United Security Bancshares reports 3rd quarter profits of $3.5 million

FRESNO, Calif., Oct. 17, 2018 /PRNewswire/ -- United Security Bancshares (Nasdaq: UBFO), today announced its unaudited financial results for the quarter and nine months ended September 30, 2018. The Company reported consolidated net income of $3,518,000, or $0.21 per basic and diluted common share, for the quarter ended September 30, 2018, as compared to $2,740,000, or $0.16 per basic and diluted common share, for the quarter ended September 30, 2017.  The Company recognized net income of $10,068,000 for the nine months ended September 30, 2018, an increase of 44% compared to the net income of $7,004,000 recognized for the nine months ended September 30, 2017. Basic earnings per share increased to $0.60 with diluted earnings per share increasing to $0.59 for the nine months ended September 30, 2018, as compared to basic and diluted shares of $0.42 for the nine months ended September 30, 2017.

Third Quarter 2018 Highlights (at or for the quarter ended September 30, 2018, except where noted)

• Net interest income after provision for credit losses increased to $9,236,000 compared to $8,150,000 for the quarter ended September 30, 2017, and increased from $8,914,000 in the preceding quarter.
• Net interest margin increased to 4.43% from 4.35% for the quarter ended September 30, 2017.
• Net recoveries totaled $746,000, compared to net recoveries of $145,000 for the quarter ended September 30, 2017.
• Capital positions remain strong with a 12.96% Tier 1 Leverage Ratio, a 15.46% Common Equity Tier 1 Ratio; a 16.94% Tier 1 Risk-Based Capital Ratio; and a 18.19% Total Risk-Based Capital Ratio.
• Annualized return on average assets ("ROAA") was 1.59%, compared to 1.33% for the quarter ended September 30, 2017.
• Annualized return on average equity ("ROAE") was 13.06%, compared to 10.77% for the quarter ended September 30, 2017.
• Total loans decreased to $577,598,000, compared to $602,390,000 at December 31, 2017.
• Other real estate owned balances remained at $5,745,000 at September 30, 2018 when compared to $5,745,000, at December 31, 2017.
• The allowance for credit losses as a percentage of gross loans decreased to 1.52%, compared to 1.54% at December 31, 2017.
• Total deposits increased to $778,883,000, compared to $687,693,000 at December 31, 2017.
• Book value per share increased to $6.33, compared to $6.00 at December 31, 2017.

Dennis Woods, President and Chief Executive Officer, stated: "We are pleased to announce the Company continues to report strong earnings and balance sheet growth. As a result of this success, the Board of Directors of the Company increased its cash dividend during the third quarter. We continue to look for additional growth opportunities and look forward to carrying this momentum through the fourth quarter."

Results of Operations

Annualized ROAE for the nine months ended September 30, 2018 was 12.82%, compared to 9.42% for the nine months ended September 30, 2017.  ROAA was 1.58% for the nine months ended September 30, 2018, compared to 1.17% for the nine months ended September 30, 2017. ROAE for the quarter ended September 30, 2018 was 13.06% compared to 10.77% for the same period in 2017. ROAA was 1.59% for the quarter ended September 30, 2018, compared to 1.33% for the same period in 2017. The average cost of deposits was 0.31% for the quarter ended September 30, 2018, and 0.20% for the quarter ended September 30, 2017. The increase in the cost of deposits is attributed to increases in rates paid on time deposits and money market accounts.

Net interest income after the provision for credit losses for the nine months ended September 30, 2018 totaled $26,664,000, an increase of $3,583,000, or 15.52%, from $23,081,000 for the same period ended September 30, 2017. The Company's net interest margin increased from 4.24% for the nine months ended September 30, 2017 to 4.31% for the nine months ended September 30, 2018.  The 7 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 5.39% for the nine months ended September 30, 2017 to 5.52% for the nine months ended September 30, 2018. The increase in net interest income on a year-over-year comparison is the result of higher interest rates on loans and an increase in overnight funds and investment securities, partially offset by increasing cost of deposits. Net interest income after the provision for credit losses for the quarter ended September 30, 2018 totaled $9,236,000, an increase of $1,086,000 or 13.33% from the net interest income of $8,150,000 for the same period ended September 30, 2017.

