Executive Summary / Key Takeaways

• Resilient Core Performance: United Security Bancshares (UBFO) demonstrates solid core banking operations, with a net interest margin expanding to 4.35% for Q3 2025 and 4.42% for the nine months ended September 30, 2025, driven by disciplined deposit pricing and lower short-term borrowing costs.
• Strategic Loan Portfolio Shifts: The company is actively reshaping its loan portfolio, showing strong growth in agricultural and real estate construction and development loans, while managing a reduction in its legacy student loan portfolio through charge-offs and paydowns.
• Robust Capital and Liquidity: UBFO maintains a strong capital position, with the Bank's Tier 1 Leverage Ratio at 12.11% as of September 30, 2025, well above regulatory minimums, and ample liquidity supported by core deposits and unused credit lines.
• Shareholder Returns and Insider Confidence: The company continues to return value to shareholders through a consistent quarterly cash dividend of $0.12 per share, complemented by a stock repurchase program, and recent insider buying signals growing confidence.
• Navigating Headwinds: While facing challenges from increased credit loss provisions, particularly in student loans, and a competitive banking landscape, UBFO's localized strategy and focus on core customer relationships provide a foundation for stability and future growth.

A Regional Banking Anchor in California's Central Valley

United Security Bancshares (NASDAQ:UBFO) stands as a vital regional banking institution, deeply embedded in the economic fabric of California's Central Valley and surrounding counties. Founded in 1987 and headquartered in Fresno, the company operates as a bank holding company for its wholly-owned subsidiary, United Security Bank. With 13 banking branches and several interactive teller machines (ITMs) spread across Fresno, Madera, Kern, and Santa Clara counties, UBFO's business model is centered on providing comprehensive commercial banking services to local businesses, professionals, and individuals.

The company's history reflects a pragmatic approach to asset management and market adaptation. Early on, UBFO demonstrated strategic foresight by transferring foreclosed real estate assets to its subsidiary, York Monterey Properties, Inc., to manage them beyond regulatory holding periods. This proactive stance highlights a long-standing commitment to optimizing asset utilization and navigating regulatory complexities. More recently, in January 2025, the Bank further expanded York Monterey Properties' holdings through additional non-judicial foreclosures, underscoring a continued focus on real estate asset management.

UBFO operates in a competitive banking landscape, facing off against a mix of larger regional players like CVB Financial Corp. (CVBF), Pacific Premier Bancorp (PPBI), and Banner Corp. (BANR), as well as national giants such as Wells Fargo & Company (WFC). UBFO's competitive edge lies in its strong local brand and community-focused relationships, which foster customer loyalty and can lead to more efficient, low-cost operations within its familiar markets. This localized approach allows UBFO to compete effectively in niche segments, particularly in agricultural lending, where its deep regional ties provide a distinct advantage. However, its smaller scale and more limited geographic reach present vulnerabilities, potentially leading to higher operational costs and slower technological adoption compared to its larger rivals.

The broader banking industry is experiencing significant shifts, including the ongoing digitization of payments and the migration to cloud solutions. While UBFO's technology strategy focuses on enhancing operational efficiency, customer experience, and robust security through offerings like online and mobile banking and ITMs, these are foundational elements for modern banking rather than proprietary differentiators. The company's investments in technology are aimed at maintaining competitive service levels and managing cybersecurity risks, which are critical for all financial institutions. The increasing demand for commercial loans, potentially driven by industry trends such as AI-driven data center growth in California, could offer new lending opportunities for UBFO, though larger banks may be better positioned to capitalize on these at scale.

Financial Performance: A Story of Margin Expansion and Portfolio Evolution

UBFO's recent financial performance reflects a strategic emphasis on optimizing its net interest margin while actively managing its loan portfolio. For the three months ended September 30, 2025, net interest income stood at $12.42 million, contributing to a net interest margin of 4.35%, an increase from 4.20% in the prior year period. This expansion was primarily driven by a notable decrease in interest expense, which fell by 18.67% to $3.21 million, largely due to lower short-term borrowing costs. The annualized average cost of deposits also saw a favorable reduction to 1.12% from 1.18% year-over-year.

