FIRST US BANCSHARES, INC. - Quarter Report: 2011 September (Form 10-Q)

FIRST US BANCSHARES, INC. - Quarter Report: 2011 September (Form 10-Q)

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10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-14549

United Security Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		63-0843362
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

131 West Front Street Post Office Box 249 Thomasville, AL		36784
(Address of Principal Executive Offices)		(Zip Code)

(334) 636-5424

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at November 14, 2011
Common Stock, $0.01 par value		6,015,737 shares

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES


	PAGE

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Condensed Consolidated Statements of Financial Condition at September 30, 2011 (Unaudited) and December 31, 2010		4

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2011 and 2010 (Unaudited)		5

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2011 and 2010 (Unaudited)		6

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011and 2010 (Unaudited)		7

Notes to Condensed Consolidated Financial Statements (Unaudited)		8

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		29

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		33

ITEM 4. CONTROLS AND PROCEDURES		34

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS		35

ITEM 1A. RISK FACTORS		35

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		36

ITEM 6. EXHIBITS		36

Signature Page		36

FORWARD-LOOKING STATEMENTS

Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). In addition, United Security Bancshares, Inc. and its subsidiaries (the “Company” or “USBI”), through its senior management, from time to time makes forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995) concerning its expected future operations and performance and other developments. The words “estimate,” “project,” “intend,” “anticipate,” “expect,” “believe” and similar expressions are indicative of forward-looking statements. Such forward-looking statements are necessarily estimates reflecting the Company’s best judgment based upon current information and involve a number of risks and uncertainties, and various factors could cause results to differ materially from those contemplated by such forward-looking statements. Such factors could include those identified from time to time in the Company’s Securities and Exchange Commission (“SEC”) filings and other public announcements, including the risk factors described in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, as amended. With respect to the adequacy of the allowance for loan losses for the Company, these factors include, but are not limited to, the rate of growth (or lack thereof) in the economy, the relative strength and weakness in the consumer and commercial credit sectors and in the real estate markets and collateral values. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to revise forward-looking statements to reflect circumstances or events that occur after the dates on which the forward-looking statements are made, except as required by law.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in Thousands, Except Per Share Data)


	September 30, 2011			December 31, 2010
	(Unaudited)
ASSETS
Cash and Due from Banks	$	10,884		$	10,330
Interest-Bearing Deposits in Banks		34,668			3,201

Total Cash and Cash Equivalents		45,552			13,531
Investment Securities Available-for-Sale, at fair market value		140,165			135,877
Investment Securities Held-to-Maturity, at cost		1,170			1,210
Federal Home Loan Bank Stock, at cost		3,471			5,093
Loans, net of allowance for loan losses of $15,261 and $20,936, respectively		382,387			387,478
Premises and Equipment, net		9,142			16,609
Cash Surrender Value of Bank-Owned Life Insurance		12,817			12,499
Accrued Interest Receivable		3,941			5,110
Goodwill		4,098			4,098
Investment in Limited Partnerships		1,476			1,766
Other Real Estate Owned		22,993			25,632
Other Assets		11,580			12,836

Total Assets	$	638,792		$	621,739


LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	531,312		$	503,530
Accrued Interest Expense		859			2,235
Short-Term Borrowings		1,307			970
Long-Term Debt		20,000			30,000
Other Liabilities		7,852			10,481

Total Liabilities		561,330			547,216

Commitments and Contingencies (See Note 13)
Shareholders’ Equity:
Common Stock, par value $0.01 per share, 10,000,000 shares authorized; 7,317,560 shares issued; 6,010,737 and 6,011,012 shares outstanding, respectively		73			73
Surplus		9,233			9,233
Accumulated Other Comprehensive Income, net of tax		4,796			3,412
Retained Earnings		84,580			84,408
Less Treasury Stock: 1,306,823 and 1,306,548 shares at cost, respectively		(21,208	)		(21,205	)
Noncontrolling Interest		(12	)		(1,398	)


Total Shareholders’ Equity		77,462			74,523


Total Liabilities and Shareholders’ Equity	$	638,792		$	621,739

The accompanying notes are an integral part of these Condensed Consolidated Statements.

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except Per Share Data)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(Unaudited)						(Unaudited)
INTEREST INCOME:
Interest and Fees on Loans	$	9,342		$	9,754		$	27,699		$	28,600
Interest on Investment Securities		1,357			1,663			4,051			5,256

Total Interest Income		10,699			11,417			31,750			33,856

INTEREST EXPENSE:
Interest on Deposits		1,566			1,913			4,742			5,871
Interest on Borrowings		161			539			631			2,035

Total Interest Expense		1,727			2,452			5,373			7,906


NET INTEREST INCOME		8,972			8,965			26,377			25,950

PROVISION FOR LOAN LOSSES		2,262			1,386			5,176			6,811


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		6,710			7,579			21,201			19,139

NON-INTEREST INCOME:
Service and Other Charges on Deposit Accounts		731			814			2,169			2,263
Credit Life Insurance Income		236			250			576			592
Other Income		628			494			2,235			5,838

Total Non-Interest Income		1,595			1,558			4,980			8,693

NON-INTEREST EXPENSE:
Salaries and Employee Benefits		3,817			3,476			11,238			10,562
Occupancy Expense		519			493			1,462			1,421
Furniture and Equipment Expense		332			311			952			937
Impairment on Other Real Estate		2,956			2,031			3,842			2,431
Loss on Sale of Other Real Estate		328			129			836			641
Other Expense		2,641			2,446			7,849			7,456

Total Non-Interest Expense		10,593			8,886			26,179			23,448


INCOME (LOSS) BEFORE INCOME TAXES		(2,288	)		251			2			4,384

PROVISION FOR (BENEFIT FROM) INCOME TAXES		(979	)		(100	)		(411	)		1,221


NET INCOME (LOSS)	$	(1,309	)	$	351		$	413		$	3,163

Less: Net Loss Attributable to Noncontrolling Interest		—			—			(1	)		(125	)

NET INCOME (LOSS) ATTRIBUTABLE TO USBI	$	(1,309	)	$	351		$	414		$	3,288

BASIC AND DILUTED NET INCOME (LOSS) ATTRIBUTABLE TO USBI PER SHARE	$	(0.22	)	$	0.06		$	0.07		$	0.55


DIVIDENDS PER SHARE	$	0.00		$	0.11		$	0.04		$	0.33

The accompanying notes are an integral part of these Condensed Consolidated Statements.

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in Thousands)


	Three Months Ended September 30,					Nine Months Ended September 30,
	2011			2010		2011			2010
	(Unaudited)					(Unaudited)
Net income (loss) attributable to USBI	$	(1,309	)	$	351	$	414		$	3,288

Other comprehensive income:
Change in unrealized holding gains on available-for-sale securities arising during period, net of tax of $522, $86, $981 and $375, respectively		870			144		1,635			627
Reclassification adjustment for net gains realized on available-for-sale securities realized in net income (loss), net of tax of $0, $0, $150 and $95, respectively		—			—		(250	)		(158	)

Other comprehensive income		870			144		1,385			469

Comprehensive income (loss) attributable to USBI	$	(439	)	$	495	$	1,799		$	3,757

Net loss attributable to noncontrolling interest		—			—		(1	)		(125	)

Total comprehensive income (loss)	$	(439	)	$	495	$	1,798		$	3,632

The accompanying notes are an integral part of these Condensed Consolidated Statements.

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)


	Nine Months Ended September 30,
	2011			2010
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	413		$	3,163
Less net loss attributable to noncontrolling interest		(1	)		(125	)

Net income attributable to USBI	$	414		$	3,288
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		524			569
Amortization of premiums and discounts, net		433			579
Provision for loan losses		5,176			6,811
Gain on sale of securities, net		(400	)		(253	)
Impairment of other real estate owned		3,842			2,431
Loss on sale of other real estate owned		836			641
Loss on sale of fixed assets, net		—			124
Net other operating activities		1,326			972

Total adjustments		11,737			11,874

Net cash provided by operating activities		12,151			15,162


CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and prepayments of investment securities		34,125			49,561
Proceeds from sales of investment securities		6,178			12,683
Proceeds from redemption of Federal Home Loan Bank stock		1,622			408
Proceeds from the sale of other real estate		3,616			3,439
Purchase of premises and equipment, net		(450	)		(194	)
Purchase of investment securities available-for-sale		(42,367	)		(20,284	)
Net decrease in federal funds sold		—			4,545
Net change in loan portfolio		(5,739	)		(12,883	)
Net effect of deconsolidating of variable interest entity		5,010			—

Net cash provided by investing activities		1,995			37,275


CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in customer deposits		27,782			572
Dividends paid		(241	)		(1,990	)
Decrease in borrowings		(9,663	)		(41,803	)
Purchase of treasury stock		(3	)		(75	)

Net cash provided by (used in) financing activities		17,875			(43,296	)


NET INCREASE IN CASH AND CASH EQUIVALENTS		32,021			9,141


CASH AND CASH EQUIVALENTS, beginning of period		13,531			12,449


CASH AND CASH EQUIVALENTS, end of period	$	45,552		$	21,590


SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest	$	6,992		$	7,999
Income Taxes		510			660
NON-CASH TRANSACTIONS:
Other real estate acquired in settlement of loans	$	5,655		$	11,838

The accompanying notes are an integral part of these Condensed Consolidated Statements.

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. GENERAL

The accompanying unaudited interim condensed consolidated financial statements include the accounts of United Security Bancshares, Inc. and its subsidiaries (the “Company” or “USBI”). The Company is the parent holding company of First United Security Bank (the “Bank” or “FUSB”). The Bank operates a finance company, Acceptance Loan Company, Inc. (“ALC”). All significant intercompany transactions and accounts have been eliminated.

The unaudited interim condensed consolidated financial statements, in the opinion of management, reflect all adjustments necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented. Such adjustments are of a normal, recurring nature. The results of operations for any interim period are not necessarily indicative of results expected for the fiscal year ending December 31, 2011. While certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), management believes that the disclosures herein are adequate to make the information presented not misleading. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, as amended. The accounting policies followed by the Company are set forth in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, as amended. In preparing the unaudited interim condensed consolidated financial statements, management evaluated subsequent events through the date on which the unaudited interim condensed consolidated financial statements were issued.

