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United Security Bancshares(UBFO) - 2023 Q1 - Quarterly Report

PART I. Financial Information This section provides the unaudited financial statements and management's discussion and analysis for the first quarter of 2023 Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for United Security Bancshares, including detailed notes Consolidated Balance Sheets Total assets decreased to $1.26 billion, driven by lower net loans and deposits, while shareholders' equity remained stable Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $1,261,194 | $1,299,193 | | Net Loans | $927,105 | $969,996 | | Total Investment Securities | $208,914 | $210,860 | | Total Liabilities | $1,148,286 | $1,186,730 | | Total Deposits | $1,111,132 | $1,165,484 | | Total Shareholders' Equity | $112,908 | $112,463 | Consolidated Statements of Income Net income significantly increased to $6.1 million, driven by a 37.2% rise in net interest income and higher diluted EPS Q1 2023 vs Q1 2022 Income Statement (in thousands, except EPS) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Total Interest Income | $14,559 | $9,991 | | Net Interest Income | $12,945 | $9,438 | | (Reversal) Provision for Credit Losses | $(493) | $5 | | Total Noninterest Income (Loss) | $1,448 | $(206) | | Total Noninterest Expense | $6,240 | $5,816 | | Net Income | $6,125 | $2,443 | | Diluted EPS | $0.36 | $0.14 | Consolidated Statements of Comprehensive Income (Loss) Comprehensive income reached $6.8 million, a turnaround from prior-year loss, driven by unrealized gains on debt securities Comprehensive Income (Loss) (in thousands) | Component | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net Income | $6,125 | $2,443 | | Other Comprehensive Income (Loss) | $639 | $(7,301) | | Comprehensive Income (Loss) | $6,764 | $(4,858) | Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity slightly increased to $112.9 million, influenced by net income, comprehensive income, and CECL adoption - The adoption of the Current Expected Credit Loss (CECL) standard on January 1, 2023, resulted in a cumulative downward adjustment to retained earnings of $4.7 million14 Consolidated Statements of Cash Flows Operating activities provided $9.3 million cash, investing activities $40.3 million, while financing activities used $43.0 million Cash Flow Summary (in thousands) | Activity | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $9,328 | $2,225 | | Net Cash from Investing Activities | $40,255 | $(20,894) | | Net Cash from Financing Activities | $(43,025) | $24,354 | | Net Change in Cash | $6,558 | $5,715 | | Cash at End of Period | $45,153 | $224,934 | Notes to Consolidated Financial Statements Detailed notes explain accounting policies, including CECL adoption's impact on credit losses, and portfolio compositions - The Company adopted ASC 326 ("CECL") on January 1, 2023, resulting in a $6.4 million increase in the allowance for credit losses and a $4.7 million reduction to retained earnings, net of tax19 Impact of CECL Adoption on Allowance for Credit Losses (in thousands) | Loan Category | Allowance Before CECL | Impact of CECL | Allowance After CECL | | :--- | :--- | :--- | :--- | | Commercial and industrial | $956 | $1,336 | $2,292 | | Real estate mortgage | $1,364 | $2,359 | $3,723 | | Real estate construction | $3,408 | $721 | $4,129 | | Agricultural | $525 | $1,025 | $1,550 | | Installment and student loans | $2,898 | $1,957 | $4,855 | | Total | $10,182 | $6,367 | $16,549 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses Q1 2023 financial performance and condition, covering income, assets, deposits, and CECL adoption Overview Q1 2023 highlights include increased net income, higher net interest margin, and CECL-driven allowance for credit losses - Key highlights for Q1 2023 include: - Net income increased to $6.1 million compared to $2.4 million in Q1 2022 - Total assets decreased by 2.9% to $1.26 billion since year-end 2022 - Total deposits decreased by 4.7% to $1.11 billion since year-end 2022 - The allowance for credit losses as a percentage of gross loans increased to 1.65% from 1.04% at year-end 2022, mainly due to CECL adoption138144 Results of Operations Net income rose to $6.1 million, driven by a 37.2% increase