10-K: United Security Bancshares Reports Mixed 2025 Results Amidst Merger Plans

United Security Bancshares reported a decrease in net income for 2025 to $12.3 million, down from $14.8 million in 2024, while announcing an all-stock merger with Community West Bancshares expected to close in Q2 2026.

Summary

• Net income decreased to $12.3 million for the year ended December 31, 2025, compared to $14.8 million in 2024.
• Net interest margin increased to 4.41% at December 31, 2025, from 4.26% at December 31, 2024.
• Annualized average cost of deposits increased to 1.08% for 2025, up from 0.96% for 2024.
• Interest and fees on loans increased slightly to $55.4 million for 2025, compared to $55.2 million for 2024.
• Interest expense decreased 13.38% to $12.0 million for 2025, compared to $13.9 million for 2024.
• Noninterest income increased $373,000 to $5.1 million for 2025, compared to $4.7 million for 2024, primarily due to changes in the fair value of Trust Preferred Securities (TruPS).
• Provision for credit losses increased to $5.6 million for 2025, compared to $3.0 million for 2024, mainly due to deterioration in the student loan portfolio.
• Noninterest expense increased 11.70% to $31.6 million for 2025, compared to $28.3 million for 2024, driven by increases in salaries, data processing, and $674,000 in merger-related expenses.
• Annualized return on average assets (ROAA) decreased to 1.01% for 2025, from 1.22% for 2024.
• Annualized return on average equity (ROAE) decreased to 9.02% for 2025, from 11.52% for 2024.
• Total loans, net of unearned fees, decreased 1.4% to $915.4 million at December 31, 2025, compared to $928.5 million at December 31, 2024.
• Total deposits increased 2.9% to $1.09 billion at December 31, 2025, compared to $1.06 billion at December 31, 2024.
• The Company signed an Agreement and Plan of Merger with Community West Bancshares on December 16, 2025, in an all-stock transaction expected to close in the second quarter of 2026.
• Partial redemptions of junior subordinated debentures (TruPS) totaling $6.0 million were made in 2025, leaving a remaining contractual balance of $6.0 million.
• Student loan charge-offs totaled $6.3 million for 2025, up from $2.8 million for 2024.
• Non-performing assets decreased $3.3 million to $13.9 million at December 31, 2025, from $17.2 million at December 31, 2024.
• The allowance for credit losses as a percentage of total loans decreased to 1.62% at December 31, 2025, from 1.72% at December 31, 2024.

Sentiment

Score: 4

Explanation: StockSavvy.ai views this as a mixed filing. While the proposed merger and strong capital ratios are positive, the significant decline in net income, ROAA, and ROAE, coupled with increased credit loss provisions and charge-offs, particularly in the student loan portfolio, indicate operational challenges.

Positives

• Net interest margin increased to 4.41% in 2025 from 4.26% in 2024.
• Interest expense decreased 13.38% to $12.0 million in 2025, primarily due to decreases in short-term borrowings and TruPS.
• Noninterest income increased $373,000 to $5.1 million in 2025, driven by a gain on the fair value of TruPS.
• Partial redemptions of junior subordinated debentures (TruPS) totaling $6.0 million in 2025 resulted in realized gains of $481,000.
• Total deposits increased 2.9% to $1.09 billion in 2025, with noninterest-bearing deposits increasing 17.14%.
• Non-performing assets decreased $3.3 million to $13.9 million in 2025, indicating an improvement in asset quality.
• The allowance for credit losses as a percentage of nonperforming loans significantly increased to 259.31% in 2025 from 131.55% in 2024, reflecting stronger coverage.
• The Company and the Bank were well capitalized under applicable regulatory standards as of December 31, 2025.
• The effective tax rate decreased to 26.40% in 2025 from 27.20% in 2024 due to a permanent adjustment to a state tax accrual.