2. RECENT ACCOUNTING PRONOUNCEMENTS

The Accounting Standards Codification (“ASC”) Topic 860 Transfers and Servicing amended previous guidance on accounting for transfers of financial assets. The amended guidance eliminates the concept of qualifying special-purpose entities and requires that these entities be evaluated for consolidation under applicable accounting guidance, and it also removes the exception that permitted sale accounting for certain mortgage securitizations when control over the transferred assets had not been surrendered. Based on this new standard, many types of transferred financial assets that would previously have been derecognized will now remain on the transferor’s financial statements. The guidance also requires enhanced disclosures about transfers of financial assets and the transferor’s continuing involvement with those assets and related risk exposure. The new standard became effective for the Company on January 1, 2010 and did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

ASC Topic 810 Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities was issued in June 2009 and amended then-existing guidance on accounting for Variable Interest Entities (“VIEs”). This guidance replaces the quantitative-based risks and rewards calculation for determining which enterprise might have a controlling financial interest in a VIE. The new, more qualitative evaluation focuses on who has the power to direct the significant economic activities of the VIE and also has the obligation to absorb losses or rights to receive benefits from the VIE. It also requires an ongoing reassessment of whether an enterprise is the primary beneficiary of a VIE and calls for certain expanded disclosures about an enterprise’s involvement with variable interest entities. The new guidance became effective for the Company on January 1, 2010 and did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In January 2010, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) (ASU No. 2010-06, Improving Disclosures about Fair Value Measurements) impacting ASC 820-10, Fair Value Measurements and Disclosures. The amendments in this update require new disclosures about significant transfers in and out of Level 1 and Level 2 fair value measurements. The amendments also require a reporting entity to provide information about activity for purchases, sales, issuances and settlements in Level 3 fair value measurements and to clarify disclosures about the level of disaggregation and disclosures about inputs and valuation techniques. This update became effective for the Company for interim and annual reporting periods beginning after December 15, 2009 and did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In April 2010, the FASB issued ASU No. 2010-18, Receivables (Topic 310): Effect of a Loan Modification When the Loan Is Part of a Pool That is Accounted for as a Single Asset, which clarifies the accounting for acquired loans that have evidence of a deterioration in credit quality since origination (referred to as “Subtopic 310-30 Loans”). Under this ASU, an entity may not apply troubled debt restructuring (“TDR”) accounting guidance to individual Subtopic 310-30 Loans that are part of a pool, even if the modification of those loans would otherwise be considered a TDR. Once a pool is established, individual loans should not be removed from the pool unless the entity sells, forecloses or writes off the loan. Entities would continue to consider whether the pool of loans is impaired if expected cash flows for the pool change. Subtopic 310-30 Loans that are accounted for individually would continue to be subject to TDR accounting guidance. A one-time election to terminate accounting for loans as a pool, which may be made on a pool-by-pool basis, was provided upon adoption of the ASU. This ASU became effective for the Company for interim and annual reporting periods beginning September 30, 2010 and did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

On July 21, 2010, the FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which requires significant new disclosures about the allowance for credit losses and the credit quality of financing receivables. The requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and lease receivables. Under this statement, allowance for credit losses and fair value are to be disclosed by portfolio segment, while credit quality information, impaired financing receivables and nonaccrual status are to be presented by class of financing receivable. Disclosure of the nature and extent, financial impact and segment information of TDR will also be required. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance. This ASU became effective for the Company for interim and annual reporting periods beginning after December 15, 2010 and did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

ASU No. 2010-28, Intangibles—Goodwill and Other (Topic 350)—When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist, such as if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. ASU 2010-28 became effective for the Company on January 1, 2011 and did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

ASU No. 2011-02, Receivables (Topic 310)—A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. ASU 2011-02 clarifies which loan modifications constitute TDRs and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a TDR, both for purposes of recording an impairment loss and for disclosure of TDRs. In evaluating whether a restructuring constitutes a TDR, a creditor must separately conclude, under the guidance clarified by ASU 2011-02, that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. ASU 2011-02 became effective for the Company on July 1, 2011 and applies retrospectively to restructurings occurring on or after January 1, 2011. Adoption of ASU 2011-02 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In April 2011, the FASB issued ASU No. 2011-03, Reconsideration of Effective Control for Repurchase Agreements. ASU No. 2011-03 affects all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendments in ASU No. 2011-03 remove from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. ASU No. 2011-03 also eliminates the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. The guidance is effective for the Company’s reporting period ending March 31, 2012. The guidance will be applied prospectively to transactions or modifications of existing transactions that occur on or after January 1, 2012. The Company is evaluating the impact that adoption will have on its consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The standards set forth in ASU 2011-04 supersede most of the accounting guidance currently found in Topic 820 of FASB’s ASC and previously known as Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. The amendments will improve comparability of fair value measurements presented and disclosed in financial statements

prepared with GAAP and International Financial Reporting Standards (“IFRS”). The amendments also clarify the application of existing fair value measurement requirements. These amendments include (1) the application of the highest and best use and valuation premise concepts, (2) measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity and (3) disclosing quantitative information about the unobservable inputs used within the Level 3 hierarchy. The guidance is effective for the Company’s interim and annual periods beginning after December 15, 2011 and will be applied prospectively. The Company is evaluating the impact that adoption will have on its consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which amends existing standards to allow an entity the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under both options, an entity is required to present each component of net income along with total net income; each component of other comprehensive income along with a total for other comprehensive income; and a total amount for comprehensive income. Any changes pursuant to the options allowed in the amendments should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The Company is evaluating its timing of adoption but will adopt it retrospectively by the effective date. The Company is evaluating the impact that adoption will have on its consolidated financial statements.

In September 2011, the FASB issued ASU No. 2011-8, Intangibles—Goodwill and Other (Topic 350) Testing Goodwill for Impairment. ASU 2011-8 clarifies the guidance for goodwill impairment testing by allowing companies to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The Company would not be required to calculate the fair value of a reporting unit unless the Company determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. ASU 2011-8 includes a number of events and circumstances for companies to consider in conducting the qualitative assessment. ASU 2011-8 is effective for interim and annual reporting periods ending on or after December 15, 2011. The Company is evaluating the impact that adoption will have on its consolidated financial statements.

3. NET INCOME (LOSS) ATTRIBUTABLE TO USBI PER SHARE

Basic net income (loss) attributable to USBI per share is computed by dividing net income (loss) attributable to USBI by the weighted average shares during the three- and nine-month periods ended September 30, 2011 and 2010. Diluted net income (loss) attributable to USBI per share for each of the three- and nine-month periods ended September 30, 2011 and 2010 is computed based on the weighted average shares outstanding during the period plus the dilutive effect of all potentially dilutive instruments outstanding. There were no outstanding potentially dilutive instruments during the periods ended September 30, 2011 or 2010, and, therefore, basic and diluted weighted average shares outstanding were the same.

The following table represents the basic and diluted net income (loss) attributable to USBI per share calculations for the three- and nine-month periods ended September 30, 2011 and 2010 (dollars in thousands, except per share data):


	Net Income (Loss) Attributable to USBI			Weighted Average Shares Outstanding		Basic and Diluted Net Income (Loss) Attributable to USBI Per Share
For the Three Months Ended:
September 30, 2011	$	(1,309	)		6,010,737	$	(0.22	)
September 30, 2010	$	351			6,011,354	$	0.06
For the Nine Months Ended:
September 30, 2011	$	414			6,010,781	$	0.07
September 30, 2010	$	3,288			6,014,914	$	0.55

4. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) consists of net income (loss) attributable to USBI and the change in the unrealized gains or losses on the Company’s available-for-sale securities portfolio arising during the period. In the calculation of comprehensive income (loss), certain reclassification adjustments are made to avoid double counting items that are displayed as part of net income (loss) for a period that also had been displayed as part of other comprehensive income (loss) in that period or earlier periods.

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company follows the provisions of ASC Topic 820 Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. ASC Topic 820 requires disclosure of fair value information about financial instruments, whether or not recognized on the face of the consolidated statements of financial condition, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Company’s financial instruments are detailed below. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather represent a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods, including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

•

Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes equity securities in banks that are publicly traded. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

•

Level 2 — Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.

•

Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

Cash, due from banks and federal funds sold: The carrying amount of cash, due from banks and federal funds sold approximates fair value.

Federal Home Loan Bank: Based on the redemption provision of the Federal Home Loan Bank (“FHLB”), the stock has no quoted market value and is carried at cost.

Securities: Fair values of securities are based on quoted market prices where available. If quoted market prices are not available, estimated fair values are based on market prices of comparable instruments.

Accrued interest: The carrying amount of accrued interest approximates fair value.

Loans, net: For variable-rate loans, fair values are based on carrying values. Fixed-rate commercial loans, other installment loans and certain real estate mortgage loans were valued using discounted cash flows. The discount rate used to determine the present value of these loans is based on interest rates currently being charged by the Company on comparable loans as to credit risk and term.

Demand and savings deposits: The fair values of demand deposits are equal to the carrying value of such deposits. Demand deposits include non-interest bearing demand deposits, savings accounts, NOW accounts and money market demand accounts.

Time deposits: The fair value of relatively short-term time deposits is equal to their carrying values. Discounted cash flows are used to value long-term time deposits. The discount rate used is based on interest rates currently being offered by the Company on comparable deposits as to amount and term.

Short-term borrowings: These borrowings may consist of federal funds purchased, securities sold under agreements to repurchase, floating rate borrowings from the FHLB and the U.S. Treasury Tax and Loan account. Due to the short-term nature of these borrowings, fair values approximate carrying values.

Long-term debt: The fair value of this debt is estimated using discounted cash flows based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements as of September 30, 2011 and December 31, 2010.

Off-balance sheet instruments: The carrying amount of commitments to extend credit and standby letters of credit approximates fair value. The carrying amount of the off-balance sheet financial instruments is based on fees currently charged to enter into such agreements.

Financial assets measured at fair value on a recurring basis at September 30, 2011 and December 31, 2010 are summarized below.


	Fair Value Measurements at September 30, 2011 Using
	Totals at September 30, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Mortgage-backed securities	$	109,180	$	—	$	109,180	$	—
Obligations of states, counties and political subdivisions		24,223		—		24,223		—
U.S. agencies		6,489		—		6,489		—
Equity securities		197		197		—		—
U.S. treasury securities		76		—		76		—


	Fair Value Measurements at December 31, 2010 Using
	Totals At December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Mortgage-backed securities	$	113,398	$	—	$	113,398	$	—
Obligations of states, counties and political subdivisions		22,186		—		22,186		—
Equity securities		213		213		—		—
U.S. treasury securities		80		—		80		—

Assets Measured at Fair Value on a Recurring Basis

The following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available-for-Sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange-traded equities. Level 2 securities include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. Level 2 fair values are obtained from quoted prices of securities with similar characteristics. Currently, all of the Company’s available-for-sale securities are considered to be Level 2 securities, except for equity securities that are considered to be Level 1 securities, which approximated $197,000 and $213,000 as of September 30, 2011 and December 31, 2010, respectively.