On a year-to-date basis, for the nine months ended September 30, 2025, net interest income reached $36.58 million, with the net interest margin improving to 4.42% from 4.27% in the comparable period of 2024. This improvement underscores the company's disciplined deposit pricing efforts, which have helped keep its cost of funds relatively low, even as the cost of deposits increased from 0.91% to 1.11% due to higher rates paid for money market accounts. Total interest income for the nine months ended September 30, 2025, increased by 0.68% to $45.91 million, partially boosted by a significant $890,000 collection of foregone interest from a nonaccrual loan payoff.

Net income for the third quarter of 2025 increased by 5.07% to $4.02 million, or $0.23 per diluted share, compared to $3.83 million, or $0.22 per share, in the same quarter of 2024. However, year-to-date net income for the nine months ended September 30, 2025, decreased to $8.87 million, or $0.51 per share, from $12.29 million, or $0.72 per share, in the prior year. This decline was primarily attributable to an increased provision for credit losses, largely stemming from deterioration within the student loan portfolio, and higher deposit interest expense. A non-recurring gain of $573,000 from life insurance proceeds in 2024 also contributed to the year-over-year difference.

Noninterest income for the third quarter decreased by 20.02% to $1.62 million, mainly due to a $414,000 decrease in the gain on the fair value of junior subordinated debentures (TruPS). A partial redemption of $3 million in TruPS on July 1, 2025, resulted in a realized gain of $241,000, which was recorded in the income statement. Noninterest expenses for the quarter increased by 4.09% to $7.43 million, driven by higher technology expenses and salaries and employee benefits. Similarly, year-to-date noninterest expenses rose by $1.9 million to $22.78 million, primarily due to increases in salaries and employee benefits and data processing costs.

Loan Portfolio Dynamics and Asset Quality Management

The loan portfolio remains the largest and most critical component of UBFO's earning assets, totaling $958.35 million at September 30, 2025, representing a 3.22% increase year-to-date from $928.46 million at December 31, 2024. This growth was primarily fueled by a $22.7 million increase in agricultural loans and a $31.4 million increase in real estate construction and development loans. Conversely, commercial and industrial loans decreased by $20.3 million, and installment loans, including student loans, saw a $3.9 million reduction.

The real estate mortgage portfolio constitutes the largest segment at $666.79 million, or 69.60% of total loans, with commercial real estate being the dominant sub-segment. Residential mortgages, while not a primary business line, include purchased home-mortgage loan pools totaling $212.3 million.

A key area of focus for UBFO is its student loan portfolio, which totaled $28.8 million at September 30, 2025. This portfolio has not seen new originations or purchases since 2019. The company experienced a persistent high rate of student loan charge-offs, totaling $4.8 million for the nine months ended September 30, 2025, largely attributed to the conclusion of pandemic-related payment forbearance programs. This led to an increased provision for credit losses, which reached $5.11 million for the nine months ended September 30, 2025, compared to $1.75 million in the prior year. Despite this, the allowance for credit losses stood at $16.24 million, or 1.69% of outstanding loan balances, at September 30, 2025, which management believes is adequate to cover estimated and inherent risks.

Nonperforming assets have shown improvement, decreasing by $3.1 million to $14.11 million at September 30, 2025, from $17.20 million at December 31, 2024. Nonaccrual loans specifically declined to $5.70 million from $12.20 million in the same period, primarily due to a loan payoff and the transfer of a nonaccrual loan to other real estate owned (OREO). This proactive management of problem assets is crucial for maintaining asset quality.

Liquidity, Capital Strength, and Shareholder Returns

UBFO maintains a robust liquidity and capital position, essential for supporting its operations and strategic growth initiatives. The company's liquidity strategy focuses on maintaining sufficient cash flows to meet financial obligations, including loan funding and deposit withdrawals, without straining its equity structure. Core deposits, which represent approximately 87.65% of total deposits at September 30, 2025, provide a significant and stable funding source. Total deposits increased by 1.73% to $1.08 billion at September 30, 2025, from $1.06 billion at December 31, 2024.

