value of TRUPs. For the nine months ended September 30, 2024, a gain on the fair value of TRUPs of $141,000 was recorded, compared to a loss of $553,000 for the same period in 2023. The change in the fair value of TRUPs reflected in noninterest income was caused by fluctuations in the Secured Overnight Financing Rate (SOFR) yield curve. Other noninterest income increased $421,000 between the two periods.

For the nine months ended September 30, 2024, noninterest expense totaled $20.8 million, an increase of $1.8 million compared to $19.1 million for the nine months ended September 30, 2023. On a year-over-year comparative basis, noninterest expense increased due to increases of $895,000 in professional fees and $477,000 in salaries and employee benefits. Professional fees increased primarily due to increases in service contract expense related to information technology services. Salaries and employee benefits expense increased due to increases in salaries, group insurance expense, and stock compensation expense.

The efficiency ratio for the nine months ended September 30, 2024, increased to 52.96%, compared to 47.66% for the nine months ended September 30, 2023. This deterioration was due to a combination of a decrease in net interest income resulting from increased short-term borrowing and deposit expenses and an increase in noninterest expense.

Total assets increased $44.3 million, or 3.7%, between December 31, 2023, and September 30, 2024. Gross loan balances increased $55.3 million, investment securities decreased $15.8 million, and total cash and cash equivalents increased $7.1 million. Increases in gross loans included increases of $41.2 million in real estate mortgage loans, $16.8 million in agricultural loans, and $3.3 million in commercial and industrial loans, and were offset by decreases of $4.3 million in real estate construction and development loans and $1.9 million in installment loans. Declines in the investment portfolio were partially the result of the maturity of $12.5 million in treasury securities, $8.9 million in paydowns, and a $5.8 million decrease in unrealized losses. Unfunded loan commitments decreased from $183.5 million at December 31, 2023, to $131.9 million at September 30, 2024. OREO balances totaled $4.6 million at December 31, 2023, and September 30, 2024.

Total deposits increased $60.5 million, or 6.0%, to $1.1 billion during the nine months ended September 30, 2024. This was due to increases of $103.7 million in interest-bearing deposits, offset by decreases of $43.1 million in noninterest-bearing deposits. Included in the increase in interest-bearing deposits are $100.0 million in brokered DDA accounts purchased during the second and third quarters of 2024. NOW and money market accounts increased $102.9 million, time deposits increased $10.2 million, and savings accounts decreased $9.5 million. In total, NOW, money market and savings accounts increased 17.7% to $622.9 million at September 30, 2024, compared to $529.4 million at December 31, 2023. Noninterest-bearing deposits decreased 10.7% to $360.1 million at September 30, 2024, compared to $403.2 million at December 31, 2023. Core deposits, which are comprised of noninterest-bearing deposits, NOW, money market, savings accounts, and time deposits less than $250,000, decreased $49.3 million.

Shareholders’ equity at September 30, 2024, totaled $132.9 million, an increase of $10.3 million from the $122.5 million reported at December 31, 2023. The increase in equity was the result of $12.3 million in net income and a decrease of $3.8 million in accumulated other comprehensive loss, partially offset by $6.2 million in dividend payments. At September 30, 2024, accumulated other comprehensive loss totaled $11.2 million, compared to $15.0 million at December 31, 2023. The decrease in accumulated other comprehensive loss was primarily the result of a decrease of $4.1 million in net unrealized losses on investment securities. Changes in unrealized losses on the investment portfolio are attributed to changes in interest rates, not credit quality. The Company does not intend to sell, and it is more likely than not that it will not be required to sell, any securities held at an unrealized loss.

The Board of Directors of United Security Bancshares declared a cash dividend on common stock of $0.12 per share on September 24, 2024. The dividend is payable on October 23, 2024, to shareholders of record as of October 7, 2024, and is included in other liabilities as of September 30, 2024. No assurances can be provided as to the amount and/or declaration and payment of future dividends, if any. The Company continues to be well-capitalized and expects to maintain adequate capital levels.

Credit Quality

The Company’s allowance for credit losses totaled 1.69% of the loan portfolio at September 30, 2024, compared to 1.70% at December 31, 2023. Management considers the allowance for credit losses at September 30, 2024, to be adequate.