Financial Assets Measured at Fair Value on a Nonrecurring Basis

The Company is required to measure certain assets at fair value on a nonrecurring basis, including impaired loans. Loan impairment is reported when full payment under the loan terms is not expected. Impaired loans are carried at the present value of estimated future cash flows using the loan’s existing rate or the fair value of collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to increase, such increase is reported as a component of the provision for loan losses. Loan losses are charged against the allowance when management believes that the uncollectibility of a loan is confirmed. Loans, net of specific allowances, subject to this evaluation amounted to $15,018,378 and $19,900,745 as of September 30, 2011 and December 31, 2010, respectively. This valuation would be considered Level 3, consisting of appraisals of underlying collateral and discounted cash flow analysis.

Non-Financial Assets and Non-Financial Liabilities Measured at Fair Value

The Company has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Certain non-financial assets and non-financial liabilities measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment.

During 2011, certain foreclosed assets, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed asset. The fair value of a foreclosed asset, upon initial recognition, is estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. Foreclosed assets measured at fair value upon initial recognition totaled $4,525,734 and $7,084,265 (utilizing Level 3 valuation inputs) during 2011 and 2010, respectively. In connection with the measurement and initial recognition of the foregoing foreclosed assets, the Company has recognized charge-offs of the allowance for possible loan losses totaling approximately $2,174,378 and $4,268,544 during 2011 and 2010, respectively. Foreclosed assets totaling $6,414,940 were remeasured at fair value in 2011, resulting in impairment loss of $2,290,107.

The estimated fair value and related carrying or notional amounts of the Company’s financial instruments at September 30, 2011 and December 31, 2010 were as follows:


	September 30, 2011				December 31, 2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(Dollars in Thousands)
Assets:
Cash and cash equivalents	$	45,552	$	45,552	$	13,531	$	13,531
Investment securities available-for-sale		140,165		140,165		135,877		135,877
Investment securities held-to-maturity		1,170		1,170		1,210		1,197
Federal Home Loan Bank stock		3,471		3,471		5,093		5,093
Accrued interest receivable		3,941		3,941		5,110		5,110
Loans, net of unearned		382,387		383,627		387,478		387,594
Liabilities:
Deposits		531,312		532,640		503,530		505,521
Short-term borrowings		1,307		1,307		970		970
Long-term debt		20,000		20,496		30,000		31,362
Accrued interest payable		859		859		2,235		2,235

6. INVESTMENT SECURITIES

Details of investment securities available-for-sale and held-to-maturity at September 30, 2011 and December 31, 2010 are as follows:

		$000,000		$000,000		$000,000			$000,000
	Available-for-Sale
	September 30, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in Thousands)
Mortgage-backed securities	$	103,422	$	6,019	$	(261	)	$	109,180
Obligations of states, counties and political subdivisions		22,373		1,850		—			24,223
U.S. agencies		6,488		18		(17	)		6,489
Equity securities		132		105		(40	)		197
U.S. treasury securities		76		—		—			76

Total	$	132,491	$	7,992	$	(318	)	$	140,165

		$000,000		$000,000		$000,000		$000,000
	Held-to-Maturity
	September 30, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(Dollars in Thousands)
Obligations of states, counties and political subdivisions	$	1,170	$	—	$	—	$	1,170

		$000,000		$000,000		$000,000			$000,000
	Available-for-Sale
	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in Thousands)
Mortgage-backed securities	$	108,410	$	5,140	$	(152	)	$	113,398
Obligations of states, counties and political subdivisions		21,797		527		(138	)		22,186
Equity securities		132		116		(35	)		213
U.S. treasury securities		80		—		—			80

Total	$	130,419	$	5,783	$	(325	)	$	135,877


	Held-to-Maturity
	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in Thousands)
Obligations of states, counties and political subdivisions	$	1,210	$	—	$	(13	)	$	1,197

The scheduled maturities of investment securities available-for-sale and held-to-maturity at September 30, 2011 are presented in the following table:


	Available-for Sale				Held-to-Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(Dollars in Thousands)
Maturing within one year	$	830	$	841	$	45	$	45
Maturing after one to five years		6,271		6,620		190		190
Maturing after five to fifteen years		84,033		89,679		665		665
Maturing after fifteen years		41,225		42,828		270		270
Equity securities and Preferred Stock		132		197		—		—

Total	$	132,491	$	140,165	$	1,170	$	1,170

For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of underlying collateral. The mortgage-backed securities generally mature earlier than their weighted-average contractual maturities because of principal prepayments.

The following table reflects the Company’s investments’ gross unrealized losses and market value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2011 and December 31, 2010. Management evaluates securities for other-than-temporary impairment no less frequently than quarterly and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) whether the Company does not intend to sell these securities, and it is not more likely than not that the Company will be required to sell the securities before recovery of their amortized cost bases. At September 30, 2011, based on the aforementioned considerations, management did not record an other-than-temporary impairment on any security that was in an unrealized loss position.


	Available-for-Sale
	September 30, 2011
	Less than 12 Months					12 Months or More
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in Thousands)
Mortgage-backed securities	$	10,939	$	(220	)	$	870	$	(41	)
Obligations of states, counties and political subdivisions		3,477		(17	)		—		—
Equity securities		—		—			45		(40	)

Total	$	14,416	$	(237	)	$	915	$	(81	)


	Available-for-Sale
	December 31, 2010
	Less than 12 Months					12 Months or More
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in Thousands)
Mortgage-backed securities	$	6,463	$	(137	)	$	637	$	(15	)
Obligations of states, counties and political subdivisions		5,288		(138	)		—		—
Equity securities		—		—			40		(35	)

Total	$	11,751	$	(275	)	$	677	$	(50	)


	Held-to-Maturity
	December 31, 2010
	Less than 12 Months					12 Months or More
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in Thousands)
Obligations of states, counties and political subdivisions	$	812	$	(13	)	$	—	$	—

Investment securities available-for-sale with a carrying amount of $76.3 million and $74.1 million at September 30, 2011 and December 31, 2010, respectively, were pledged to secure public deposits and for other purposes.

The following chart represents the gross gains and losses realized on securities (dollars in thousands):


	Gross Gains		Gross Losses		Net Gains (Losses)
	(Dollars in Thousands)
Nine Months Ended:
September 30, 2011	$	400	$	—	$	400
September 30, 2010	$	253	$	—	$	253

7. INVESTMENTS IN LIMITED PARTNERSHIPS

The Company has limited partnership investments in affordable housing projects for which it provides funding as a limited partner and receives tax credits related to its investments in the projects based on its partnership share. The Company has invested in limited partnerships of affordable housing projects, both as direct investments and investments in funds that invest solely in affordable housing projects. The Company has determined that these structures meet the definition of a variable interest entity (“VIE”) under ASC Topic 810 Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. The Company consolidates one of the funds in which it is the sole limited partner. The resulting financial impact to the Company of the consolidation was a net increase to total assets of approximately $150,000 as of September 30, 2011. Unconsolidated investments in these partnerships are accounted for under the cost method as allowed under ASC Topic 325 Accounting for Tax Benefits Resulting from Investments in Affordable Housing Projects. The Company amortizes the excess of carrying value of the investment over its estimated residual value during the period in which tax credits are allocated to the investors. The Company’s maximum exposure to future loss related to these limited partnerships is limited to the $1.5 million recorded investment.

The assets and liabilities of these partnerships consist primarily of apartment complexes and related mortgages. The Bank’s carrying value approximates cost or its underlying equity in the net assets of the partnerships. Market quotations are not available for any of the aforementioned partnerships. Management has no knowledge of intervening events since the date of the partnerships’ financial statements that would have had a material effect on the Company’s consolidated financial position or results of operations.

The Bank had no remaining cash commitments to these partnerships at September 30, 2011.

Prior to June 30, 2011 the Company consolidated La Vista Foundation I, LP, which is one of the affordable housing projects in which Guilford Corporate Tax Credit Fund XVII, LTD, a consolidated VIE, owns a 9.9% limited partnership interest. The Company was deemed to be the primary beneficiary of the VIE because of a $5.0 million

mortgage loan from La Vista Foundation I, LP payable to the Bank. During the second quarter of 2011, the mortgage loan was refinanced with another financial institution. The Company reassessed whether it is the primary beneficiary of the VIE and determined that, as of June 30, 2011, it is not. Thus the June 30, 2011 financials reflect the deconsolidation of La Vista Foundation I, LP. This deconsolidation resulted in a change in noncontrolling interest of $1.4 million, which resulted in an increase in shareholders’ equity of $1.4 million. The balance sheet impact was a decrease to total assets of $2.4 million. This included a $7.4 million decrease in premises and equipment and an increase in loans of $5.0 million. There was no gain or loss and thus no income statement impact. The only indirect retained investment is the 9.9% limited partnership interest held by Guilford Corporate Tax Credit Fund XVII, LTD. The deconsolidation did not involve a related party.

8. LOANS AND ALLOWANCE FOR LOAN LOSSES

At September 30, 2011 and December 31, 2010, the composition of the loan portfolio by reporting segment and portfolio segment was as follows (dollars in thousands):


	September 30, 2011
	FUSB		ALC		Total
Real estate loans:
Construction, land development and other land loans	$	28,168	$	—	$	28,168
Secured by 1-4 family residential properties		41,971		42,084		84,055
Secured by multi-family residential properties		26,899		—		26,899
Secured by nonfarm, nonresidential properties		153,641		—		153,641
Other		830		—		830

Commercial and industrial loans		43,584		—		43,584
Consumer loans		19,836		44,697		64,533
Other loans		610		—		610

Total loans	$	315,539	$	86,781	$	402,320
Less: Unearned Interest		236		4,436		4,672
Allowance for loan losses		11,461		3,800		15,261

Net loans	$	303,842	$	78,545	$	382,387


	December 31, 2010
	FUSB		ALC		Total
Real estate loans:
Construction, land development and other land loans	$	43,839	$	—	$	43,839
Secured by 1-4 family residential properties		39,330		47,059		86,389
Secured by multi-family residential properties		27,237		—		27,237
Secured by nonfarm, nonresidential properties		146,074		—		146,074
Other		179		—		179

Commercial and industrial loans		44,393		—		44,393
Consumer loans		21,192		41,832		63,024
Other loans		1,888		—		1,888

Total loans	$	324,132	$	88,891	$	413,023
Less: Unearned Interest		351		4,258		4,609
Allowance for loan losses		17,027		3,909		20,936

Net loans	$	306,754	$	80,724	$	387,478

The Company grants commercial, real estate and installment loans to its customers. Although the Company has a diversified loan portfolio, 73.0% of the portfolio is concentrated in loans secured by real estate.

In the ordinary course of business, the Bank makes loans to certain officers and directors of the Company and the Bank, including companies with which they are associated. These loans are made on the same terms as those prevailing for comparable transactions with others. Such loans do not represent more than normal risk of collectibility, nor do they present other unfavorable features. The amounts of such related party loans and commitments at September 30, 2011 and December 31, 2010 were $3,037,316 and $2,138,530, respectively. During the period ended September 30, 2011, new loans to these parties totaled $822,200, and repayments were $234,922.

