Document

Dennis Woods, President and Chief Executive Officer, stated: "We realized the full impact of the first phase of our 2021 Strategy in our earnings during the third quarter. As part of the second phase of the 2021 Strategy, we invested an additional $55 million in our mortgage loan portfolio, which will settle during the fourth quarter. Core net income, which is a non-GAAP measure, grew 9.3% during 2021, compared to the nine months ended September 30, 2020 despite the challenging interest rate environment. Our outlook on growth and profitability for the remainder of 2021 remains upbeat."

Net income for the nine months ended September 30, 2021 decreased $311,000 when compared to the nine months ended September 30, 2020. The decrease is the result of the change in the fair value of junior subordinated debentures, partially offset by a reduced provision for credit losses, and an increase of $1,902,000 in loan interest income and fees. The change in fair value of junior subordinated debentures, which is caused by changes in LIBOR rates, was reflected as a $1.5 million gain for the nine months ended September 30, 2020, compared to a $691,000 loss for the nine months ended September 30, 2021. The provision for credit losses was $1.7 million for the nine months ended September 30, 2021, compared to $2.1 million for the nine months ended September 30, 2020. ROAE for the nine months ended September 30, 2021 was 7.55%, compared to 7.93% for the nine months ended September 30, 2020. ROAA was 0.75% for the nine months ended September 30, 2021, compared to 0.93% for the nine months ended September 30, 2020.

The annualized average cost of deposits was 0.17% for the nine months ended September 30, 2021, a decrease from 0.24% for the nine months ended September 30, 2020. The decrease in the cost of deposits is primarily attributed to decreases in deposit rates made during the the second quarter of 2020, which have held throughout 2021. Average interest-bearing deposits increased 20.58% between the periods ended September 30, 2020 and 2021 from $523.1 million to $630.8 million, respectively.

Net interest income, before the provision for credit losses, for the nine months ended September 30, 2021 totaled $26.3 million, an increase of $2,231,000, or 9.28%, from $24.0 million for the same period ended September 30, 2020. The Company's net interest margin contracted from 3.46% for the nine months ended September 30, 2020 to 3.18% for the nine months ended September 30, 2021. The decrease was the result of decreases in yields on loans and interest-bearing deposits held at the federal reserve resulting from the low interest rate environment. This decrease is partially offset by a decrease in the yield on interest-bearing liabilities. Loan yields decreased from 5.08% to 4.60% between the two periods. The yield on interest-bearing liabilities decreased from 0.45% to 0.32% between the two periods. Included in interest income for the nine months ended September 30, 2021 were $778,000 in fees related to SBA PPP loans. For the nine months ended September 30, 2020, the Company had recognized no fees related to SBA PPP loans.

Noninterest income for the nine months ended September 30, 2021 totaled $2.1 million, a decrease of $2.6 million when compared to the $4.7 million reported for the nine months ended September 30, 2020. On a year-over-year comparative basis, noninterest income decreased primarily due to a loss on the fair value of junior subordinated debentures (TRUPs) of $691,000 for the nine months ended September 30, 2021, compared to a gain of $1.5 million for the same period in 2020. The change in the fair value of TRUPs reflected in noninterest income was caused by fluctuations in the LIBOR yield curve. Noninterest income for the nine month ended September 30, 2020, includes a $310,000 gain in proceeds from bank-owned life insurance. Customer service fees totaled $2.1 million for the nine months ended September 30, 2021 and $2.0 million for the nine months ended September 30, 2020.

For the nine months ended September 30, 2021, noninterest expense totaled $17.3 million, an increase of $560,000 compared to $16.8 million for the nine months ended September 30, 2020. On a year-over-year comparative basis, noninterest expense increased due to increases in salaries and employee benefits of $673,000 and regulatory assessment fees of $264,000, partially offset by decreases in OREO expense of $901,000 related to the write-down of $727,000 recognized during 2020.

Net interest income, before the provision for credit losses, was $9.3 million for the quarter ended September 30, 2021, representing a $1.7 million, or 22.9%, increase from the $7.6 million reported at September 30, 2020. The increase in net interest income was driven by growth in the loan and investment portfolios. The Company's net interest margin increased from 3.02% to 3.17% between the quarters ended September 30, 2020 and September 30, 2021, respectively. The increase in net interest margin was driven by growth in average loan and investment balances, increases in yields on investment securities, and decreases in average rates paid on deposits, partially offset by decreases in loan yields. Net interest income during the quarter ended September 30, 2021 increased 5.0% from the $8.9 million reported during the quarter ended June 30, 2021.