Negatives

• Net income decreased to $12.3 million in 2025 from $14.8 million in 2024.
• Annualized average cost of deposits increased to 1.08% in 2025 from 0.96% in 2024, reflecting a competitive deposit rate environment.
• Provision for credit losses increased to $5.6 million in 2025 from $3.0 million in 2024, primarily due to deterioration in the student loan portfolio.
• Noninterest expense increased 11.70% to $31.6 million in 2025, partly due to increased salaries, data processing, and merger-related expenses.
• Annualized return on average assets (ROAA) decreased to 1.01% in 2025 from 1.22% in 2024.
• Annualized return on average equity (ROAE) decreased to 9.02% in 2025 from 11.52% in 2024.
• Total loans, net, decreased 1.4% to $915.4 million in 2025.
• Commercial and industrial loans decreased 27.51% and installment loans decreased 15.10% in 2025.
• Student loan charge-offs totaled $6.3 million in 2025, significantly higher than $2.8 million in 2024.
• Net charge-offs to average loans increased to 0.65% in 2025 from 0.28% in 2024.

Risks

• The possibility that any of the anticipated benefits of the proposed merger with Community West Bancshares (CWBC) will not be realized or will not be realized within the expected time period.
• The risk that integration of the Company's operations with those of CWBC will be materially delayed or will be more costly or difficult than expected.
• The inability to complete the proposed Merger due to the failure of the Company's shareholders to adopt the Merger Agreement, or the failure of CWBC's shareholders to adopt the Merger Agreement or to approve the issuance of CWBC's common stock in connection with the Merger.
• The failure to satisfy other conditions to completion of the proposed Merger or the failure of the proposed Merger to close for any other reason.
• The challenges of integrating and retaining key employees.
• The effect of the announcement of the proposed Merger on the Company's, CWBC's or the combined company's respective customer and employee relationships and operating results.
• Adverse developments with respect to U.S. or global economic conditions and other uncertainties, including the impact of supply chain disruptions, inflationary pressures, labor shortages, and global conflict and unrest.
• The impact of natural disasters, droughts, earthquakes, floods, wildfires, terrorist attacks, health epidemics, and threats of war or actual war, including current military actions involving the Russian Federation and Ukraine and the conflict in the Middle East, which may impact the local economy and/or the condition of real estate collateral.
• Geopolitical and domestic political developments that can increase levels of political and economic unpredictability, contribute to rising energy and commodity prices, and increase the volatility of financial markets.
• Changes in general economic and financial market conditions, either nationally or locally.
• Fiscal policies of the U.S. government, including interest rate policies of the Board of Governors of the Federal Reserve System and the resulting impact on the Company's interest-rate sensitive assets and liabilities.
• Changes in banking laws or regulations and government policies that could lead to a tightening of credit and/or a requirement that the Company raise additional capital.
• Increased competition in the Company's markets, impacting the ability to execute its business plans, and continued or increasing competition from other financial institutions, credit unions, and non-bank financial services companies.
• Loss of, or inability to attract, key personnel.
• Unanticipated deterioration in the loan portfolio, credit losses, and the sufficiency of the allowance for credit losses.
• The ability to grow the loan portfolio due to constraints on concentrations of credit.
• Challenges arising from unsuccessful attempts to expand into new geographic markets, products, or services.
• The impact of technological changes and the ability to develop and maintain secure and reliable electronic systems, including failures in or breaches of the Company's operational and/or security systems or infrastructure, and the Company's ability to identify and address cyber-security risks such as data security breaches, denial of service attacks, hacking and identity theft, and other attacks on the Company's information technology systems or on third-party vendors.
• The failure to maintain effective controls over financial reporting.
• Risks related to the sufficiency of liquidity, including the quality and quantity of the Company's deposits and the ability to attract and retain deposits and other sources of funding and liquidity.
• Adverse developments in the financial services industry generally, such as the bank failures in 2023 and 2024 and any related impact on depositor behavior or investor sentiment.
• The possibility that the recorded goodwill could become impaired which may have an adverse impact on earnings and capital.
• Asset/liability matching risks.
• Changes in accounting policies or procedures.
• The Company's operations are subject to changes in the economic condition of California's Central Valley, which is largely dependent on agriculture, making it vulnerable to downturns in the agricultural industry, including declines in prices, changes in yields, and severe droughts.
• The Trump administration's potential for abrupt policy shifts, including tariffs and deregulation, may cause fluctuations in market conditions, impacting the Company's investment portfolio, lending activities, and overall financial performance, particularly in the agriculture industry.
• Elevated inflation and expectations for elevated future inflation can adversely impact economic growth, consumer and business confidence, and the Company's financial condition and results, potentially leading to monetary policy tightening.
• Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all relevant laws or regulations (e.g., PATRIOT Act, AML Act of 2020), could have serious legal, strategic, and reputational consequences, and result in material fines and sanctions.
• Non-compliance with OFAC-administered economic sanctions could lead to serious legal, strategic, and reputational consequences, and civil money penalties.
• Failure to receive at least a 'Satisfactory' rating under the Community Reinvestment Act (CRA) could inhibit the institution or its holding company from undertaking certain activities, including acquisitions.
• Cybersecurity threats and attacks, despite well-designed or implemented controls, may be insufficient or unsuccessful in protecting against all cyber incidents, potentially materially affecting the Company's business, financial condition, and results of operations.