The following table details loans individually and collectively evaluated for impairment at September 30, 2011 and December 31, 2010 (dollars in thousands).


	September 30, 2011
	Loans Evaluated for Impairment
	Individually		Collectively		Total
Real estate loans:
Construction, land development and other land loans	$	20,330	$	7,838	$	28,168
Secured by 1-4 family residential properties		—		84,055		84,055
Secured by multi-family residential properties		2,884		24,015		26,899
Secured by nonfarm, nonresidential properties		19,724		133,917		153,641
Other		—		830		830
Commercial and industrial loans		1,642		41,942		43,584
Consumer loans		—		64,533		64,533
Other loans		—		610		610

Total loans	$	44,580	$	357,740	$	402,320


	December 31, 2010
	Loans Evaluated for Impairment
	Individually		Collectively		Total
Real estate loans:
Construction, land development and other land loans	$	24,339	$	19,501	$	43,840
Secured by 1-4 family residential properties		—		86,389		86,389
Secured by multi-family residential properties		3,956		23,281		27,237
Secured by nonfarm, nonresidential properties		21,035		125,039		146,074
Other		—		179		179
Commercial and industrial loans		1,642		42,750		44,392
Consumer loans		—		63,024		63,024
Other loans		—		1,888		1,888

Total loans	$	50,972	$	362,051	$	413,023

Changes in the allowance for loan losses by reporting segment and portfolio segment were as follows (dollars in thousands):


	FUSB
	September 30, 2011
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other			Total
Beginning balance	$	988	$	15,205	$	375	$	360	$	99		$	17,027
Charge-offs		245		8,165		264		510		—			9,184
Recoveries		71		44		84		142		—			341

Net charge-offs		174		8,121		180		368		—			8,843
Provision		122		2,635		134		443		(57	)		3,277

Ending balance	$	936	$	9,719	$	329	$	435	$	42		$	11,461


	ALC
	September 30, 2011
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other		Total
Beginning balance	$	—	$	—	$	2,663	$	1,246	$	—	$	3,909
Charge-offs		—		—		1,991		652		—		2,643
Recoveries		—		—		551		84		—		635

Net charge-offs		—		—		1,440		568		—		2,008
Provision		—		—		1,408		491		—		1,899

Ending balance	$	—	$	—	$	2,631	$	1,169	$	—	$	3,800


	FUSB & ALC
	September 30, 2011
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other			Total
Beginning balance	$	988	$	15,205	$	3,038	$	1,606	$	99		$	20,936
Charge-offs		245		8,165		2,255		1,162		—			11,827
Recoveries		71		44		635		226		—			976

Net charge-offs		174		8,121		1,620		936		—			10,851
Provision		122		2,635		1,542		934		(57	)		5,176

Ending balance	$	936	$	9,719	$	2,960	$	1,604	$	42		$	15,261


	FUSB
	December 31, 2010
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other		Total
Beginning balance	$	752	$	4,053	$	428	$	259	$	96	$	5,588
Charge-offs		773		4,096		405		420		1		5,695
Recoveries		82		102		118		24		1		327

Net charge-offs		691		3,994		287		396		—		5,368
Provision		927		15,146		234		497		3		16,807

Ending balance	$	988	$	15,205	$	375	$	360	$	99	$	17,027


	ALC
	December 31, 2010
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other		Total
Beginning balance	$	—	$	—	$	3,040	$	1,376	$	—	$	4,416
Charge-offs		—		—		2,458		1,189		—		3,647
Recoveries		—		—		653		164		—		817

Net charge-offs		—		—		1,805		1,025		—		2,830
Provision		—		—		1,428		895		—		2,323

Ending balance	$	—	$	—	$	2,663	$	1,246	$	—	$	3,909


	FUSB & ALC
	December 31, 2010
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other		Total
Beginning balance	$	752	$	4,053	$	3,468	$	1,635	$	96	$	10,004
Charge-offs		773		4,096		2,863		1,609		1		9,342
Recoveries		82		102		771		188		1		1,144

Net charge-offs		691		3,994		2,092		1,421		—		8,198
Provision		927		15,146		1,662		1,392		3		19,130

Ending balance	$	988	$	15,205	$	3,038	$	1,606	$	99	$	20,936


	FUSB & ALC
	September 30, 2010
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other		Total
Beginning balance	$	752	$	4,053	$	3,468	$	1,635	$	96	$	10,004
Charge-offs		683		3,993		2,169		1,029		1		7,875
Recoveries		76		16		656		97		1		846

Net charge-offs		607		3,977		1,513		932		—		7,029
Provision		850		3,877		1,102		973		9		6,811

Ending balance	$	995	$	3,953	$	3,057	$	1,676	$	105	$	9,786

Impaired loans totaled $44.6 million, $51.0 million and $33.0 million as of September 30, 2011, December 31, 2010 and September 30, 2010, respectively. There was approximately $5.3 million, $12.6 million and $1.1 million in the

allowance for loan losses specifically allocated to these impaired loans at September 30, 2011, December 31, 2010 and September 30, 2010, respectively. Impaired loans totaling $24.2 million, $18.4 million and $26.0 million for September 30, 2011, December 31, 2010 and September 30, 2010, respectively, have no measurable impairment, and no allowance for loan losses is specifically allocated to these loans. The average recorded investment in impaired loans for September 30, 2011, December 31, 2010 and September 30, 2010 was approximately $45.3 million, $37.0 million and $33.1 million, respectively.

The Company evaluates the loan allowance for loans individually and collectively. Loans evaluated on an individual basis resulted in a related allowance of $5.3 million, $12.6 million and $1.1 million at September 30, 2011, December 31, 2010 and September 30, 2010, respectively. The remaining allowances of $10.0 million, $8.3 million and $8.7 million at September 30, 2011, December 31, 2010 and September 30, 2010, respectively, were evaluated collectively.

At September 30, 2011, the carrying amount of impaired loans consisted of the following (dollars in thousands):


	September 30, 2011
	Carrying Amount		Unpaid Principal Balance		Related Allowances
Impaired loans with no related allowance recorded
Loans secured by real estate
Construction, land development and other land loans	$	6,656	$	6,656	$	—
Secured by multi-family residential properties		2,884		2,884		—
Secured by nonfarm, nonresidential properties		13,067		13,067		—
Commercial and industrial		1,642		1,642		—

Total loans with no related allowance recorded	$	24,249	$	24,429	$	—


Impaired loans with an allowance recorded
Loans secured by real estate
Construction, land development and other land loans	$	13,674	$	13,674	$	4,624
Secured by multi-family residential properties		—		—		—
Secured by nonfarm, nonresidential properties		6,657		6,657		689

Total loans with an allowance recorded	$	20,331	$	20,331	$	5,313


Total impaired loans
Loans secured by real estate
Construction, land development and other land loans	$	20,330	$	20,330	$	4,624
Secured by multi-family residential properties		2,884		2,884		—
Secured by nonfarm, nonresidential properties		19,724		19,724		689
Commercial and industrial		1,642		1,642		—

Total impaired loans	$	44,580	$	44,580	$	5,313

At December 31, 2010, the carrying amount of impaired loans consisted of the following (dollars in thousands):


	December 31, 2010
	Carrying Amount		Unpaid Principal Balance		Related Allowances
Impaired loans with no related allowance recorded
Loans secured by real estate
Construction, land development and other land loans	$	1,193	$	1,193	$	—
Secured by multi-family residential properties		2,128		2,128		—
Secured by nonfarm, nonresidential properties		13,470		13,470		—
Commercial and industrial		1,642		1,642		—

Total loans with no related allowance recorded	$	18,433	$	18,433	$	—


Impaired loans with an allowance recorded
Loans secured by real estate
Construction, land development and other land loans	$	23,146	$	23,146	$	10,470
Secured by multi-family residential properties		1,828		1,828		472
Secured by nonfarm, nonresidential properties		7,565		7,565		1,696

Total loans with an allowance recorded	$	32,539	$	32,539	$	12,638


Total impaired loans
Loans secured by real estate
Construction, land development and other land loans	$	24,339	$	24,339	$	10,470
Secured by multi-family residential properties		3,956		3,956		472
Secured by nonfarm, nonresidential properties		21,035		21,035		1,696
Commercial and industrial		1,642		1,642		—

Total impaired loans	$	50,972	$	50,972	$	12,638

The Bank has established a credit risk rating system to assess and manage the risk in the loan portfolio. It establishes a uniform framework and common language for assessing and monitoring risk in the portfolio. There have been no changes to the credit risk rating system since December 31, 2010.

The table below illustrates the carrying amount of loans by credit quality indicator at September 30, 2011 (dollars in thousands).


	FUSB
	Pass 1-4		Special Mention 5		Substandard 6		Doubtful 7		Total
Loans secured by real estate:
Construction, land development and other land loans	$	16,203	$	1,088	$	10,637	$	240	$	28,168
Secured by 1-4 family residential properties		36,081		2,348		3,498		44		41,971
Secured by multi-family residential properties		24,015		—		2,884		—		26,899
Secured by nonfarm, nonresidential properties		113,869		7,243		32,529		—		153,641
Other		830		—		—		—		830
Commercial and industrial loans		39,667		701		3,196		20		43,584
Consumer loans		18,472		694		632		38		19,836
Other loans		609		—		1		—		610

Total	$	249,746	$	12,074	$	53,377	$	342	$	315,539


	ALC
	Performing		Nonperforming		Total
Loans secured by real estate:
Secured by 1-4 family residential properties	$	39,848	$	2,236	$	42,084
Consumer loans		42,869		1,828		44,697

Total	$	82,717	$	4,064	$	86,781

The table below illustrates the carrying amount of loans by credit quality indicator at December 31, 2010 (dollars in thousands).


	FUSB
	Pass 1-4		Special Mention 5		Substandard 6		Doubtful 7		Total
Loans secured by real estate:
Construction, land development and other land loans	$	28,537	$	2,763	$	12,397	$	142	$	43,839
Secured by 1-4 family residential properties		32,712		2,444		3,959		215		39,330
Secured by multi-family residential properties		23,281		894		3,062		—		27,237
Secured by nonfarm, nonresidential properties		104,071		5,641		35,665		697		146,074
Other		179		—		—		—		179
Commercial and industrial loans		40,210		918		3,131		133		44,392
Consumer loans		19,702		727		643		121		21,193
Other loans		1,888		—		—		—		1,888

Total	$	250,580	$	13,387	$	58,857	$	1,308	$	324,132


	ALC
	Performing		Nonperforming		Total
Loans secured by real estate:
Secured by 1-4 family residential properties	$	44,485	$	2,574	$	47,059
Consumer loans		40,485		1,347		41,832

Total	$	84,970	$	3,921	$	88,891

The following table provides an aging analysis of past due loans and nonaccruing loans by class at September 30, 2011 (dollars in thousands).