Noninterest income for the quarter ended September 30, 2021 totaled $0.9 million, an increase of $19,000 from the $911,000 in non-interest income reported for the quarter ended September 30, 2020. The increase is primarily attributed to an increase of $77,000 in customer services fees. Noninterest income decreased $392,000 from the $1.3 million reported for the quarter ended June 30, 2021. The decrease is attributed to the change in the fair value of junior subordinated debentures, which was reported as a $377,000 gain during the quarter ended June 30, 2021.

Total assets increased $200.1 million, or 18.3%, between September 30, 2021 and December 31, 2020. Gross loan balances increased $152.5 million and investment securities increased $79.3 million. As a result of purchases of securities for investment and additions to the loan portfolio, total cash and cash equivalents decreased $34.6 million between December 31, 2020 and September 30, 2021. Unfunded loan commitments increased from $216.8 million at December 31, 2020 to $223.1 million at September 30, 2021. OREO balances decreased from $5.0 million at December 31, 2020 to $4.6 million at September 30, 2021. The reduction is attributed to the sale of one OREO property during the quarter.

Total deposits increased $198.1 million, or 20.8%, to $1.15 billion during the nine months ended September 30, 2021. This increase was due to increases of $112.3 million in NOW and money market accounts, $63.7 million in noninterest bearing deposits, $13.3 million in savings accounts, and $8.7 million in time deposits. In total, NOW, money market and savings accounts increased 25.2% to $624.9 million at September 30, 2021, compared to $499.2 million at December 31, 2020. Noninterest bearing deposits increased 16.3% to $455.6 million at September 30, 2021, compared to $391.9 million at December 31, 2020. Core deposits, which are made up of the balance of noninterest bearing deposits, NOW, money market, savings, and time deposits accounts less than $250,000, increased $196.7 million.

Shareholders’ equity at September 30, 2021 was $119.1 million, an increase of $1.3 million from shareholders’ equity of $117.8 million at December 31, 2020. This increase in equity was the result of increases in retained earnings and decreases in the accumulated other comprehensive loss. At September 30, 2021 there was an accumulated other comprehensive loss of $668,000, as compared to an accumulated other comprehensive loss of $728,000 at December 31, 2020. The decrease in the loss was primarily the result of a decrease in the loss on junior subordinated debentures (TRUPs) caused by a change in market credit spreads during the nine month period ended September 30, 2021, and was partially offset by a decrease in unrealized gains on investment securities,

The Company recorded a provision for credit losses of $1.7 million for the nine months ended September 30, 2021, compared to a provision of $2.1 million for the nine months ended September 30, 2020. Net loan charge-offs totaled $1.0 million for the nine months ended September 30, 2021, as compared to net loan charge-offs of $1.3 million for the nine months ended September 30, 2020. Net charge-offs totaled $509,000 for the quarter ended September 30, 2021, compared to $157,000 and $174,000 for the quarters ended September 30, 2020 and June 30, 2021, respectively. The provision recorded during the year is attributed to loan portfolio growth, agricultural loan downgrades,and student loan charge-offs, partially offset by the continuation of the positive trend in commercial loss factor adjustments. For the nine months ended September 30, 2020, the provision recorded was attributed to growth of the loan portfolio, net charge-offs, and economic uncertainty resulting from COVID-19. In 2020, the Company had executed a total of 28 payment deferrals or modifications on outstanding loan balances of $70.0 million in connection with the COVID-19 relief provided by the CARES Act and interagency guidance issued in March 2020. The Company has not recognized any losses on the loan modifications and as of September 30, 2021, there were no modifications outstanding.

The Company's allowance for loan loss totaled 1.13% of the loan portfolio at September 30, 2021, compared to 1.30% at December 31, 2020. The decrease in the allowance for credit losses as a percentage of gross loans is the result of a change in loan mix from an increase in residential mortgage loans purchased during the previous quarter. The reserve required on the residential mortgage loan segment is lower than reserves required for other loan segments due to lower historical loss rates. In

Non-performing assets, comprised of nonaccrual loans, troubled debt restructures (TDRs), other real estate owned through foreclosure (OREO), and loans more than 90 days past due and still accruing interest, decreased $899,000 between December 31, 2020 and September 30, 2021 to $16.6 million. Nonperforming assets as a percentage of total assets decreased from 1.61% at December 31, 2020 to 1.29% at September 30, 2021. The decrease in nonperforming assets is attributed to the reduction in past due loans more than 90 days and still accruing interest from $513,000 at December 31, 2020 to $318,000 at September 30, 2021, and decreases in total restructured loans of $664,000 between December 31, 2020 and September 30, 2021. OREO balances decreased from $5.0 million at December 31, 2020 to $4.6 million at September 30, 2021. Nonaccrual loans increased $55,000 between December 31, 2020 and September 30, 2021.

