United Security Bancshares reports 2017 net income of $8.6 million

FRESNO, Calif., Jan. 29, 2018/PRNewswire/ -- United Security Bancshares (Nasdaq: UBFO), today announced its unaudited financial results for the quarter ended December 31, 2017.  The Company reported consolidated net income of $1,637,000, or $0.10 per basic and diluted common share, for the quarter ended December 31, 2017, as compared to $1,555,000, or $0.09 per basic and diluted common share, for the quarter ended December 31, 2016.  The Company recognized net income of $8,640,000 for the year ended December 31, 2017, an increase of 17% compared to the net income of $7,385,000 recognized for the year ended December 31, 2016.  Basic and diluted earnings per share increased to $0.51 for the year ended December 31, 2017, as compared to $0.44 for the year ended December 31, 2016.

Fourth Quarter 2017 Highlights(at or for the quarter ended December 31, 2017, except where noted)

• Net interest income after provision for credit losses increased to $8,096,000 compared to $7,398,000 for the quarter ended December 31, 2016, and decreased from $8,150,000 in the preceding quarter.
• Net interest margin increased to 4.38% from 4.15% for the quarter ended December 31, 2016.
• Net recoveries totaled $61,000, compared to net recoveries of $145,000 in the preceding quarter and net recoveries of $2,000 for the quarter ended December 31, 2016.
• Total loans increased to $602,390,000, compared to $570,834,000 at December 31, 2016.
• Nonperforming assets as a percentage of total assets decreased to 2.17%, compared to 2.40% at December 31, 2016.
• Nonperforming assets decreased approximately $1,396,000 between December 31, 2016 and December 31, 2017.
• Other real estate owned balances decreased to $5,745,000 at December 31, 2017 when compared to $6,471,000, at December 31, 2016.
• The allowance for credit losses as a percentage of gross loans decreased to 1.54%, compared to 1.56% at December 31, 2016.
• Total deposits increased to $687,693,000, compared to $676,629,000 at December 31, 2016.
• Book value per share increased to $6.00, compared to $5.79 at December 31, 2016.

Dennis Woods, President and Chief Executive Officer, stated: "We are pleased to report an accumulation of earnings, which has resulted in a successful 2017. Excluding Non-Core items such as the Fair Value Adjustment for Trust Preferred Securities ("TRUPS"), the gain on sale of Other Real Estate Owned (OREO), and a write-down of deferred tax assets ("DTA") due to the Tax Cuts and Jobs Act of 2017, net income would be $9,954,000 for the year ended December 31, 2017, an increase of approximately 29.71% compared to net income of $7,674,000 for the same period in 2016. None of these items are part of Core Income and specifically the TRUPS Fair Value Adjustment is dependent upon market rates, which can 'add to' or 'subtract from' Core Income and mask Core Income change." Management believes that our financial results are more comparative excluding the impact of the fair value adjustment for TRUPS, the gain on sale of OREO and the write-down of the DTA related to the Tax Cuts and Jobs Act of 2017.

A reconciliation of Core Income, as a non-GAAP measure, to Net Income appears at the end of this Press Release.

Results of Operations

Annualized return on average equity (ROAE) for the year ended December 31, 2017 was 8.63%, compared to 7.86% for the year ended December 31, 2016.  Annualized return on average assets (ROAA) was 1.07% for the year ended December 31, 2017, compared to 0.98% for the year ended December 31, 2016. ROAE for the quarter ended December 31, 2017 was 6.34% compared to 6.38% for the same period in 2016. ROAA was 0.79% for the quarter ended December 31, 2017, compared to 0.79% for the same period in 2016.  The average cost of deposits was 0.21% for the quarter ended December 31, 2017, up from 0.20% for the quarter ended December 31, 2016.

Net interest income after the provision for credit losses for the year ended December 31, 2017 totaled $31,176,000, an increase of $3,091,000, or 11.01%, from the net interest income of $28,085,000 for the same period ended December 31, 2016. The Company's net interest margin increased from 4.11% for the year ended December 31, 2016 to 4.27% for the year ended December 31, 2017.  The 16 basis point increase in net interest margin in the period-to-period comparison was the result of higher yields on both the loan portfolio and overnight deposits, partially offset by increasing cost of deposits.  The yield on loans increased from 5.21% for the year ended December 31, 2016 to 5.42% for the year ended December 31, 2017. The 21 basis point increase in loan yields is primarily the result of growth of the higher-yielding student loan portfolio and increases on rates throughout the loan portfolio reflecting the increase in the prime rate.  The increase in net interest income on a year-over-year comparison is the result of loan growth.  Net interest income after the provision for credit losses for the quarter ended December 31, 2017 totaled $8,096,000, an increase of $698,000 from the net interest income of $7,398,000 for the same period ended December 31, 2016.