	FUSB
	Past Due
	30-89 Days		Greater than 90 Days		Total		Nonaccrual		Current Loans		Total Loans
Loans secured by real estate:
Construction, land development and other land loans	$	455	$	198	$	653	$	4,600	$	22,915	$	28,168
Secured by 1-4 family residential properties		753		30		783		1,355		39,833		41,971
Secured by multi-family residential properties		—		—		—		2,884		24,015		26,899
Secured by nonfarm, nonresidential properties		1,037		102		1,139		9,320		143,182		153,641
Other		—		—		—		—		830		830
Commercial and industrial loans		705		—		705		227		42,652		43,584
Consumer loans		498		53		551		151		19,134		19,836
Other loans		—		—		—		—		610		610

Total past due loans	$	3,448	$	383	$	3,831	$	18,537	$	293,171	$	315,539


	ALC
	Past Due
	30-89 Days		Greater than 90 Days		Total		Nonaccrual		Current Loans		Total Loans
Loans secured by real estate:
Secured by 1-4 family residential properties	$	1,538	$	1,708	$	3,246	$	528	$	38,310	$	42,084
Consumer loans		1,240		992		2,232		836		41,629		44,697

Total past due loans	$	2,778	$	2,700	$	5,478	$	1,364	$	79,939	$	86,781

The following table provides an aging analysis of past due loans and nonaccruing loans by class at December 31, 2010 (dollars in thousands).


	FUSB
	Past Due
	30-89 Days		Greater than 90 Days		Total		Nonaccrual		Current Loans		Total Loans
Loans secured by real estate:
Construction, land development and other land loans	$	708	$	333	$	1,041	$	1,045	$	41,753	$	43,839
Secured by 1-4 family residential properties		1,535		127		1,662		1,701		35,967		39,330
Secured by multi-family residential properties		—		—		—		3,073		24,164		27,237
Secured by nonfarm, nonresidential properties		8,781		2,085		10,866		6,087		129,121		146,074
Other		—		—		—		—		179		179
Commercial and industrial loans		1,003		37		1,040		225		43,128		44,393
Consumer loans		900		29		929		145		20,118		21,192
Other loans		—		—		—		—		1,888		1,888

Total past due loans	$	12,927	$	2,611	$	15,538	$	12,276	$	296,318	$	324,132


	ALC
	Past Due
	30-89 Days		Greater than 90 Days		Total		Nonaccrual		Current Loans		Total Loans
Loans secured by real estate:
Secured by 1-4 family residential properties	$	1,830	$	1,989	$	3,819	$	585	$	42,655	$	47,059
Consumer loans		1,373		636		2,009		711		39,112		41,832

Total past due loans	$	3,203	$	2,625	$	5,828	$	1,296	$	81,767	$	88,891

9. SHORT-TERM BORROWINGS

Short-term borrowings consist of federal funds purchased, treasury tax and loan deposits and securities sold under repurchase agreements. Federal funds purchased generally mature within one to four days. None were outstanding at September 30, 2011 or December 31, 2010. Treasury tax and loan deposits totaled $676,724 and $778,294 at September 30, 2011 and December 31, 2010, respectively. These deposits are withdrawable on demand.

Securities sold under repurchase agreements, which are secured borrowings, generally are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities. The Company monitors the fair value of the underlying securities on a daily basis. Securities sold under repurchase agreements at September 30, 2011 and December 31, 2010 were $630,605 and $192,139, respectively.

At September 30, 2011, the Bank had $7.8 million in available federal fund lines from correspondent banks.

10. LONG-TERM DEBT

The Company uses FHLB advances as an alternative to funding sources with similar maturities such as certificates of deposit or other deposit programs. These advances generally offer more attractive rates when compared to other mid-term financing options. They are also flexible, allowing the Company to quickly obtain the necessary maturities and rates that best suit its overall asset/liability strategy. At September 30, 2011 and December 31, 2010, investment securities and mortgage loans amounting to $21,494,613 and $45,533,914, respectively, were pledged to secure these borrowings.

At September 30, 2011, the Bank had $171.3 million in available credit from the FHLB.

11. INCOME TAXES

The consolidated tax provision differed from the amount computed by applying the federal statutory income tax rate of 34.0%, as described in the following table:


	September 30, 2011			September 30, 2010
	(Dollars in Thousands)
Income tax expense at federal statutory rate	$	—		$	1,491
Increase (decrease) resulting from:
Tax-exempt interest		(305	)		(302	)
State income tax expense, net of federal income tax benefit		(34	)		191
Low income housing tax credits		—			(54	)
Other		(72	)		(105	)

Total	$	(411	)	$	1,221

12. SEGMENT REPORTING

Under ASC Topic 280 Segment Reporting, certain information is disclosed for the two reportable operating segments of the Company. The reportable segments were determined using the internal management reporting system. They are composed of the Company’s and the Bank’s significant subsidiaries. The accounting policies for each segment are the same as those described in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the period ended December 31, 2010, as amended. The segment results include certain overhead allocations and intercompany transactions that were recorded at current market prices. All intercompany transactions have been eliminated to determine the consolidated balances. The results for the two reportable segments of the Company are included in the following table:


	FUSB			ALC		All Other			Eliminations			Consolidated
	(Dollars in Thousands)
For the three months ended September 30, 2011:
Net interest income	$	5,478		$	3,479	$	15		$	—		$	8,972
Provision for loan losses		1,574			688		—			—			2,262
Total non-interest income (loss)		1,179			370		(956	)		1,002			1,595
Total non-interest expense		7,420			3,011		352			(190	)		10,593

Income (loss) before income taxes		(2,337	)		150		(1,293	)		1,192			(2,288	)
Provision for (benefit from) income taxes		(1,052	)		68		5			—			(979	)

Net income (loss)	$	(1,285	)	$	82	$	(1,298	)	$	1,192		$	(1,309	)

Less: Net loss attributable to noncontrolling interest		—			—		—			—			—

Net income (loss) attributable to USBI	$	(1,285	)	$	82	$	(1,298	)	$	1,192		$	(1,309	)


Other significant items:
Total assets	$	638,241		$	86,648	$	83,567		$	(169,664	)	$	638,792
Total investment securities		141,073			—		262			—			141,335
Total loans, net		376,030			78,545		—			(72,188	)		382,387
Goodwill		3,111			—		987			—			4,098
Investment in subsidiaries		1,345			—		77,293			(78,633	)		5
Fixed asset addition		144			6		—			—			150
Depreciation and amortization expense		140			34		—			—			174
Total interest income from external customers		5,945			4,754		—			—			10,699
Total interest income from affiliates		1,275			—		14			(1,289	)		—

For the nine months ended September 30, 2011:
Net interest income	$	16,406		$	9,931	$	40		$	—		$	26,377
Provision for loan losses		3,277			1,899		—			—			5,176
Total non-interest income		3,723			1,220		1,430			(1,393	)		4,980
Total non-interest expense		17,741			8,070		907			(539	)		26,179

Income (loss) before income taxes		(889	)		1,182		563			(854	)		2
Provision for(benefit from) income taxes		(886	)		462		13			—			(411	)

Net income (loss)		(3	)		720		550			(854	)		413

Less: Net loss attributable to noncontrolling interest		—			—		(1	)		—			(1	)

Net income (loss) attributable to USBI	$	(3	)	$	720	$	551		$	(854	)	$	414


Other significant items:
Fixed asset addition	$	295		$	155	$	—		$	—		$	450
Depreciation and amortization expense		424			100		—			—			524
Total interest income from external customers		17,970			13,778		2			—			31,750
Total interest income from affiliates		3,847			—		37			(3,884	)		—


	FUSB			ALC		All Other			Eliminations			Consolidated
	(Dollars in Thousands)
For the three months ended September 30, 2010:
Net interest income	$	5,742		$	3,206	$	17		$	—		$	8,965
Provision for loan losses		908			478		—			—			1,386
Total non-interest income		1,208			259		662			(571	)		1,558
Total non-interest expense		6,268			2,476		301			(159	)		8,886

Income (loss) before income taxes		(226	)		511		378			(412	)		251
Provision for (benefit from) income taxes		(285	)		180		5			—			(100	)

Net income	$	59		$	331	$	373		$	(412	)	$	351

Less: Net loss attributable to noncontrolling interest		—			—		—			—			—

Net income attributable to USBI	$	59		$	331	$	373		$	(412	)	$	351


Other significant items:
Total assets	$	645,450		$	91,777	$	98,097		$	(181,543	)	$	653,781
Total investment securities		154,207			—		262			—			154,469
Total loans, net		399,311			81,084		—			(83,658	)		396,737
Goodwill		3,111			—		987			—			4,098
Investment in subsidiaries		14,954			63		83,870			(98,811	)		76
Fixed asset addition		110			24		—			—			134
Depreciation and amortization expense		147			38		—			—			185
Total interest income from external customers		6,810			4,604		3			—			11,417
Total interest income from affiliates		1,397			—		14			(1,411	)		—

For the nine months ended September 30, 2010:
Net interest income	$	16,634		$	9,270	$	46		$	—		$	25,950
Provision for loan losses		5,369			1,442		—			—			6,811
Total non-interest income		4,016			4,566		4,176			(4,065	)		8,693
Total non-interest expense		15,919			7,105		905			(481	)		23,448

Income (loss) before income taxes		(638	)		5,289		3,317			(3,584	)		4,384
Provision for (benefit from) income taxes		(803	)		2,011		13			—			1,221

Net income		165			3,278		3,304			(3,584	)		3,163

Less: Net loss attributable to noncontrolling interest		—			—		(125	)		—			(125	)

Net income attributable to USBI	$	165		$	3,278	$	3,429		$	(3,584	)	$	3,288

Other significant items:
Fixed asset addition	$	169		$	25	$	—		$	—		$	194
Depreciation and amortization expense		453			116		—			—			569
Total interest income from external customers		20,306			13,543		7			—			33,856
Total interest income from affiliates		4,273			—		39			(4,312	)		—

13. GUARANTEES, COMMITMENTS AND CONTINGENCIES

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and in connection with its interest rate risk management, investing and trading activities. These financial instruments include commitments to extend credit and standby letters of credit.