in net interest income and an expanded net interest margin Rate and Volume Analysis of Net Interest Income Change (Q1 2023 vs Q1 2022, in thousands) | Component | Total Change | Change Due to Rate | Change Due to Volume | | :--- | :--- | :--- | :--- | | Increase in Interest Income | $4,568 | $5,332 | $(764) | | Loans | $3,881 | $2,869 | $1,012 | | Investment securities | $711 | $600 | $111 | | Increase in Interest Expense | $1,151 | $1,189 | $(38) | | Increase in Net Interest Income | $3,417 | $4,143 | $(726) | - Net interest margin increased to 4.45% for Q1 2023, up from 3.10% in Q1 2022, primarily due to a shift to higher-yielding assets and increased loan yields154 - Noninterest income increased by $1.7 million year-over-year, largely due to a $1.3 million positive swing in the fair value adjustment of junior subordinated debentures157 Financial Condition Total assets decreased to $1.26 billion due to lower loans and deposits; asset quality stable, credit loss allowance increased Loan Portfolio Composition (in thousands) | Loan Category | March 31, 2023 | % of Loans | December 31, 2022 | % of Loans | | :--- | :--- | :--- | :--- | :--- | | Commercial and industrial | $50,511 | 5.4% | $57,902 | 5.9% | | Real estate – mortgage | $665,706 | 70.6% | $671,521 | 68.5% | | RE construction & development | $137,257 | 14.6% | $153,374 | 15.6% | | Agricultural | $45,513 | 4.8% | $52,722 | 5.4% | | Installment and student loans | $43,740 | 4.6% | $44,659 | 4.6% | | Total gross loans | $942,727 | 100.0% | $980,178 | 100.0% | Nonperforming Assets (in thousands) | Category | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Nonaccrual loans | $13,195 | $14,544 | | Loans past due 90+ days | $382 | $252 | | Total nonperforming loans | $13,577 | $14,796 | | Other real estate owned | $4,582 | $4,582 | | Total nonperforming assets | $18,159 | $19,378 | | NPA to Total Assets | 1.44% | 1.49% | - Total deposits decreased by $54.4 million (4.7%) since year-end 2022, primarily due to an $86.9 million drop in noninterest-bearing deposits178180 Liquidity and Capital Resources The company maintains strong liquidity with substantial cash and credit lines, and capital ratios remain well above minimums - At March 31, 2023, the company had $13.2 million in outstanding borrowings and access to an additional $481.5 million in unused, collateralized lines of credit214 Capital Ratios as of March 31, 2023 | Ratio | Company | Bank | Minimum to be Well Capitalized | | :--- | :--- | :--- | :--- | | Tier 1 Leverage Ratio | 10.89% | 10.88% | 5.00% (9.00% for CBLR) | - A cash dividend of $0.11 per share was declared on March 28, 2023223 Quantitative and Qualitative Disclosures about Market Risk This section is not applicable as the company qualifies as a smaller reporting company - This section is not applicable because United Security Bancshares is a smaller reporting company225 Controls and Procedures Management concluded disclosure controls and procedures were effective, with no material changes to internal controls this quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2023227 - No material changes were made to the internal control over financial reporting during the first quarter of 2023228 PART II. Other Information This section covers legal proceedings, equity sales, and exhibits filed with the Form 10-Q Legal Proceedings Management expects no material adverse effect on financial condition from ongoing legal proceedings in the normal course - Management does not expect any material adverse effect on the Company's financial condition from ongoing legal proceedings231 Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities occurred during the quarter ended March 31, 2023 - The company reported no unregistered sales of equity securities for the first quarter of 2023232 Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications required by Sarbanes-Oxley - Exhibits filed with this report include CEO and CFO certifications as required by the Sarbanes-Oxley Act233 Signatures The report was signed by the President and CEO, and Senior Vice President and CFO on May 15, 2023 - The report was signed on May 15, 2023, by Dennis R. Woods, President and Chief Executive Officer, and David A. Kinross, Senior Vice President and Chief Financial Officer237