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 12 full-service branch offices in Fresno, Bakersfield, Campbell, Caruthers, Coalinga, Firebaugh, Mendota, Oakhurst, San Joaquin, and Taft, California. Additionally, United Security Bank operates Commercial Real Estate Construction, Commercial Lending, and Consumer Lending departments. For more information, please visit www.unitedsecuritybank.com.

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.

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) the effects of the COVID-19 pandemic, or other similar outbreaks, including the effects of the steps being taken to address the pandemic and their impact on the Company’s markets, customers and employees, (2) changes in general economic and financial market conditions, either nationally or locally, (3) changes in interest rates, (4) changes in banking laws or regulations, (5) increased competition in the Company's markets, impacting the ability to execute its business plans, (6) loss of key personnel, (7) unanticipated credit losses, (8) drought, earthquakes or other natural disasters impacting the local economy and/or the condition of real estate collateral, (9) the impact of technological changes and the ability to develop and maintain secure and reliable electronic systems, (10) uncertainty regarding the replacement of LIBOR, and (11) changes in accounting policies or procedures.

The Company undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. 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, 2020, 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.


United Security Bancshares
Consolidated Balance Sheets (unaudited)
(in thousands)
	September 30, 2021		December 31, 2020		September 30, 2020
Assets
Cash and non-interest-bearing deposits in other banks	$	42,172	$	29,490	$	29,197
Due from Federal Reserve Bank ("FRB")	217,256		264,579		294,135

Cash and cash equivalents	259,428		294,069		323,332


Investment securities (at fair value)
Available-for-sale ("AFS") securities	161,732		82,341		87,917
Marketable equity securities	3,776		3,851		3,865
Total investment securities	165,508		86,192		91,782
Loans	807,937		655,411		661,482
Unearned fees and unamortized loan origination costs - net	1,177		(1,064)		(1,038)
Allowance for credit losses	(9,144)		(8,522)		(8,708)
Net loans	799,970		645,825		651,736

Premises and equipment - net	9,113		9,110		9,379
Accrued interest receivable	8,246		8,164		10,099
Other real estate owned	4,582		5,004		5,018
Goodwill	4,488		4,488		4,488
Deferred tax assets - net	3,086		2,907		2,631

Cash surrender value of life insurance	22,043		20,715		20,403

Operating lease right-of-use assets	2,743		2,864		2,914
Other assets	13,574		13,316		12,165
Total assets	$	1,292,781	$	1,092,654	$	1,133,947

Liabilities and Shareholders' Equity
Deposits
Non-interest-bearing	$	455,584	$	391,897	$	430,028
Interest-bearing	695,131		560,754		564,755
Total deposits	1,150,715		952,651		994,783

Operating lease liabilities	2,852		2,967		3,017
Other liabilities	8,791		8,305		8,013
Junior subordinated debentures (at fair value)	11,295		10,924		10,081
Total liabilities	1,173,653		974,847		1,015,894

Shareholders' Equity
Common stock, no par value; 20,000,000 shares authorized; issued and outstanding: 17,010,288 at September 30, 2021, 17,009,883 at December 31, 2020, and 16,977,239 at September 30, 2020.	59,549		59,397		59,289
Retained earnings	60,247		59,138		59,084
Accumulated other comprehensive loss	(668)		(728)		(320)
Total shareholders' equity	119,128		117,807		118,053
Total liabilities and shareholders' equity	$	1,292,781	$	1,092,654	$	1,133,947


United Security Bancshares
Consolidated Statements of Income (unaudited)
(in thousands - except per share data)
	Three Months Ended						Nine Months Ended September 30,
	September 30, 2021		June 30, 2021		September 30, 2020		2021		2020
Interest Income:
Interest and fees on loans	$	9,163	$	8,708	$	7,693	$	25,942	$	24,040
Interest on investment securities	650		654		343		1,691		1,127
Interest on deposits in FRB	64		42		62		168		667

Total interest income	9,877		9,404		8,098		27,801		25,834

Interest Expense:
Interest on deposits	496		468		451		1,391		1,562
Interest on other borrowed funds	44		45		49		136		229
Total interest expense	540		513		500		1,527		1,791
Net Interest Income	9,337		8,891		7,598		26,274		24,043
Provision for Credit Losses	453		826		4		1,654		2,138
Net Interest Income after Provision for Credit Losses	8,884		8,065		7,594		24,620		21,905