The Bank’s exposure to credit loss in the event of nonperformance by the other party for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making these commitments as it does for on-balance sheet instruments. For interest rate swap transactions and commitments to purchase or sell securities for forward delivery, the contract or notional amounts do not represent exposure to credit loss. The Bank controls the credit risk of these derivative instruments through credit approvals, limits and monitoring procedures. Certain derivative contracts have credit risk for the carrying value plus the amount to replace such contracts in the event of counterparty default. All of the Bank’s financial instruments are held for risk management and not for trading purposes. During the period ended September 30, 2011, there were no credit losses associated with derivative contracts.

In the normal course of business, there are outstanding commitments and contingent liabilities, such as commitments to extend credit, letters of credit and others, that are not included in the consolidated financial statements. The financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the financial statements. A summary of these commitments and contingent liabilities is presented below:


	September 30, 2011		December 31, 2010
	(Dollars in Thousands)
Standby Letters of Credit	$	1,224	$	1,127
Commitments to Extend Credit	$	35,489	$	36,560

Standby letters of credit are contingent commitments issued by the Bank generally to guarantee the performance of a customer to a third party. The Bank has recourse against the customer for any amount that it is required to pay to a third party under a standby letter of credit. Revenues are recognized over the lives of the standby letters of credit. The potential amount of future payments that the Bank could be required to make under its standby letters of credit at September 30, 2011 was $1.2 million, representing the Bank’s total credit risk.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties.

Commitments to purchase securities for delayed delivery require the Bank to purchase a specified security at a specified price for delivery on a specified date. Similarly, commitments to sell securities for delayed delivery require the Bank to sell a specified security at a specified price for delivery on a specified date. Market risk arises from potential movements in security values and interest rates between the commitment and delivery dates. At September 30, 2011, there were no outstanding commitments to purchase and sell securities for delayed delivery.

Litigation

On September 27, 2007, Malcomb Graves Automotive, LLC (“Graves Automotive”), Malcomb Graves and Tina Graves filed a lawsuit in the Circuit Court of Shelby County, Alabama against the Company, the Bank, the Bank’s subsidiary, Acceptance Loan Company (“ALC”), and their respective directors and officers seeking an unspecified amount of compensatory and punitive damages. A former employee of ALC, Corey Mitchell, was named as a co-defendant, and ALC and the Bank filed a crossclaim against him seeking, among other relief, defense and indemnification for any damages suffered in the underlying lawsuit. The underlying complaint alleged that the defendants committed fraud in misrepresenting to Graves Automotive the amounts that Graves Automotive owed on certain loans and failing to credit Graves Automotive properly for certain loans. The defendants moved to compel arbitration, and the trial court denied the defendants’ motion. The defendants appealed this decision, and, on September 29, 2010, the Alabama Supreme Court affirmed the trial court’s denial of defendants’ motion. Following the return of the case to the active docket, on November 30, 2010, ALC and the Bank moved to dismiss the lawsuit.

In response to this motion to dismiss, on June 15, 2011, the Circuit Court dismissed all claims against the Company, the Bank and their respective directors and officers and all claims that were brought by Malcomb Graves and Tina Graves in their individual capacities. The Circuit Court also dismissed Graves Automotive’s claims for conversion and negligent supervision against ALC and ordered Graves Automotive to re-plead its fraud allegations against ALC with more particularity. On September 15, 2011, Graves Automotive filed a third amended complaint in response to the Circuit Court’s June 15, 2011 order. In its third amended complaint, Graves Automotive asserted claims against ALC for breach of contract, fraud, unjust enrichment and conversion. ALC moved to dismiss the third amended complaint on many of the same grounds as set forth in its previous motion to dismiss. On October 13, 2011, the Circuit Court dismissed Graves Automotive’s conversion claim and again ordered Graves Automotive to re-plead its fraud claims with more particularity, this time within 60 days. As a result, the only counts that remain pending are Graves Automotive’s claims against ALC for breach of contract and unjust enrichment and potentially Graves Automotive’s fraud claim against ALC, once re-pled. ALC continues to deny the allegations against it in the underlying lawsuit and intends to vigorously defend itself in this matter. Given the requirement that Graves Automotive re-plead its fraud claims and the lack of discovery conducted, it is too early to assess the likelihood of a resolution of the remaining claims in this matter or the possibility of an unfavorable outcome.

On February 17, 2011, Wayne Allen Russell, Jr. (“Russell”) filed a lawsuit in the Circuit Court of Tuscaloosa County, Alabama against the Bank and Bill Morgan, who currently serves as the Bank’s Business Development Officer. The allegations in the lawsuit relate to a mortgage on a parcel of real estate, executed by Russell in favor of the Bank as security for a loan, and certain related transactions, including foreclosure proceedings executed by the Bank. Additionally, on June 17, 2011, Mr. Russell’s wife, Rebecca Russell, in response to a lawsuit filed against Ms. Russell by the Bank, filed a counterclaim against the Bank seeking compensatory and punitive damages, asserting that she was induced to mortgage a rental dwelling owned by her, the proceeds of which were paid upon certain obligations owed to the Bank by her husband, and that the Bank had orally agreed to refinance her loan as a part of an alleged refinancing promise by the Bank with respect to the obligations of Mr. Russell. The Court granted the motion to strike the jury demand in both cases and has consolidated the matters for a non-jury trial. Once the consolidation order is entered, the Bank intends to seek the dismissal of Mr. Russell’s complaint and Ms. Russell’s counterclaim. Although the defendants intend to vigorously defend themselves in these matters, it is too early to assess the likelihood of a resolution of these matters or the possibility of an unfavorable outcome.

The Company and its subsidiaries also are parties to other litigation and intend to vigorously defend themselves in all such litigation. In the opinion of management, based on review and consultation with legal counsel, the outcome of such other litigation should not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

14. RESTATEMENT OF 2010 FORM 10-K

Between the end of the quarter ended March 31, 2011 and the filing of the first quarter 2011 Form 10-Q, as reported by the Company in a Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on May 11, 2011, subsequent to the March 14, 2011 filing of the Annual Report on Form 10-K for the year ended December 31, 2010 (the “Initial Form 10-K”), management of the Company was made aware of certain material adjustments to the current appraised values of several properties securing impaired loans held by the Bank. The adjustments were not factored into the Company’s provision for loan losses in the previously issued consolidated financial statements and accompanying footnotes as of and for the year ended December 31, 2010 (the “2010 Financials”). As a result, management and the Audit Committee of the Company’s Board of Directors determined that the Initial Form 10-K and accompanying 2010 Financials should be amended and restated. Therefore, on May 20, 2011, the Company’s management filed Amendment No. 1 to the Initial Form 10-K to reflect the amendment and restatement of the 2010 Financials.

15. RECENT DEVELOPMENTS

On October 24, 2011, the Company announced that the Board of Directors of the Company and the Bank had approved the appointment of James F. House as President and Chief Executive Officer of the Company and the Bank. Mr. House commenced employment with the Company and the Bank on November 7, 2011. Mr. House will also serve on the Boards of Directors of both the Company and the Bank, as well as the respective Board committees on which the President and Chief Executive Officer customarily serves. The Company and the Bank have entered into an Executive Employment Agreement with Mr. House, which agreement sets forth the terms of his employment (the “Employment Agreement”). The Employment Agreement was filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the SEC on November 8, 2011.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and financial information are presented to aid in an understanding of the current consolidated financial position, changes in financial position, results of operations and cash flows of United Security Bancshares, Inc. (the “Company” or “USBI”). The Company is the parent holding company of First United Security Bank (the “Bank” or “FUSB”). The Bank operates a finance company, Acceptance Loan Company, Inc. (“ALC”). The Company has no operations of any consequence other than the ownership of its subsidiaries.

The accounting principles and reporting policies of the Company, and the methods of applying these principles, conform with accounting principles generally accepted in the United States of America (“GAAP”) and with general practices within the financial services industry. Critical accounting policies relate to securities, loans, allowance for loan losses, derivatives and hedging. A description of these estimates, which significantly affect the determination of consolidated financial position, results of operations and cash flows, is set forth in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, as amended.

The emphasis of this discussion is a comparison of assets, liabilities and shareholders’ equity as of September 30, 2011 to year-end 2010, while comparing income and expense for the three- and nine-month periods ended September 30, 2011 and 2010.

All yields and ratios presented and discussed herein are based on the accrual basis and not on the tax-equivalent basis, unless otherwise indicated.

This information should be read in conjunction with the Company’s unaudited consolidated financial statements and related notes appearing elsewhere in this report and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, as amended.

COMPARING THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2011 TO THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2010

Net loss attributable to USBI during the third quarter of 2011 was $1.3 million, compared to net income attributable to USBI of $0.4 million for the same period of 2010, resulting in a decrease of basic net income (loss) attributable to USBI per share from $0.06 to $(0.22). Net income attributable to USBI decreased from $3.3 million for the nine months ended September 30, 2010 to $0.4 million for the nine months ended September 30, 2011, resulting in a decrease in basic net income attributable to USBI per share to $0.07 from $0.55. Annualized return on assets was 0.1% for the first nine months of 2011, compared to 0.7% for the same period during 2010. Average return on shareholders’ equity decreased to 0.7% for the first nine months of 2011 from 5.3% during the first nine months of 2010.

For the three-month period ended September 30, 2011, the Bank had net loss of $1.3 million, compared to net income of $59,000 for the same quarter in 2010. For the nine-month period ended September 30, 2011, the Bank had net loss of $3,000, compared to net income of $165,000 for the same period in 2010. Decreases in net income for the Bank resulted from higher provisions for loan losses as a result of higher charge-offs in both periods. These charge-offs resulted mainly from the foreclosure of several commercial real estate loans as real estate values continue to decline and market conditions continue to be depressed. The impairment loss on other real estate owned of $3.0 million realized in the third quarter of 2011 also contributed to the decrease in net income.

Net income attributable to ALC for the three-month period ending September 30, 2011 was $82,000, compared to $331,000 for the same quarter of 2010. For the nine-month period ended September 30, 2011, net income attributable to ALC was $720,000, compared to $3.3 million in 2010. In the second quarter of 2010, net income at ALC benefited from the net proceeds in the amount of $3.8 million from a settlement in connection with a fidelity insurance policy issued by The Cincinnati Insurance Company.

Interest income for the 2011 third quarter decreased $718,000, or 6.3%, compared to the third quarter of 2010. The decrease in interest income was primarily due to a decrease in interest earned on loans and investment securities resulting from an overall decrease in the average yield on loans and investment securities. For the nine months ending September 30, 2011, interest income decreased $2.1 million, or 6.2%, compared with the same period last year. This decrease in interest income was primarily due to a decrease in interest earned on loans resulting from an overall decrease in the average yield on loans and a decrease in the average yield and volume of investment

securities. Interest income at the Bank for the 2011 third quarter decreased $264,000 compared to the third quarter of 2010. For the nine months ended September 30, 2011, interest income at the Bank decreased $228,000, compared to the same period in 2010. These decreases were due to an overall decrease in the average yield and average volume of loans and investment securities. Loan demand continues to be weak due to continuing difficult economic conditions. Cash flows from loans and investment securities were reinvested at lower rates, resulting in lower interest income. Interest income at ALC increased $273,000 for the third quarter of 2011 compared to the same quarter in 2010. Interest income at ALC increased $661,000 for the nine-month period ended September 30, 2011 compared to the same period in 2010.