Non-interest income for the year ended December 31, 2017 totaled $4,306,000, reflecting a decrease of $208,000 from $4,514,000 in non-interest income reported for the year ended December 31, 2016.  Customer service fees, which represent the largest portion of the Company's non-interest income, totaled $3,851,000 and $3,792,000 for the years ended December 31, 2017 and 2016, respectively.  On a year-over-year comparative basis, non-interest income decreased primarily due to the change in fair value option of financial liability caused by fluctuations in the LIBOR yield curve.  The Company recorded a $882,000 loss on the fair value option of financial liability for the year ended December 31, 2017, compared to a $518,000 loss for the same period ended December 31, 2016.

Non-interest income for the quarter ended December 31, 2017 totaled $1,155,000, reflecting an increase of $414,000 from $741,000 in non-interest income reported for the quarter ended December 31, 2016.  This increase was primarily due to a $194,000 loss recorded on the fair value option of financial liability for the quarter ended December 31, 2017, compared to a $566,000 loss for the same period ended 2016. The change in the fair value of financial liability was primarily caused by fluctuations in the LIBOR yield curve. Customer service fees totaled $954,000 for the quarter ended December 31, 2017, as compared to $925,000 for the quarter ended December 31, 2016. 

For the year ended December 31, 2017, non-interest expense totaled $19,803,000, a decrease of $542,000 compared to $20,345,000 for the year ended December 31, 2016.  On a year-over-year comparative basis, non-interest expense decreased primarily due to decreases of $413,000 in the net cost on operation and sale of OREO, $376,000 in regulatory assessments, and $60,000 in professional fees, partially offset by an increase of $193,000 in salaries and employee benefit expenses.  Professional fees for the year ended December 31, 2016, included a $125,000 legal settlement. Salaries and employee benefit expenses for the year ended December 31, 2017, reflect increases in salaries, higher group insurance expenses, and increases in incentives and bonuses.

Non-interest expense totaled $5,260,000 for the quarter ended December 31, 2017, a decrease of $98,000 as compared to $5,358,000 reported for the quarter ended December 31, 2016. On a quarter-over-quarter comparative basis, non-interest expense decreased primarily due to decreases in salary and employee benefits and regulatory assessments, partially offset by increases in professional fees, occupancy expenses, and net cost on operation and sale of OREO. The decrease is salary and employee benefits was primarily due to a $385,000 accrual in 2016 for bonuses as compared to an accrual of $79,000 in the quarter ended December 31, 2017. The increase in professional fees was a result of $156,000 consulting fees paid for the generation of tax credits. 

Balance Sheet Review

Total assets increased $17,864,000, or 2.27%, for the year ended December 31, 2017, due primarily to increases of $31,556,000 in gross loan balances. The increase in loan balances was reflected as increases in the commercial real estate loan portfolio of $21,000,000 and increases in the student loan portfolio of $22,000,000. These increases were offset by decreases of $8,400,000 in the real estate construction and development portfolio, and decreases of $2,600,000 in the residential mortgages portfolio.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017, was signed into law, reducing the federal corporate tax rate to 21% from the existing maximum rate of 35%, effective January 1, 2018. As a result, The Company's net deferred tax asset was revalued at the new lower tax rate as of December 31, 2017. The revaluation resulted in a write-down of $986,000. The impact to earnings for the fourth quarter 2017 is $0.06 per share. The subsequent expense due to this write-down is expected to be recovered within two quarters through the savings attributed to the change in the noted tax rate.

Total deposits increased $11,064,000, or 1.64%, to $687,693,000 during the year ended December 31, 2017.  The overall increase was led by an increase of $44,602,000 in noninterest bearing deposits and an increase of $4,621,000 in NOW, money market, and savings accounts. These increases were offset by a decrease of $38,159,000 in time deposits. Time deposits as of December 31, 2016 included $17,185,000 in brokered CDs and $18,482,000 in out of market CDs. The increase in core  deposits such as noninterest bearing, NOW, money market, and savings accounts allowed the Company to run off expensive non-core deposits such as brokered and out of market CDs in 2017. Interest bearing deposits and savings accounts increased 1.49% to $315,562,000 at December 31, 2017, compared to $310,941,000 at December 31, 2016.  Noninterest bearing deposits increased 16.98% to $307,299,000 at December 31, 2017, compared to $262,697,000 at December 31, 2016. As a result of the increases in demand deposits, NOW, money market, and saving accounts, net core deposits increased $49,223,000.

Shareholders' equity at December 31, 2017 was $101,352,000, up $4,698,000 from shareholders' equity of $96,654,000 at December 31, 2016. The increase in equity was a result of net earnings for the period.