Noninterest Income:
Customer service fees	745		692		668		2,094		2,014
Increase in cash surrender value of bank-owned life insurance	139		138		124		408		382
Unrealized (loss) gain on fair value of marketable equity securities	(14)		—		4		(75)		89
Gain on proceeds from bank-owned life insurance	—		—		—		—		310
Gain (loss) on fair value of junior subordinated debentures	(35)		377		(18)		(691)		1,451


Gain on sale of assets	(5)		—		—		8		—
Other	100		115		133		349		460
Total noninterest income	930		1,322		911		2,093		4,706

Noninterest Expense:
Salaries and employee benefits	2,888		2,893		2,722		8,804		8,131
Occupancy expense	1,013		837		887		2,705		2,609
Data processing	147		148		139		382		386
Professional fees	833		865		854		2,524		2,399
Regulatory assessments	258		123		121		547		283
Director fees	91		92		94		275		282

Correspondent bank service charges	22		23		19		65		52

Net cost on operation and sale of OREO	24		18		35		67		968
Other	888		606		469		1,964		1,663
Total noninterest expense	6,164		5,605		5,340		17,333		16,773

Income Before Provision for Taxes	3,650		3,782		3,165		9,380		9,838
Provision for Taxes on Income	1,039		1,077		894		2,653		2,800
Net Income	2,611		2,705		2,271		$	6,727	$	7,038

Basic earnings per common share	$	0.15	$	0.16	$	0.13	$	0.40	$	0.41
Diluted earnings per common share	$	0.15	$	0.16	$	0.13	$	0.40	$	0.41
Weighted average basic shares for EPS	17,010,288		17,010,288		16,977,239		17,010,236		16,975,648
Weighted average diluted shares for EPS	17,035,533		17,032,878		17,000,501		17,027,671		16,993,180


United Security Bancshares
Average Balances and Rates (unaudited)
(in thousands)	Three Months Ended									Nine Months Ended September 30,
	September 30, 2021			June 30, 2021			September 30, 2020			2021			2020
Average Balances:
Loans (1)	$	826,754		$	762,090		$	656,501		$	753,424		$	632,221
Investment securities	170,408			164,908			94,076			146,434			91,140

Interest-bearing deposits in FRB	172,073			180,061			248,722			203,366			203,574
Total interest-earning assets	1,169,235			1,107,059			999,299			1,103,224			926,935
Allowance for credit losses	(9,203)			(8,552)			(8,917)			(8,762)			(8,650)
Cash and due from banks	44,804			48,415			32,106			44,968			29,948
Other real estate owned	4,716			4,965			5,204			4,917			6,033
Other non-earning assets	60,771			71,387			60,479			64,235			61,872
Total average assets	$	1,270,323		$	1,223,274		$	1,088,171		$	1,208,582		$	1,016,138

Interest-bearing deposits	$	675,419		$	637,444		$	551,797		$	630,823		$	523,136
Junior subordinated debentures	11,225			10,961			9,710			11,029			9,640

Total interest-bearing liabilities	686,644			648,405			561,507			641,861			532,776

Non-interest-bearing deposits	453,159			446,352			398,282			437,482			355,114
Other liabilities	9,968			9,657			9,689			9,789			9,675
Total liabilities	1,149,771			1,104,414			969,478			1,089,132			897,565
Total equity	120,552			118,860			118,693			119,459			118,573
Total liabilities and equity	$	1,270,323		$	1,223,274		$	1,088,171		$	1,208,591		$	1,016,138

Average Rates:
Loans (1)	4.40		%	4.58		%	4.66		%	4.60		%	5.08		%
Investment securities	1.51		%	1.59		%	1.45		%	1.54		%	1.65		%

Interest-bearing deposits in FRB	0.15		%	0.09		%	0.10		%	0.11		%	0.44		%
Earning assets	3.35		%	3.41		%	3.22		%	3.37		%	3.72		%
Interest bearing deposits	0.29		%	0.29		%	0.33		%	0.29		%	0.40		%
Total deposits	0.17		%	0.17		%	0.19		%	0.17		%	0.24		%
Junior subordinated debentures	1.56		%	1.65		%	2.01		%	1.65		%	3.17		%
Total interest-bearing liabilities	0.31		%	0.32		%	0.35		%	0.32		%	0.45		%
Net interest margin (2)	3.17		%	3.22		%	3.02		%	3.18		%	3.46		%