Interest expense for the Company for the 2011 third quarter decreased $725,000, or 29.6%, compared to the third quarter of 2010. Interest expense decreased $2.5 million, or 32.0%, to $5.4 million for the first nine months of 2011, compared to $7.9 million for the first nine months of 2010. These decreases were the result of lower interest rates paid on certificates of deposit and borrowed funds for these periods in 2011. As longer term certificates of deposit mature, they reprice at lower rates, as rates on deposits and borrowed funds remain at record lows.

Net interest income increased $7,000, or 0.1%, for the third quarter of 2011 and increased $427,000, or 1.7%, for the first nine months of 2011 compared to the same periods in 2010, respectively. The net interest margin improved from 5.74% for the nine months ended September 30, 2010 to 6.18% for the nine months ended September 30, 2011 and from 6.01% for the third quarter of 2010 to 6.19% for the third quarter of 2011. Loan and investment yields declined for the three- and nine-month periods ended September 30, 2011 compared to the same periods in 2010. The cost of funds declined due to a decline in interest rates paid on interest bearing deposits and borrowed funds. Asset yields and funds costs have stabilized, and the net interest margin is expected to remain near current levels until the Federal Reserve adjusts rates.

The provision for loan losses was $2.3 million, or 2.2% annualized of average loans, in the third quarter of 2011, compared to $1.4 million, or 1.4% annualized of average loans, in the third quarter of 2010. The provision for loan losses decreased to $5.2 million for the nine months ended September 30, 2011, compared to $6.8 million for the same period in 2010. The annualized provision as a percent of average loans was 1.7% and 2.2% for the first nine months of 2011 and 2010, respectively. Charge-offs exceeded recoveries by $10.9 million for the nine months ended September 30, 2011, an increase of approximately $3.8 million over the same period in the prior year. See “CREDIT QUALITY.” The provision for loan losses at the Bank decreased to $3.3 million for the nine months ended September 30, 2011, compared to $5.4 million for the same period in 2010. For the quarter ended September 30, 2011, the provision for loan losses at the Bank was $1.6 million, an increase from $908,000 for the same quarter of 2010. Despite continued weakness in residential and commercial real estate and high unemployment levels in our market areas, the year-to-date net charge-offs and the provisions for loan losses have declined when compared to the first nine months of 2010. The provision for loan losses at ALC increased to $1.9 million for the nine months ended September 30, 2011, compared to $1.4 million for the same period in 2010. For the quarter ended September 30, 2011, the provision for loan losses at ALC was $688,000, compared to $478,000 for the third quarter of 2010. While non-performing loans at ALC declined, net charge-offs, primarily in the consumer portfolio, increased, requiring increased provision for loan losses for both the three and nine months ended September 30, 2011 compared to the same periods in 2010. Net charge-offs were $1.9 million and $2.0 million for September 30, 2010 and September 30, 2011, respectively.

Total non-interest income for the Company increased $37,000, or 2.4%, for the third quarter of 2011 and decreased $3.7 million, or 42.7%, for the first nine months of 2011 compared to the same periods in 2010, respectively. Service charges and fees on deposit accounts decreased $83,000 for the 2011 third quarter and $94,000 for the nine months ended September 30, 2011, compared to the same periods in 2010, respectively. Credit life insurance income decreased $14,000 for the 2011 third quarter and decreased $16,000 for the nine months ended September 30, 2011, compared to the same periods in 2010, respectively. All other fees decreased $3.6 million for the nine months ended September 30, 2011 compared to the same period of 2010 as a result of the settlement with The Cincinnati Insurance Company of $4.2 million in the first quarter of 2010.

Total non-interest expense increased $1.7 million, or 19.2%, for the 2011 third quarter and increased $2.7 million, or 11.7%, for the nine months ended September 30, 2011 compared to the same periods in 2010. Salary and employee benefits increased $341,000, when comparing the third quarter of 2011 to the same period in 2010, and increased $676,000 for the nine months ended September 30, 2011 compared to the same period in 2010. For the 2011 third quarter, impairment on other real estate increased $925,000, and realized loss on the sale of other real estate increased $199,000. Legal and professional fees decreased $38,000 for the 2011 third quarter and decreased $476,000 for the nine month period ended September 30, 2011 when compared to the same periods in 2010. All other expense increased $431,000 for the 2011 third quarter and $868,000 for the nine month period ending September 30, 2011 when compared to the same periods in 2010.

Income tax benefit for the third quarter of 2011 was $979,000, compared to income tax benefit of $100,000 in the third quarter of 2010. Income tax expense declined from $1.2 million in 2010 to a benefit of $411,000 in 2011. The decrease during the first nine months of 2011 compared to 2010 resulted from lower levels of taxable income. Management estimates the effective tax rate for the Company to be approximately 30.0% of pre-tax income for the period ending December 31, 2011.

COMPARING THE SEPTEMBER 30, 2011 STATEMENTS OF FINANCIAL CONDITION TO DECEMBER 31, 2010

In comparing consolidated financial condition at September 30, 2011 to December 31, 2010, total assets increased $17.1 million to $638.8 million, while liabilities increased $14.1 million to $561.3 million. Shareholders’ equity increased $2.9 million as a result of an increase in other comprehensive income of $1.4 million, earnings in excess of dividends of $172,000 and a $1.4 million increase related to the deconsolidation of a variable interest entity (see Note 7 to the Condensed Consolidated Financial Statements).

Investment securities increased $4.3 million, or 3.2%, during the first nine months of 2011. Investments provide the Company with a stable form of liquidity while maximizing earnings yield. Loans, net of unearned income, decreased $10.8 million, from $408.4 million at December 31, 2010 to $397.6 million at September 30, 2011. Loan growth at the Bank has been flat due to the slowdown in construction and real estate development in the trade areas served by the Company and the Bank. Deposits increased $27.8 million, or 5.5%, during the first nine months of 2011. Loans, net of unearned income at ALC decreased $2.3 million, from $84.6 million at December 31, 2010 to $82.3 million at September 30, 2011. Loans at the Bank, after consolidation eliminations, decreased $8.5 million from $323.8 million at December 31, 2010 to $315.3 million at September 30, 2011.

The Company maintains the allowance for loan losses at a level deemed adequate by management to absorb possible losses from loans in the portfolio. In determining the adequacy of the allowance for loan losses, management considers numerous factors, including, but not limited to, management’s estimate of: (a) future economic conditions, (b) the financial condition and liquidity of certain loan customers and (c) collateral values of property securing certain loans. Because these factors and others involve the use of management’s estimation and judgment, the allowance for loan losses is inherently subject to adjustment at future dates. Unfavorable changes in the factors used by management to determine the adequacy of the allowance, including increased loan delinquencies and subsequent charge-offs, or the availability of new information, could require additional provisions, in excess of normal provisions, to the allowance for loan losses in future periods. There can be no assurance that loan losses in future periods will not exceed the allowance for loan losses or that additions to the allowances will not be required.

At September 30, 2011, the allowance for loan losses was $15.3 million, or 3.8% of loans net of unearned income, compared to $9.8 million, or 2.4% of loans net of unearned income, at September 30, 2010, and $20.9 million, or 5.1% of loans net of unearned income, at December 31, 2010. The coverage ratio of the allowance for loan losses to non-performing assets decreased to 33.2% at September 30, 2011, compared to 47.1% at December 31, 2010. At September 30, 2011, loans on non-accrual increased $6.3 million, accruing loans past due 90 days or more decreased $2.2 million and real estate acquired in settlement of loans decreased $2.6 million, each as compared to December 31, 2010.

Net charge-offs as of the quarter ended September 30, 2011 were $10.9 million, or 3.5% of average loans on an annualized basis, an increase of 54.4%, or $3.8 million, from the charge-offs of $7.0 million, or 2.3% of average loans on an annualized basis, reported a year earlier. The provision for loan losses for the first nine months of 2011 was $5.2 million, compared to $6.8 million in the first nine months of 2010.

Non-performing assets were as follows (dollars in thousands):


	Consolidated
	September 30, 2011			December 31, 2010			September 30, 2010
Loans Accounted for on a Non-Accrual Basis	$	19,901		$	13,572		$	9,286
Accruing Loans Past Due 90 Days or More		3,083			5,237			5,020
Real Estate Acquired in Settlement of Loans		22,993			25,632			27,992

Total	$	45,977		$	44,441		$	42,298
Non-Performing Assets as a Percentage of Net Loans and Other Real Estate		10.93	%		10.24	%		9.73	%


	FUSB
	September 30, 2011			December 31, 2010			September 30, 2010
Loans Accounted for on a Non-Accrual Basis	$	18,537		$	12,276		$	7,613
Accruing Loans Past Due 90 Days or More		383			2,612			2,450
Real Estate Acquired in Settlement of Loans		17,688			19,002			21,378

Total	$	36,608		$	33,890		$	31,441
Non-Performing Assets as a Percentage of Net Loans and Other Real Estate		10.99	%		9.89	%		9.17	%


	ALC
	September 30, 2011			December 31, 2010			September 30, 2010
Loans Accounted for on a Non-Accrual Basis	$	1,364		$	1,296		$	1,673
Accruing Loans Past Due 90 Days or More		2,700			2,625			2,570
Real Estate Acquired in Settlement of Loans		5,305			6,630			6,614

Total	$	9,369		$	10,551		$	10,857
Non-Performing Assets as a Percentage of Net Loans and Other Real Estate		10.69	%		11.56	%		11.84	%

Non-performing assets as a percentage of net loans and other real estate was 10.9% at September 30, 2011 and 10.2% at December 31, 2010. Loans on non-accrual status increased $6.3 million, accruing loans past due 90 days or more decreased $2.2 million and real estate acquired in settlement of loans decreased $2.6 million from December 31, 2010. The substantial increase in non-accrual loans resulted from placing twelve commercial real estate loans totaling $19.7 million on non-accrual status in the first nine months of 2011. As these loans have progressed through the collection process, $4.7 million has been charged-off, $1.7 million has been reclassified as other real estate acquired in settlement of loans and $3.2 million has been restored to accruing status. The Company forecasts that adverse economic conditions and the severely depressed real estate market will continue to put downward pressure on real estate collateral values and will impact our ability to reduce non-performing assets. Other real estate acquired as of September 30, 2011 consisted of seventeen residential properties totaling $209,848 and sixty-six commercial properties totaling $17.5 million at the Bank, and one hundred thirty-three residential properties totaling $4.8 million and eighteen commercial properties totaling $552,924 at ALC. Every effort is made to dispose of these properties in a timely manner, but these efforts continue to be hampered by poor economic conditions. Real estate values continue to decline, and the real estate market remains severely depressed in all of our market areas. Management reviews these non-performing assets and reports to the Board of Directors of the Bank monthly. Loans past due 90 days or more and still accruing are reviewed by management and are allowed to continue accruing only when management believes that underlying collateral values and the financial strength of the borrowers are sufficient to protect the Bank from loss. If at any time management determines that there may be a loss of interest or principal, these loans will be changed to non-accrual status and their asset values downgraded.