Future Outlook

The proposed all-stock merger with Community West Bancshares is expected to be completed during the second quarter of 2026. The Company cannot predict the full effect of potential changes to Dodd-Frank Act regulations or actions by the Trump administration on future results. Current market expectations anticipate one to two interest rate cuts in 2026, contingent on inflation, unemployment, and geopolitical events. Inflationary pressures, potentially exacerbated by U.S. military operations in Iran and new tariffs, could negatively impact investment values, interest expenses, labor costs, and borrower repayment abilities. The Company continues to evaluate its strategic business plan, focusing on balance sheet management, revenue enhancement, and market share, and believes it will meet minimum capital requirements in the foreseeable future, despite potential future loan losses.

Management Comments

• During 2025, the Company focused on its strategy of serving the banking needs of its customers and retaining deposit balances in a competitive deposit rate environment.
• Management believes the allowance for credit losses is appropriate to cover risk elements in the loan portfolio.
• Management believes that the loan allowance for credit losses, totaling 1.62% of the loan portfolio at December 31, 2025, is adequate to absorb both known and inherent risks in the loan portfolio.
• Management is not currently aware of any conditions that may adversely affect the levels of losses incurred in the Company's loan portfolio.
• Management believes that, under the current regulations, both will continue to meet their minimum capital requirements in the foreseeable future.
• Management believes the election of fair value accounting for the TruPS better reflects the true economic value of the debt instrument on the consolidated balance sheet.
• Management believes that the subjective nature of these inputs, credit concerns in the capital markets, and inactivity in the trust preferred markets, limit the observability of market spreads, requiring TruPS to be classified at a Level 3 fair value.
• Management attributes the change in fair value of TruPS to market changes in the nonperformance expectations and pricing of this type of debt.

Industry Context

StockSavvy.ai notes that the proposed all-stock merger with Community West Bancshares aligns with a broader trend of consolidation in the regional banking sector, particularly in California, as institutions seek scale, efficiency, and expanded market reach in a competitive and evolving regulatory landscape. The increased provision for credit losses, especially from student loans, reflects a sector-wide challenge in managing specific loan portfolios, while the overall increase in net interest margin suggests effective asset/liability management in a fluctuating interest rate environment. The emphasis on deposit retention and managing the cost of funds is critical in the current banking climate, where deposit competition remains high.