United Security Bancshares
Condensed - Consolidated Balance Sheets (unaudited)
(in thousands)
	September 30, 2021		June 30, 2021		March 31, 2021		December 31, 2020		September 30, 2020
Cash and cash equivalents	$	259,428	$	160,908	$	307,909	$	294,069	$	323,332
Investment securities	165,508		170,767		147,340		86,192		91,782
Loans	809,114		842,049		674,489		654,347		660,444
Allowance for credit losses	(9,144)		(9,200)		(8,549)		(8,522)		(8,708)
Net loans	799,970		832,849		665,940		645,825		651,736
Other assets	67,875		66,531		65,747		66,568		67,097
Total assets	$	1,292,781	$	1,231,055	$	1,186,936	$	1,092,654	$	1,133,947

Non-interest-bearing	$	455,584	$	442,140	$	429,005	$	391,897	$	430,028
Interest-bearing	695,131		648,302		618,776		560,754		564,755
Total deposits	1,150,715		1,090,442		1,047,781		952,651		994,783
Other liabilities	22,938		22,248		21,822		22,196		21,111
Total liabilities	1,173,653		1,112,690		1,069,603		974,847		1,015,894
Total shareholders' equity	119,128		118,365		117,333		117,807		118,053
Total liabilities and shareholder's equity	$	1,292,781	$	1,231,055	$	1,186,936	$	1,092,654	$	1,133,947


United Security Bancshares
Condensed - Consolidated Statements of Income (unaudited)
(in thousands)	For the Quarters Ended:
	September 30, 2021		June 30, 2021		March 31, 2021		December 31, 2020		September 30, 2020
Total interest income	$	9,877	$	9,404	$	8,520	$	8,496	$	8,098
Total interest expense	540		513		473		499		500
Net interest income	9,337		8,891		8,047		7,997		7,598
Provision for credit losses	453		826		375		631		4
Net interest income after provision for credit losses	8,884		8,065		7,672		7,366		7,594

Total non-interest income (loss)	930		1,322		(159)		467		911
Total non-interest expense	6,164		5,605		5,565		5,260		5,340
Income before provision for taxes	3,650		3,782		1,948		2,573		3,165
Provision for taxes on income	1,039		1,077		537		651		894
Net income	$	2,611	$	2,705	$	1,411	$	1,922	$	2,271


United Security Bancshares
Nonperforming Assets (unaudited)
(dollars in thousands)
	September 30, 2021			December 31, 2020			September 30, 2020


RE construction & development	11,273			11,057			11,058
Agricultural	278			439			477

Total nonaccrual loans	$	11,551		$	11,496		$	11,535

Loans past due 90 days and still accruing	318			513			53
Restructured loans	198			535			1,609
Total nonperforming loans	$	12,067		$	12,544		$	13,197
Other real estate owned	4,582			5,004			5,018
Total nonperforming assets	$	16,649		$	17,548		$	18,215

Nonperforming loans to total gross loans	1.49		%	1.91		%	2.00		%
Nonperforming assets to total assets	1.29		%	1.61		%	1.61		%
Allowance for credit losses to nonperforming loans	75.78		%	67.94		%	65.98		%


United Security Bancshares
Selected Financial Data (unaudited)
(dollars in thousands, except per share amounts)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021	2020

Return on average assets	0.82	%	0.83	%	0.75%	0.93%
Return on average equity	8.62	%	7.61	%	7.55%	7.93%
Annualized net charge-off to average loans	0.24	%	0.10	%	0.18%	0.28%


	September 30, 2021		December 31, 2020
Shares outstanding - period end	17,010,288		17,009,883
Book value per share	$7.00		$6.93
Efficiency ratio (1)	61.10	%	58.74	%
Total impaired loans	$11,750		$13,376
Net loan to deposit ratio	69.52	%	67.79	%
Allowance for credit losses to total loans	1.13	%	1.30	%
Tier 1 capital to adjusted average assets (leverage)
Company	9.96	%	11.37	%
Bank	9.80	%	11.17	%


United Security Bancshares
Net Income before Non-Core Reconciliation
Non-GAAP Information (dollars in thousands)
(unaudited)
	Nine Months Ended September 30,
	2021		2020		Change $		Change %
Net income	$	6,727	$	7,038	$	(311)	(4.42)	%

Junior subordinated debenture (1) fair value adjustment	(691)		1,451
Write down on OREO (2)	—		(727)
Loss on sale of OREO (2)	(1)		(113)
Total non-core items	(692)		611

Income tax effect	201		(177)
Non-core items net of taxes	(491)		434


Non-GAAP core net income	$	7,218	$	6,604	$	614	9.30	%