LIQUIDITY AND CAPITAL RESOURCES

The Bank’s primary sources of funds are customer deposits, FHLB advances, repayments of loan principal and interest from loans and investments. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition, making them less predictable. The Bank manages the pricing of its deposits to maintain a desired deposit balance. In addition, the Bank invests in short-term interest-earning assets, which provide liquidity to meet lending requirements.

The Bank currently has up to $171.3 million in borrowing capacity from the FHLB and $7.8 million in established federal funds lines.

The Bank is required to maintain certain levels of regulatory capital. At September 30, 2011 and December 31, 2010, the Company and the Bank were in compliance with all regulatory capital requirements.

Management is not aware of any condition that currently exists that would have an adverse effect on the liquidity, capital resources or operation of the Company. However, the Company is a defendant in certain claims and legal actions arising in the ordinary course of business. See Note 13 to Item 1, “Guarantees, Commitments and Contingencies,” for a discussion of such claims and legal actions.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary functions of asset and liability management are to (1) assure adequate liquidity, (2) maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities, (3) maximize the profit of the Bank and (4) reduce risks to the Bank’s capital. Liquidity management involves the ability to meet day-to-day cash flow requirements of the Bank’s customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs. Without proper liquidity management, the Bank would not be able to perform a primary function under its role as a financial intermediary and would not be able to meet the needs of the communities that it serves. Interest rate risk management focuses on the maturity structure and repricing characteristics of its assets and liabilities when changes occur in market interest rates. Effective interest rate sensitivity management ensures that both assets and liabilities respond to changes in interest rates within an acceptable time frame, thereby minimizing the effect of such interest rate movements on short- and long-term net interest margin and net interest income.

The asset portion of the balance sheet provides liquidity primarily from two sources. These are principal payments and maturities of loans and maturities and principal payments from the investment portfolio. Other short-term investments such as federal funds sold are additional sources of liquidity. Loans maturing or repricing in one year or less amounted to $195.0 million at December 31, 2010 and $144.9 million at September 30, 2011.

Investment securities forecasted to mature or reprice over the next twelve months ending September 30, 2012 are estimated to be $8.6 million, or approximately 6.09% of the investment portfolio, as of September 30, 2011. For comparison, principal payments on investment securities totaled $30.8 million, or 21.8% of the investment portfolio, at September 30, 2011.

Although the majority of the securities portfolio has legal final maturities longer than 10 years, a substantial percentage of the portfolio provides monthly principal and interest payments and consists of securities that are readily marketable and easily convertible into cash on short notice. As of September 30, 2011, the bond portfolio had an expected average maturity of 3.9 years, and approximately 70.1% of the $141.3 million in bonds were expected to be repaid within 5 years. However, management does not rely solely upon the investment portfolio to generate cash flows to fund loans, capital expenditures, dividends, debt repayment and other cash requirements. Instead, these activities are funded by cash flows from loan payments, as well as increases in deposits and short-term borrowings.

The liability portion of the balance sheet provides liquidity through interest bearing and non-interest bearing deposit accounts. Federal funds purchased, FHLB advances, securities sold under agreements to repurchase and short-term and long-term borrowings are additional sources of liquidity. Liquidity management involves the continual monitoring of the sources and uses of funds to maintain an acceptable cash position. Long-term liquidity management focuses on considerations related to the total balance sheet structure.

The Bank, at September 30, 2011, had long-term debt and short-term borrowings that, on average, represented 4.1% of total liabilities and equity, compared to 8.3% at year-end 2010.

Interest rate sensitivity is a function of the repricing characteristics of the portfolio of assets and liabilities. These repricing characteristics are the time frames during which the interest bearing assets and liabilities are subject to changes in interest rates, either at replacement or maturity, during the life of the instruments. Measuring interest rate sensitivity is a function of the difference in the volume of assets and the volume of liabilities that are subject to repricing in future time periods. These differences are known as interest sensitivity gaps and are usually calculated for segments of time and on a cumulative basis.

Measuring Interest Rate Sensitivity: Gap analysis is a technique used to measure interest rate sensitivity at a particular point in time. Assets and liabilities are placed in gap intervals based on their repricing dates. Assets and liabilities for which no specific repricing dates exist are placed in gap intervals based on management’s judgment concerning their most likely repricing behaviors.

A net gap for each time period is calculated by subtracting the liabilities repricing in that interval from the assets repricing. A positive gap – more assets repricing than liabilities – will benefit net interest income if rates are rising and will detract from net interest income in a falling rate environment. Conversely, a negative gap – more liabilities repricing than assets – will benefit net interest income in a declining interest rate environment and will detract from net interest income in a rising interest rate environment.

Gap analysis is the simplest representation of the Bank’s interest rate sensitivity. However, it cannot reveal the impact of factors such as administered rates, pricing strategies on consumer and business deposits, changes in balance sheet mix or the effect of various options embedded in balance sheet instruments, such as refinancing rates within the loan and bond portfolios.

Simple Gap analysis is no longer considered to be as accurate a tool for measuring interest rate risk as pro forma income simulation because it does not make an allowance for how much an item reprices as interest rates change, only that it is possible that the item could reprice. Accordingly, the Bank does not rely on gap analysis but instead measures changes in net interest income and net interest margin through income simulation over +/- 1%, 2% and 3% interest rate shocks. Our estimates have consistently shown that the Bank has very limited, if any, net interest margin and net interest income risk to rising interest rates.

On a monthly basis, the Bank simulates how changes in short- and long-term interest rates will impact future profitability, as reflected by changes in the Bank’s net interest margin.

Also on a monthly basis, the Bank calculates how changes in interest rates would impact the market value of its assets and liabilities, as well as changes in long-term profitability. The process is similar to assessing short-term risk but emphasizes and is measured over a five-year time period, which allows for a more comprehensive assessment of longer-term repricing and cash flow imbalances that may not be captured by short-term net interest margin simulation. The results of these calculations are representative of long-term interest rate risk, both in terms of changes in the present value of the Bank’s assets and liabilities, as well as long-term changes in core profitability.

ITEM 4.

CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures designed to provide reasonable assurance of achieving the objective that information in its reports filed with the SEC under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified and pursuant to the requirements of the SEC’s rules and forms. Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) include controls and procedures designed to ensure that information required to be disclosed by the Company in the reports filed or submitted under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met.

As of September 30, 2011, the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed in the Company’s periodic filings with the SEC is recorded, processed, summarized and reported within the time periods specified.

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

See Note 13 to Item 1, “Guarantees, Commitments and Contingencies,” for information regarding certain litigation matters relating to the Company and its subsidiaries.

The Company and its subsidiaries also are parties to litigation other than as described in Note 13 to Item 1, and the Company intends to vigorously defend itself in all such litigation. In the opinion of the Company, based on review and consultation with legal counsel, the outcome of such litigation should not have a material adverse effect on the Company’s consolidated financial statements or results of operations.

ITEM 1A.

RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2010, as amended, that could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K, as amended, are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

The following update to our risk factors should be read in conjunction with the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2010, as amended:

We are dependent on our management and other key personnel. If we do not effectively manage the transition associated with our new President and Chief Executive Officer, there could be an adverse impact on our business, financial condition and results of operations.

Our future success depends to a significant degree on the skills, experience and continued service of our executives and other and key personnel and the identification of suitable successors for them. Changes in key leadership positions within the Company and the Bank can be disruptive, and, if we lose the services of our executives or other key personnel, or if we are unable to identify suitable successors for them, our business, financial condition and results of operations could be materially adversely affected, and we could have difficulty in implementing our business strategy.

On October 24, 2011, the Company announced that the Board of Directors of the Company and the Bank had approved the appointment of James F. House as President and Chief Executive Officer of the Company and the Bank. Mr. House commenced employment with the Company and the Bank on November 7, 2011. There can be no assurance that we will be able to implement a smooth transition to our new President and Chief Executive Officer or that the transition of these responsibilities will be successful. It is important to our success that Mr. House quickly adapts and excels in his new management role. If he is unable to do so, and, as a result, he is unable to provide effective guidance and leadership, our business, financial condition and results of operations could be materially adversely affected.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth purchases made by or on behalf of the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, of shares of the Company’s common stock.

Issuer Purchases of Equity Securities


Period	Total Number of Shares Purchased			Average Price Paid per Share			Total Number of Shares Purchased as Part of Publicly Announced Programs⁽¹⁾		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Programs⁽¹⁾
July 1 – July 31		0		$	0.00			0		242,303
August 1 – August 31		0		$	0.00			0		242,303
September 1 – September 30		10,250	⁽²⁾	$	5.05	⁽²⁾		0		242,303

Total		10,250		$	5.05			0		242,303

(1)

On December 17, 2010, the Board of Directors of the Company extended the share repurchase program previously approved by the Board on January 19, 2006. Under the repurchase program, the Company is authorized to repurchase up to 642,785 shares of common stock before December 31, 2011, the expiration date of the extended repurchase program. No shares were purchased under the program during the quarter ended September 30, 2011.

(2)	10,250 shares were purchased in open-market transactions by an independent trustee for the United Security Bancshares, Inc. Employee Stock Ownership Plan (With 401(k) Provisions).

ITEM 6.

EXHIBITS

The exhibits listed in the Index to Exhibits below are filed herewith and are incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


UNITED SECURITY BANCSHARES, INC.

DATE: November 14, 2011

BY:		/s/ Robert Steen
		Robert Steen
		Its Vice President, Treasurer and Assistant Secretary, Chief Financial Officer and Principal Accounting Officer (Duly Authorized Officer and Principal Financial Officer)

INDEX TO EXHIBITS


Exhibit No.		Description

3.1		Certificate of Incorporation of United Security Bancshares, Inc., incorporated herein by reference to the Exhibits to Form 10-Q for the quarter ended September 30, 1999.

3.2		Amended and Restated Bylaws of United Security Bancshares, Inc., incorporated herein by reference to Exhibit 3(ii) to the Current Report on Form 8-K filed August 29, 2007.

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.

32		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		Interactive Data File

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Smaller reporting company