United Security Bancshares(UBFO) - 2022 Q4 - Annual Report

Part I Item 1. Business United Security Bancshares is a California-based bank holding company operating through its subsidiary, United Security Bank - United Security Bancshares is a bank holding company whose principal business is serving as the holding company for United Security Bank, a California state-chartered bank headquartered in Fresno, California[13][15] - The Bank operates twelve branches and several lending offices primarily in Fresno, Madera, Kern, and Santa Clara Counties, offering commercial banking services, various deposit instruments, and a range of lending activities[15][19] Loan Portfolio Composition (as of Dec 31, 2022) | Loan Type | Percentage of Total Loans | | :--- | :--- | | Real estate mortgage | 68.5% | | Real estate construction | 15.5% | | Commercial and industrial | 6.1% | | Agricultural | 5.4% | | Installment loans | 4.5% | - The company faces high competition in its primary markets of Fresno, Madera, Kern, and Santa Clara counties, ranking 20th in total deposit market share across these areas as of June 30, 2022[27][28][29] - The company is extensively regulated by federal and state authorities, including the FRB, FDIC, and DFPI, with key regulations including the Dodd-Frank Act and the USA PATRIOT Act[30][32][54] - As of December 31, 2022, the company employed 117 full-time equivalent staff and offers a 401(k) plan with a 100% match up to 4% of salary contributions[97][99] Item 1A. Risk Factors This section is not required for smaller reporting companies, and therefore, no risk factors are listed - Disclosure of risk factors is not required for smaller reporting companies[102] Item 1B. Unresolved Staff Comments The Company reported no unresolved staff comments from the SEC as of December 31, 2022 - The Company had no unresolved staff comments at December 31, 2022[103] Item 2. Properties The Company operates from twelve branches and two loan offices, owning its headquarters and six branches - The Company operates twelve branches, two loan production offices, and nine remote ITM/ATM locations across Fresno, Madera, Kern, and Santa Clara Counties[104] - As of year-end 2022, the Company owned six branches and its Fresno headquarters, and leased the remaining six branches and all remote machine locations[105] Item 3. Legal Proceedings The Company is not aware of any pending legal proceedings that would materially affect its financial condition - The Company is not currently a party to any legal proceedings that are expected to have a material adverse effect on its financial condition or operations[106] Item 4. Mine Safety Disclosures This item is not applicable to the Company - Mine safety disclosures are not applicable to the Company's business[107] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities The Company's stock (UBFO) trades on Nasdaq, with quarterly dividends of $0.11 per share paid in 2022 - The Company's common stock (UBFO) is traded on The Nasdaq Global Select Market and had approximately 549 record holders as of December 31, 2022[108] 2022 Quarterly Common Stock Prices | Quarter | High | Low | | :--- | :--- | :--- | | Q1 2022 | $8.74 | $8.03 | | Q2 2022 | $8.67 | $7.24 | | Q3 2022 | $7.73 | $6.50 | | Q4 2022 | $7.44 | $6.51 | - The Company declared and paid quarterly cash dividends of $0.11 per share in 2022, consistent with the dividends paid in 2021[112] - The Company did not repurchase any common shares under its $3 million stock repurchase plan during 2022 and 2021[117] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Net income rose to $15.7 million in 2022, driven by a 29.2% increase in net interest income from rising rates Overview and Financial Summary Net income rose to $15.7 million in 2022, driven by higher net interest income, with improved ROAA and ROAE 2022 vs 2021 Financial Highlights | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Income | $15.7 million | $10.1 million | | Total Assets | $1.30 billion | $1.33 billion | | Total Loans, net | $980.2 million | $871.5 million | | Total Deposits | $1.17 billion | $1.19 billion | | Net Interest Income | $46.1 million | $35.7 million | | Provision for Credit Losses | $1.8 million | $2.1 million | | Net Interest Margin | 3.69% | 3.16% | | ROAA | 1.16% | 0.82% | | ROAE | 13.75% | 8.47% | Results of Operations Net income increased by $5.6 million in 2022, as a $10.4 million rise in net interest income offset lower noninterest income Summary of Earnings (Years Ended Dec 31) | (In thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net interest income | $46,062 | $35,651 | $32,277 | | Provision for credit losses | $1,802 | $2,107 | $2,769 | | Noninterest income | $1,838 | $3,385 | $5,174 | | Noninterest expense | $24,039 | $23,615 | $22,270 | | Net income | $15,686 | $10,098 | $8,961 | | Net income - Diluted (per share) | $0.92 | $0.59 | $0.53 | - Net interest income increased by $10.4 million (29.2%) in 2022, driven by a 61 basis point increase in the yield on interest-earning assets[135][141][142] - Noninterest income decreased by $1.5 million (45.7%) in 2022, primarily due to a larger loss on the fair value of junior subordinated debentures[150] - Noninterest expense increased by $424,000 (1.8%) in 2022, mainly due to higher professional fees and data processing costs[151] - The Company adopted the CECL accounting standard effective January 1, 2023, and estimates a one-time increase to its allowance for credit losses of $6.0 million to $8.0 million[147] Financial Condition Total assets decreased slightly to $1.30 billion as cash was deployed into a 12.9% growth in net loans Year-End Balance Sheet Highlights (in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Due from FRB | $6,945 | $188,162 | ($181,217) | (96.3)% | | Net loans | $969,996 | $862,200 | $107,796 | 12.9% | | Investment securities | $210,860 | $182,646 | $28,214 | 15.4% | | Total assets | $1,299,193 | $1,330,944 | ($31,751) | (2.4)% | | Total deposits | $1,165,484 | $1,188,106 | ($22,622) | (1.9)% | - The loan portfolio grew by 12.9% to $981.8 million in 2022, led by a 20.4% increase in real estate mortgage loans and a 31.9% increase in commercial and industrial loans[156][157] - The student loan portfolio decreased to $42.1 million from $48.5 million in 2021, with no new originations[162] - Nonperforming assets increased to $19.5 million (1.99% of gross loans) at