UBFO - United Security Bancshares: A 6.6% Yield From California Community Bank

2023-06-23 14:58:03 ET

Summary

• United Security Bancshares has maintained its quarterly dividend payouts despite the regional banking crisis and challenging operating conditions.
• The bank's net income surged in the first quarter, driven by a rise in interest and fees on loans, but total deposits decreased quarter-over-quarter.
• UBFO's stock performance in 2023 will depend on the improvement of the broader conversation around regional banks and the bank's ability to manage potential deposit flight.

Banks of all types have experienced near-existential operating conditions over the last six months with the Fed funds rate being hiked ten consecutive times to its highest level since 2008 at 5% to 5.25%. Whilst this has broadly provided a boost for net interest margins, it is also driven large unrealized losses on the fixed-income asset part of balance sheets. This sparked the collapse of several national lenders to drive a pertinent bearish bank trade that's built on depositors shunning smaller regional banks for the larger more systematically important banks like Bank of America, JPMorgan Chase, Citi, and Wells Fargo. Fresno, California-based United Security Bancshares ( UBFO ) has maintained its quarterly dividend payouts against the chaos of 2023. It last declared a quarterly cash dividend of $0.11 per share , in line with its prior payment for a 6.6% annualized forward dividend yield.

The bank is down 7% since the start of the year and is currently changing hands at a trailing 12-month price-to-earnings ratio of 5.85x , around 36% below its peer group median of 9.17x. I'm not entirely bullish here though. The March banking panic has undoubtedly deteriorated the operating conditions for non-SIBs as both insured and uninsured deposits likely become more risk averse. However, we've likely seen the worst of the regional banking crisis with a conclusive end likely to come on the back of a positive fiscal 2023 second-quarter earnings season and a second consecutive FOMC rate pause at its July 26th meeting.

Net Income Surges As Deposits Decrease

UBFO's first quarter earnings saw the bank realize a net income of $6.1 million , around $0.36 per share, and up around $0.22 from net income per share of $0.14 in the year-ago comp. This 157% growth year-over-year was driven by a surge in interest and fees on loans on the back of the marked rise in the Fed funds rate and the year-over-year growth in their loan portfolio. Net of unearned fees, this portfolio grew 7.2% over its year-ago comp to $942.7 million. However, on a sequential basis, the portfolio declined by $37.5 million from a $980.2 million loan portfolio as of the end of the fourth quarter.

The bank also benefited from a total non-interest income of $1.45 million versus a loss of $206,000 in the year-ago period. This was driven by a gain on the fair value of its junior subordinated debentures of $333,000 versus a loss of $1 million in the year-ago quarter. Total deposits did decrease quarter-over-quarter by 4.7% to $1.11 billion. This was also below its year-ago figure and could trend lower if bearish concerns around deposit flight to SIBs are realized. Since the high-profile banking collapses kicked off in March, we haven't received updated earnings results from UBFO. We will have to wait until the company releases its second-quarter earnings to fully gauge the impact of the March banking panic on its deposit base.

Will The Commons Recover In 2023?

The $113 million market cap UBFO currently operates 12 branches of its United Security Bank in Fresno, Madera, Kern, and Santa Clara counties. It held $1.29 billion in total assets as of the end of its first quarter for a book value per share of $6.61. Critically, the bank is set to continue to benefit from net interest margins that were at 4.42% as of the end of the first quarter. This was an expansion of 132 basis points from 3.1% in the year-ago comp and was against an annualized average cost of deposits of 0.48%. Net interest margins did decline sequentially from 4.44% in the fourth quarter.

Whether the commons close out 2023 on a positive note will be dependent on whether the panic that has defined the broader conversation of regional banks improves. The headline inflation rate has been dropping and now at 4% is double the Fed's 2% target. The debt ceiling deal has helped to partially place US fiscal policy in lockstep with the hawkish Fed as a resumption of student loan repayments and the lagging effect of the collapse of energy prices look set to contribute to the wider effort to reduce inflationary pressures on the US economy. However, the overall situation is still somewhat prone to disruption.

UBFO held cash and cash equivalents of $45.2 million as of the end of the first quarter with $434.7 million available through its secured lines of credit and a further $100 million from unsecured lines. This access to liquidity was also bolstered by unpledged investment securities of $138.7 million to render the possibility of a collapse from deposit flight a distant possibility. To be clear, UBFO has liquidity on hand to manage the extreme scenario of half of its deposits requesting their funds back. Hence, with the dividend safe and the company trading at a discount to its peers, the commons are a hold.

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