Non-interest income for the nine months ended September 30, 2018 totaled $2,940,000, reflecting a decrease of $211,000 from $3,151,000 in non-interest income reported for the nine months ended September 30, 2017.  Customer service fees, which represent the largest portion of the Company's non-interest income, totaled $2,787,000 and $2,897,000 for the years ended September 30, 2018 and 2017, respectively.  On a year-over-year comparative basis, non-interest income decreased primarily due to a $923,000 loss on the fair value of junior subordinated debentures ("TRUPs") for the nine months ended September 30, 2018, compared to a $688,000 loss for the same period ended September 30, 2017.  The change in the fair value of TRUPs reflected in non-interest income was caused by fluctuations in the LIBOR yield curve.  The decrease in non-interest income was partially offset by a gain recorded on the death benefit proceeds of bank-owned life insurance of $171,000.

On January 1, 2018, the Company adopted ASU 2016-01, requiring the Company to present separately in other comprehensive income the portion of change in fair value of the TRUPs resulting from a change in the instrument-specific credit risk. In contrast, prior to January 1, 2018 the entire change in the fair value of TRUPs was recorded in earnings. For the nine months ended September 30, 2018, the Company has recognized a change of $643,000 on the fair value of TRUPs, of which a $923,000 loss was attributed to fluctuations in the LIBOR yield curve, and recorded in earnings, and a $280,000 gain was attributed to changes in credit risk and presented in other comprehensive income.

Non-interest income for the quarter ended September 30, 2018 totaled $849,000, reflecting a decrease of $327,000 from the $1,176,000 in non-interest income reported for the quarter ended September 30, 2017.  The decrease during the period was primarily due to recording a $262,000 loss on the fair value of TRUPs for the quarter ended September 30, 2018, as compared to a $88,000 loss for the same period ended 2017. The change in the fair value of TRUPs reflected in non-interest income was primarily caused by fluctuations in the LIBOR yield curve. Customer service fees totaled $815,000 for the quarter ended September 30, 2018, as compared to $959,000 for the quarter ended September 30, 2017.

For the nine months ended September 30, 2018, non-interest expense totaled $15,459,000, an increase of $916,000 compared to $14,543,000 for the nine months ended September 30, 2017.  On a year-over-year comparative basis, non-interest expense increased primarily due to increases of $649,000 in salary and employee benefits, $386,000 in OREO expenses, and $222,000 in professional fees, partially offset by a decrease of $65,000 in regulatory fees and a decrease of $104,000 in the loss on a tax credit partnership. The increase in salary and employee benefits is attributed to additional compensation expense related to equity awards. OREO expense for the nine months ended September 30, 2017 includes a $336,000 gain related to the sale of OREO. The decrease in other non-interest expenses of $324,000 includes a $121,000 recovery of workman's compensation insurance expense.

Non-interest expense totaled $5,143,000 for the quarter ended September 30, 2018, an increase of $397,000 as compared to $4,746,000 reported for the quarter ended September 30, 2017. On a quarter-over-quarter comparative basis, non-interest expense increased primarily due to increases in salary and employee benefits, occupancy expense, and net cost on operation of OREO. The increase in salary and employee benefits was primarily due to increases in employee salaries and additional compensation expense related to equity awards.

The Company recorded an income tax provision of $4,077,000 for the nine months ended September 30, 2018, compared to $4,685,000 for the same period in 2017. The effective tax rate for the nine months ended September 30, 2018 was 28.82%, compared to 40.08% for the nine months ended September 30, 2017. For the quarter ended September 30, 2018, the Company recorded a tax provision of $1,424,000, compared to a provision of $1,840,000 for the same period in 2017. The signing of the Tax Cuts and Jobs Act on December 22, 2017 reduced the Company's federal income tax rate from 35% to 21% effective as of the beginning of 2018.

In an attempt to remain consistent with prior periods, provided at the end of this Press Release is a reconciliation of Core Net Income, as a non-GAAP measure, to Net Income. This reconciliation continues to exclude Non-Core items such as the Fair Value Adjustment for TRUPs, recovery of provision for credit loss, and gain on sale of other real estate owned ("OREO"). As such core net income would have been $9,577,000 for the nine months ended September 30, 2018, an increase of approximately 33% compared to net income of $7,212,000 for the same period in 2017. Management believes that our financial results are more comparative excluding the impact of such non-core items.