year-end 2022 from $16.6 million (1.92% of gross loans) at year-end 2021[218][222] - The Company and Bank remain well-capitalized, with the Company's Tier 1 Leverage Ratio at 10.10% as of Dec 31, 2022, exceeding the 9.00% minimum requirement[57][237][449] Critical Accounting Estimates and Policies The Company identifies the Allowance for Credit Losses and Fair Value of Junior Subordinated Debt as critical accounting estimates - The determination of the Allowance for Credit Losses is a critical accounting estimate requiring significant judgment regarding future cash flows and economic conditions[243] - The Fair Value of Junior Subordinated Debt is another critical estimate, valued using a discounted cash flow model with Level 3 inputs (unobservable inputs)[244] Item 7A. Quantitative and Qualitative Disclosures about Market Risk This section is not required for smaller reporting companies, and therefore, no market risk disclosures are provided - Disclosure of quantitative and qualitative information about market risk is not required for smaller reporting companies[245] Item 8. Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements, supplementary data, and the independent auditor's report Report of Independent Registered Public Accounting Firm The independent auditor issued an unqualified opinion, identifying the Allowance for Credit Losses as a critical audit matter - The auditor, Moss Adams LLP, issued an unqualified opinion, concluding that the financial statements are fairly presented in accordance with U.S. GAAP[249] - The Allowance for Credit Losses was identified as a critical audit matter, highlighting the significant auditor judgment required to evaluate management's assumptions[253][254][255] Consolidated Financial Statements The financial statements show total assets of $1.30 billion and a 2022 net income of $15.7 million Consolidated Balance Sheet (in thousands) | | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $1,299,193 | $1,330,944 | | Net Loans | $969,996 | $862,200 | | Total Investment Securities | $210,860 | $182,646 | | Total Liabilities | $1,186,730 | $1,210,737 | | Total Deposits | $1,165,484 | $1,188,106 | | Total Shareholders' Equity | $112,463 | $120,207 | Consolidated Statement of Income (in thousands) | | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Net Interest Income | $46,062 | $35,651 | | Provision for Credit Losses | $1,802 | $2,107 | | Noninterest Income | $1,838 | $3,385 | | Noninterest Expense | $24,039 | $23,615 | | Net Income | $15,686 | $10,098 | | Diluted EPS | $0.92 | $0.59 | - The company experienced a net cash outflow from investing activities of $174.2 million in 2022, driven by a net increase in loans and purchases of securities[263] - Shareholders' equity decreased from $120.2 million to $112.5 million, largely due to a $16.3 million other comprehensive loss from unrealized losses on securities[262] Notes to Consolidated Financial Statements The notes detail key accounting policies, including the upcoming CECL adoption, and provide breakdowns of financial statement components - The company will adopt the CECL accounting standard on January 1, 2023, replacing the current "incurred loss" model with an "expected loss" model[303] - At Dec 31, 2022, the investment portfolio had unrealized losses of $27.1 million, primarily due to changes in interest rates, not credit quality[306][311] - The allowance for credit losses totaled $10.2 million at year-end 2022, based on historical loss migration and specific allowances for impaired loans[193][279][280] - The company has two stock-based compensation plans, with total stock-based compensation expense of $185,000 in 2022[400][401][402] - The company measures its junior subordinated debt at fair value, classifying it as a Level 3 liability with a fair value of $10.9 million at year-end 2022[425][430] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The Company reported no changes in or disagreements with its accountants on accounting or financial disclosure - There were no disagreements with accountants on accounting and financial disclosure[452] Item 9A. Controls and Procedures Management concluded that disclosure controls, procedures, and internal control over financial reporting were effective - Management concluded that the Company's disclosure controls and procedures are effective as of December 31, 2022[453] - Management concluded that the Company's internal control over financial reporting is effective as of December 31, 2022[454] Item 9B. Other Information There was no other information to be reported in this item - No information was reported under this item[456] Item 9C. Disclosures Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the Company - This disclosure is not applicable to the Company[457] Part III Item 10. Directors, Executive Officers, and Corporate Governance Information for this item is incorporated by reference from the Company's 2023 Proxy Statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the Company's 2023 Proxy Statement[459] Item 11. Executive Compensation Information for this item is incorporated by reference from the Company's 2023 Proxy Statement - Information regarding executive compensation is incorporated by reference from the Company's 2023 Proxy Statement[460] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the Company's 2023 Proxy Statement - Information regarding security ownership is incorporated by reference from the Company's 2023 Proxy Statement[461] Item 13. Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the Company's 2023 Proxy Statement - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the Company's 2023 Proxy Statement[462] Item 14. Principal Accounting Fees and Services Information for this item is incorporated by reference from the Company's 2023 Proxy Statement - Information regarding principal accounting fees and services is incorporated by reference from the Company's 2023 Proxy Statement[463] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the report - The Consolidated Financial Statements are located in Item 8 of the report[465] - All financial statement schedules have been omitted because they are not applicable, not required, or the information is included elsewhere in the report[467] - Filed exhibits include Articles of Incorporation, Bylaws, various executive employment and compensation agreements, and CEO/CFO certifications[469][470]