Comparison to Industry Standards

• The Company's Tier 1 Leverage Ratios (12.56% for the Company and 12.40% for the Bank in 2025) are well above the 9.00% minimum required for 'well capitalized' status under the Community Bank Leverage Ratio framework, indicating strong capital health compared to regulatory benchmarks.
• The increase in net charge-offs to average loans from 0.28% in 2024 to 0.65% in 2025, largely driven by student loan deterioration, suggests a specific portfolio weakness that may diverge from peers with less exposure to unsecured student lending.
• The increase in the allowance for credit losses as a percentage of nonaccrual loans to 259.31% in 2025 from 131.55% in 2024 indicates a more conservative and robust provisioning against problem loans, potentially exceeding the coverage ratios of some less-prepared regional banks, especially in light of recent bank failures in 2023 and 2024.
• The net interest margin increase to 4.41% in 2025 from 4.26% in 2024 is a positive trend, but its sustainability will depend on the company's ability to manage deposit costs and loan yields in a dynamic interest rate environment, which is a common challenge across the banking industry.

Management Changes

Corporate Governance

Legal Proceedings

• The Company is not aware of any pending legal proceedings to which it is a party or of which any of its property is the subject, nor is it aware of any such proceedings known to be contemplated by governmental entities, which would have a material adverse effect on the financial condition or results of operations.

Related Party Transactions

• Loans to directors, officers, principal shareholders, and their affiliates totaled $2.519 million outstanding at December 31, 2025, with $1.875 million in undisbursed commitments. These loans are made on substantially the same terms as those with unrelated parties.
• Deposits of directors, officers, and other related parties totaled $10.3 million at December 31, 2025, with rates similar to those customarily paid to the Bank's customers.
• The Bank owns interests in three local-area limited partnerships, with a total investment of $4.3 million at December 31, 2025. Income received from these partnerships totaled $84,000 in 2025. Remaining unfunded commitments totaled $2.2 million.

Stakeholder Impact

• Shareholders face potential long-term value creation from the proposed merger with Community West Bancshares, but short-term earnings decline and increased credit losses may impact sentiment. The dividend payout ratio increased to 68.37% in 2025.
• Employees may experience integration challenges and retention risks associated with the merger. The new 2025 Equity Incentive Award Plan provides long-term incentives.
• Customers may benefit from expanded services or geographic reach post-merger, as the Company continues its focus on serving banking needs and retaining deposits.
• Creditors are supported by the Company's strong capital adequacy (well-capitalized status) and increased allowance for credit losses, though deterioration in specific loan portfolios (student loans) warrants monitoring.
• Regulators will oversee the merger approval process and ongoing compliance with evolving banking regulations (Dodd-Frank, CRA, AML, OFAC).

Next Steps

• Complete the all-stock merger with Community West Bancshares, expected in Q2 2026.
• Monitor and adapt to potential changes in Dodd-Frank Act regulations and actions by the Trump administration.
• Monitor and manage the impact of interest rate fluctuations, inflation, and geopolitical developments on financial performance.
• Continue to evaluate and enhance systems and procedures for compliance with the PATRIOT Act and AML Act of 2020.
• Monitor challenges to the CRA regulations raised by various trade groups and stakeholders.
• Continue to manage and reduce the level of problem assets, particularly within the student loan portfolio.
• Implement the new beneficial ownership reporting requirements under the Corporate Transparency Act, unless enforcement is suspended.

Key Dates

Recommendation

The proposed merger with Community West Bancshares presents a significant strategic move with potential for long-term synergies and market expansion. However, the immediate financial results show a decline in net income, ROAA, and ROAE, coupled with a notable increase in credit loss provisions and charge-offs, particularly from the student loan portfolio. While capital ratios remain strong and non-performing assets decreased, the operational challenges and integration risks associated with the merger warrant a cautious 'hold' stance until more clarity emerges on the combined entity's performance and successful integration.

Keywords

Banking, Financial Services, Bank Holding Company, Commercial Banking, Community Bank, Merger, Acquisition, Financial Performance, Net Income, Net Interest Margin, Loan Portfolio, Deposits, Credit Quality, Student Loans, Non-Performing Assets, Capital Adequacy, Regulatory Compliance, California Banking, Central Valley Economy, Risk Management, Corporate Governance, Shareholder Return, UBFO, Community West Bancshares, CWBC, SEC Filing, 10-K, Annual Report