Non-performing assets, comprised of nonaccrual loans, loan modifications, other real estate owned through foreclosure (OREO), and loans more than 90 days past due and still accruing interest, increased $974,000 between December 31, 2023, and September 30, 2024, to $17.4 million. As a percentage of total assets, non-performing assets increased from 1.36% at December 31, 2023, to 1.39% at September 30, 2024. The increase in non-performing assets is primarily attributed to an increase of $554,000 in nonaccrual loans, an increase of $368,000 in loans past due more than 90 days and still accruing, and the addition of one loan modification with a balance of $52,000 at September 30, 2024. OREO balances remained at $4.6 million at September 30, 2024 and December 31, 2023.

About United Security Bancshares

Non-GAAP Financial Measures

This press release and the accompanying financial tables contain a non-GAAP financial measure (net income before non-Core) within the meaning of the Securities and Exchange Commission’s Regulation G. In the accompanying financial table, the Company has provided a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure. The Company’s management believes that this non-GAAP financial measure provides useful information about the Company’s results of operations and/or financial position to both investors and management. The Company provides this non-GAAP financial measure to investors to assist them in performing their analysis of its historical operating results. The non-GAAP financial measure shows the Company’s operating results before consideration of certain adjustments and, consequently, this non-GAAP financial measure should not be construed as an alternative to net income as an indicator of the Company’s operating performance, as determined in accordance with GAAP. The Company may calculate this non-GAAP financial measure differently than other companies.

Forward-Looking Statements

This press release may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Company intends such statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and often include the words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may.” Forward-looking statements are based on management’s knowledge and belief as of today and are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date. Forward-looking statements are subject to risks and uncertainties and actual results may differ materially from those presented. Factors that might cause such differences, some of which are beyond the Company’s ability to control or predict, include, but are not limited to: (1) adverse developments with respect to U.S. or global economic conditions and other uncertainties, including the impact of supply chain disruptions, inflationary pressures, labor shortages, and global conflict and unrest; (2) the impact of natural disasters, droughts, earthquakes, floods, wildfires, terrorist attacks, health epidemics, and threats of war or actual war, including current military actions involving the Russian Federation and Ukraine and the conflict in the Middle East, which may impact the local economy and/or the condition of real estate collateral; (3) geopolitical and domestic political developments that can increase levels of political and economic unpredictability, contribute to rising energy and commodity prices, and increase the volatility of financial markets; (4) changes in general economic and financial market conditions, either nationally or locally; (5) fiscal policies of the U.S. government, including interest rate policies of the Board of Governors of the Federal Reserve System and the resulting impact on the Company’s interest-rate sensitive assets and liabilities; (6) changes in banking laws or regulations and government policies that could lead to a tightening of credit and/or a requirement that the Company raise additional capital;

(7) increased competition in the Company’s markets, impacting the ability to execute its business plans; (8) continued or increasing competition from other financial institutions, credit unions, and non-bank financial services companies, many of which are subject to different regulations than the Company is, and the Company’s response to competitive pressure; (9) loss of, or inability to attract, key personnel; (10) unanticipated deterioration in the loan portfolio, credit losses, and the sufficiency of the allowance for credit losses; (11) the ability to grow the loan portfolio due to constraints on concentrations of credit; (12) challenges arising from unsuccessful attempts to expand into new geographic markets, products, or services; (13) the impact of technological changes and the ability to develop and maintain secure and reliable electronic systems, including failures in or breaches of the Company’s operational and/or security systems or infrastructure, and the Company's ability to identify and address cyber-security risks such as data security breaches, “denial of service” attacks, “hacking” and identity theft, and other attacks on the Company’s information technology systems or on the third-party vendors who perform functions for the Company; (14) the failure to maintain effective controls over financial reporting; (15) risks related to the sufficiency of liquidity, including the quality and quantity of the Company’s deposits and the ability to attract and retain deposits and other sources of funding and liquidity; (16) adverse developments in the financial services industry generally, such as the bank failures in 2023 and 2024 and any related impact on depositor behavior or investor sentiment; (17) the possibility that the recorded goodwill could become impaired which may have an adverse impact on earnings and capital; (18) asset/liability matching risks; (19) and changes in the accounting policies or procedures.

The Company does not undertake (and expressly disclaims) any obligation to publicly revise or update these forward-looking statements to reflect subsequent events or circumstances except as may be required by law. For a more complete discussion of these risks and uncertainties, see the Company’s Annual Report on Form 10-K, for the year ended December 31, 2023, and particularly the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Readers should carefully review all disclosures the Company files from time to time with the Securities and Exchange Commission.