Balance Sheet Review

Total assets increased $98,192,000, or 12.19%, for the nine months ended September 30, 2018, due primarily to increases of $105,651,000 in overnight funds held at the Federal Reserve. This increase is partially the reflection of an increase of $91,190,000 in deposits.  Loan balances decreased by $24,236,000 during 2018 and investment securities increased by $20,005,000. The reduction in loan balances is primarily attributed to the payoff of a large relationship during the second quarter of 2018. The Company continues to review multiple loan purchase opportunities, on a flow basis, and recently executed a $30,000,000 letter of intent to purchase SBA loans.

Total deposits increased $91,190,000, or 13.26%, to $778,883,000 during the nine months ended September 30, 2018.  This increase was due to increases of $75,190,000 in NOW, money market, and savings accounts, $8,086,000 in time deposits, and $7,914,000 in noninterest bearing deposits.  Interest bearing deposits and savings accounts increased 23.83% to $390,752,000 at September 30, 2018, compared to $315,562,000 at December 31, 2017.  Noninterest bearing deposits increased 2.58% to $315,213,000 at September 30, 2018, compared to $307,299,000 at December 31, 2017. As a result of these large increases, net core deposits, which is made up of the balance of noninterest bearing deposits, NOW, money market, savings, and time deposits accounts less than $250,000, increased $83,104,000.

Shareholders' equity at September 30, 2018 was $107,046,000, up $5,694,000 from shareholders' equity of $101,352,000 at December 31, 2017. The increase in equity was a result of net earnings for the period, partially offset by cash dividends.

The Board of Directors of United Security Bancshares declared a cash dividend on common stock of $0.10 per share on September 25, 2018.  The dividend is payable on October 19, 2018, to shareholders of record as of October 9, 2018.  The Board of Directors of United Security Bancshares declared a cash dividend on common stock of $0.09 per share on June 26, 2018.  The dividend was payable on July 19, 2018, to shareholders of record as of July 9, 2018.  The Board of Directors of United Security Bancshares declared a cash dividend on common stock of $0.09 per share on March 27, 2018.  The dividend was payable on April 19, 2018, to shareholders of record as of April 9, 2018. No assurances can be provided that future dividends will be declared and/or as to the timing of such future dividends, if any.

Credit Quality

The Company has recorded a recovery of provision for credit losses of $1,699,000 for the nine months ended September 30, 2018, compared to a recovery of provision of $24,000 for the nine months ended September 30, 2017.  Net loan recoveries totaled $1,230,000 for the nine months ended September 30, 2018, as compared to net recoveries of $280,000 for the nine months ended September 30, 2017. The Company recorded a recovery of provision for credit loss of $373,000 for the quarter ended September 30, 2018, compared to a provision for credit losses of $7,000 for the quarter ended September 30, 2017. The recovery of provision for the quarter ended September 30, 2018 is the result of loan recoveries and improvement in historical loss factors, partially offset by additional reserves required due to adjustments in qualitative factors. Net loan recoveries totaled $746,000 for the quarter ended September 30, 2018, as compared to net loan recoveries of $145,000 for the quarter ended September 30, 2017.

The Company's allowance for loan loss totaled 1.52% of the loan portfolio at September 30, 2018, compared to 1.54% at December 31, 2017. In determining the adequacy of the allowance for loan losses, the judgment of the Company's management is a significant factor. Management considers the allowance for credit losses at September 30, 2018 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, increased approximately $4,779,000 between December 31, 2017 and September 30, 2018 to $22,389,000.  Nonperforming assets as a percentage of total assets increased from 2.19% at December 31, 2017 to 2.48% at September 30, 2018.  The increase in nonperforming assets is mainly attributed to increases in nonaccrual loans, partially offset by paydowns on restructured loans.  Nonaccrual loans increased $6,810,000 between December 31, 2017 and September 30, 2018 to $12,106,000. The increase in nonaccrual loans is isolated to one borrower, which is well-secured by real estate collateral. OREO totaled $5,745,000 at September 30, 2018 and December 31, 2017.

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, and Consumer Lending 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, 2017, 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