The Bank had no outstanding short-term borrowings at September 30, 2025, and benefits from substantial unused collateralized lines of credit totaling $707.6 million with the Federal Reserve Bank and the Federal Home Loan Bank (FHLB). These lines are backed by a significant pool of investment securities and qualifying loans, providing a strong buffer against unforeseen liquidity needs. The loan-to-deposit ratio stood at 89.07% at September 30, 2025, indicating a healthy balance between lending activities and funding sources.

From a capital perspective, both United Security Bancshares and United Security Bank are well-capitalized, exceeding regulatory minimums. The Bank's Tier 1 Leverage Ratio was 12.11% at September 30, 2025, comfortably above the 9% minimum requirement. Management expresses confidence that both the Company and the Bank will continue to meet their minimum capital requirements for the foreseeable future.

UBFO is committed to returning value to its shareholders. On September 23, 2025, the Board of Directors declared a regular quarterly cash dividend of $0.12 per share, payable in October 2025. This consistent dividend payout is supported by cash dividends received from the Bank. The company also has an authorized program to repurchase up to $3 million of its outstanding common stock, representing 2.18% of total shareholders' equity, though no shares were repurchased during the nine months ended September 30, 2025. Recent insider activity, including a director significantly increasing their stake, further signals confidence in the company's prospects.

Outlook and Key Investment Considerations

United Security Bancshares operates in an environment shaped by local economic conditions in California's Central Valley, broader U.S. monetary policy, and competitive pressures. The region's dependence on agriculture introduces specific risks, as downturns in this sector due to factors like declining prices, increased operating costs, or water allocation reductions can indirectly impact the company's loan portfolio and overall business activity. Management actively monitors these conditions and their potential impact on the allowance for credit losses.

The Federal Reserve's interest rate policies are a significant driver of UBFO's earnings. While the Federal Open Market Committee (FOMC) has lowered interest rates four times since 2024, totaling a 125-basis point decrease, concerns about inflation and unemployment introduce uncertainty regarding future monetary policy. UBFO's net interest margin has benefited from disciplined management of interest-bearing liabilities, but continued rate fluctuations will require ongoing vigilance.

Competition from major banks, local independents, and non-bank institutions remains a constant factor, exerting pressure on loan pricing. UBFO's strategy of focusing on core customer relationships and localized service is a key differentiator in this environment. The company's ability to attract and retain deposit customers and maintain market share will be crucial for its sustained success.

While UBFO does not highlight a unique, proprietary technological differentiator with quantifiable benefits in the same vein as a specialized manufacturing process, its investments in online and mobile banking, as well as ITMs, are essential for modern service delivery and operational efficiency. The company's focus on maintaining secure and reliable electronic communication systems is a critical aspect of its risk management strategy in an increasingly digital world.

Conclusion

United Security Bancshares presents a compelling investment narrative rooted in its regional strength, disciplined financial management, and strategic adaptation to evolving market dynamics. Despite facing headwinds from increased credit loss provisions, particularly within its legacy student loan portfolio, and a competitive banking landscape, UBFO has demonstrated an expanding net interest margin and robust capital and liquidity positions. The company's commitment to its core Central Valley markets, coupled with a focus on managing credit risk and enhancing shareholder returns through consistent dividends, underpinning its stability.

UBFO's ability to grow its agricultural and real estate construction loan portfolios, while prudently managing its nonperforming assets, showcases its operational effectiveness. The ongoing emphasis on core deposits as a stable funding source further strengthens its financial foundation. While the absence of a distinct technological moat might be a consideration for some investors, UBFO's strategic investments in modern banking infrastructure are vital for maintaining competitive service levels and robust security. For discerning investors seeking exposure to a well-managed regional bank with a strong local presence and a clear strategy for navigating a dynamic economic environment, United Security Bancshares (NASDAQ:UBFO) offers a resilient and yield-generating opportunity.