The Board of Directors of United Security Bancshares declared cash dividends on common stock on April 25, 2017, and June 27, 2017, for $0.05 per share, and on September 26, 2017, and December 19, 2017, for $0.07 per share.  The dividends were payable on May 17, 2017, to shareholders of record as of  May 8, 2017, on July 21, 2017, to shareholders of record as of July 7, 2017, on October 19, 2017, to shareholders of record as of October 10, 2017, and on January 16, 2018, to shareholder of record as of January 4, 2018.  No assurances can be provided that future dividends, whether payable in stock or cash, will be declared and/or as to the timing of such future dividends, if any.

Credit Quality

The Company recorded a provision for credit losses of $24,000 for the year ended December 31, 2017, compared to a recovery of provision of $21,000 for the year ended December 31, 2016.  Net loan recoveries totaled $341,000 for the year ended December 31, 2017, as compared to net loan losses of $790,000 for the year ended December 31, 2016.  The Company recorded a provision for credit loss of $48,000 for the quarter ended December 31, 2017, compared to a recovery of provision for credit losses of $14,000 for the quarter ended December 31, 2016. Net loan recoveries totaled $61,000 for the quarter ended December 31, 2017, as compared to net loan charge-offs of $2,000 for the quarter ended December 31, 2016.

The Company's allowance for loan loss totaled 1.54% of the loan portfolio at December 31, 2017, compared to 1.56% at December 31, 2016. In determining the adequacy of the allowance for loan losses, the judgment of the Company's management is a significant factor and management considers the allowance for credit losses at December 31, 2017 to be adequate.

Non-performing assets, comprised of nonaccrual loans, troubled debt restructures (TDR), other real estate owned through foreclosure (OREO), and loans more than 90 days past due and still accruing interest, decreased approximately $1,396,000 between December 31, 2016 and December 31, 2017 to $17,485,000.  Nonperforming assets as a percentage of total assets decreased from 2.40% at December 31, 2016 to 2.17% at December 31, 2017.  The decrease in nonperforming assets is mainly attributed to decreases in nonaccrual loans, impaired loans and OREO.  Nonaccrual loans decreased $1,968,000 between December 31, 2016 and December 31, 2017 to $5,296,000.  Impaired loans totaled $14,790,000 at December 31, 2017, a decrease of $1,389,000 from the balance of $16,179,000 at December 31, 2016. OREO totaled $5,745,000 at December 31, 2017 as compared to $6,471,000 at December 31, 2016.

About United Security Bancshares

United Security Bancshares (NASDAQ: UBFO) is the holding company for United Security Bank, which was founded in 1987. United Security Bank is headquartered in Fresno and operates 11 full-service branch offices in Fresno, Bakersfield, Campbell, Caruthers, Coalinga, Firebaugh, Oakhurst, San Joaquin, and Taft.  Additionally, United Security Bank operates Commercial Real Estate Construction, Commercial Lending, Consumer Lending, and Financial Services departments.  For more information, please visit www.unitedsecuritybank.com.

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 tables, 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 (loss) 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 news release contains 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 are based on management's knowledge and belief as of today and include information concerning the Company's possible or assumed future financial condition, and its results of operations, business and earnings outlook. These forward-looking statements are subject to risks and uncertainties. A number of factors, some of which are beyond the Company's ability to control or predict, could cause future results to differ materially from those contemplated by such forward-looking statements. These factors include (1) changes in interest rates, (2) significant changes in banking laws or regulations, (3) increased competition in the company's market, (4) other-than-expected credit losses, (5) earthquake or other natural disasters impacting the condition of real estate collateral, (6) the effect of acquisitions and integration of acquired businesses, (7) the impact of proposed and/or recently adopted changes in laws, and regulations on the Company and its business; (8) changing bank regulatory conditions, policies, whether arising as new legislation or regulatory initiatives or changes in our regulatory classifications, that could lead to restrictions on activities of banks generally or as to the Bank, including specifically the formal order between the Federal Reserve Bank of San Francisco and the Company and the Bank, (9) failure to comply with the written regulatory agreement under which the Company is subject and (10) unknown economic impacts caused by the State of California's budget issues, including the effect on Federal spending due to sequestration required by the Budget Control Act of 2011. Management cannot predict at this time the severity or duration of the effects of the recent business slowdown on the Company's specific business activities and profitability. Weaker or a further decline in capital and consumer spending, and related recessionary trends could adversely affect the Company's performance in a number of ways including decreased demand for our products and services and increased credit losses. Likewise, changes in interest rates, among other things, could slow the rate of growth or put pressure on current deposit levels and affect the ability of borrowers to repay loans. Forward-looking statements speak only as of the date they are made, and the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the statements are made, or to update earnings guidance including the factors that influence earnings. 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, 2016, 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 ("SEC").

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SOURCE United Security Bancshares