FIRST US BANCSHARES, INC. - Quarter Report: 2012 September (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 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, 2012

¨	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 13, 2012
Common Stock, $0.01 par value		6,023,622 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, 2012 (Unaudited) and December 31, 2011			4

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2012 and 2011 (Unaudited)			5

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2012 and 2011 (Unaudited)			6

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 (Unaudited)			7

Notes to Condensed Consolidated Financial Statements (Unaudited)			8

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		35

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		39

ITEM 4.	CONTROLS AND PROCEDURES		41

	PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS		41

ITEM 1A.	RISK FACTORS		41

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		42

ITEM 6.	EXHIBITS		42

Signature Page			42

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 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, 2011. Specifically, with respect to any statements regarding the status of certain loan relationships or the borrowers’ ability to pay or timing of payment, these factors include, but are not limited to, general economic, market and other conditions that could affect the ability of borrowers to pay or timing of payment. Additionally, 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,			December 31,
	2012			2011
	(Unaudited)
ASSETS
Cash and Due from Banks	$	9,800		$	9,491
Interest-Bearing Deposits in Banks		52,035			43,306

Total Cash and Cash Equivalents		61,835			52,797
Federal Funds Sold		5,000			—
Investment Securities Available-for-Sale, at fair market value		102,572			122,170
Investment Securities Held-to-Maturity, at cost		12,191			1,170
Federal Home Loan Bank Stock, at cost		936			2,861
Loans, net of allowance for loan losses of $19,886 and $22,267, respectively		344,733			381,085
Premises and Equipment, net		8,949			9,050
Cash Surrender Value of Bank-Owned Life Insurance		13,209			12,922
Accrued Interest Receivable		3,308			3,958
Investment in Limited Partnerships		854			1,456
Other Real Estate Owned		13,608			16,774
Other Assets		17,127			17,567

Total Assets	$	584,322		$	621,810

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	506,628		$	527,073
Accrued Interest Expense		523			790
Short-Term Borrowings		1,332			356
Long-Term Debt		—			20,000
Other Liabilities		7,745			7,384

Total Liabilities		516,228			555,603

Commitments and Contingencies (See Note 14)
Shareholders’ Equity:
Common Stock, par value $0.01 per share, 10,000,000 shares authorized; 7,327,560 shares issued; 6,023,622 and 6,015,737 shares outstanding, respectively		73			73
Surplus		9,284			9,259
Accumulated Other Comprehensive Income, net of tax		3,470			3,004
Retained Earnings		76,403			75,091
Less Treasury Stock: 1,303,938 and 1,306,823 shares at cost, respectively		(21,123	)		(21,208	)
Noncontrolling Interest		(13	)		(12	)

Total Shareholders’ Equity		68,094			66,207

Total Liabilities and Shareholders’ Equity	$	584,322		$	621,810

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					Nine Months Ended
	September 30,					September 30,
	2012		2011			2012		2011
	(Unaudited)					(Unaudited)
INTEREST INCOME:
Interest and Fees on Loans	$	8,488	$	9,342		$	26,454	$	27,699
Interest on Investment Securities		840		1,357			2,632		4,051

Total Interest Income		9,328		10,699			29,086		31,750
INTEREST EXPENSE:
Interest on Deposits		1,027		1,566			3,549		4,742
Interest on Borrowings		4		161			119		631

Total Interest Expense		1,031		1,727			3,668		5,373

NET INTEREST INCOME		8,297		8,972			25,418		26,377
PROVISION FOR LOAN LOSSES		492		2,262			3,175		5,176

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		7,805		6,710			22,243		21,201
NON-INTEREST INCOME:
Service and Other Charges on Deposit Accounts		639		731			1,870		2,169
Credit Life Insurance Income		272		236			613		576
Other Income		542		628			1,575		2,235

Total Non-Interest Income		1,453		1,595			4,058		4,980
NON-INTEREST EXPENSE:
Salaries and Employee Benefits		3,433		3,817			10,912		11,238
Occupancy Expense		488		519			1,416		1,462
Furniture and Equipment Expense		317		332			970		952
Impairment on Other Real Estate		377		2,956			3,241		3,842
Loss on Sale of Other Real Estate		572		328			1,032		836
Other Expense		2,375		2,641			7,261		7,849

Total Non-Interest Expense		7,562		10,593			24,832		26,179

INCOME (LOSS) BEFORE INCOME TAXES		1,696		(2,288	)		1,469		2
PROVISION FOR (BENEFIT FROM) INCOME TAXES		517		(979	)		157		(411	)

NET INCOME (LOSS)	$	1,179	$	(1,309	)	$	1,312	$	413

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

NET INCOME (LOSS) ATTRIBUTABLE TO USBI	$	1,179	$	(1,309	)	$	1,312	$	414

BASIC AND DILUTED NET INCOME (LOSS) ATTRIBUTABLE TO USBI PER SHARE	$	0.20	$	(0.22	)	$	0.22	$	0.07

DIVIDENDS PER SHARE	$	0.00	$	0.00		$	0.00	$	0.04

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					Nine Months Ended
	September 30,					September 30,
	2012		2011			2012		2011
	(Unaudited)					(Unaudited)
Net income (loss) attributable to USBI	$	1,179	$	(1,309	)	$	1,312	$	414

Other comprehensive income:
Change in unrealized holding gains on available-for- sale securities arising during period, net of tax of $74, $522, $279 and $981, respectively		123		870			465		1,635
Reclassification adjustment for net gains realized on available-for-sale securities realized in net income (loss), net of tax of $0, $0, $0 and $150, respectively		—		—			—		(250	)

Other comprehensive income		123		870			465		1,385

Comprehensive income (loss) attributable to USBI	$	1,302	$	(439	)	$	1,777	$	1,799

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

Total comprehensive income (loss)	$	1,302	$	(439	)	$	1,777	$	1,798

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,
	2012			2011
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,312		$	413
Less net loss attributable to noncontrolling interest		—			(1	)

Net income attributable to USBI	$	1,312		$	414
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		524			524
Amortization of premiums and discounts, net		890			433
Provision for loan losses		3,175			5,176
Gain on sale of securities, net		—			(400	)
Impairment of OREO		3,241			3,842
Loss on sale of OREO		1,032			836
Net other operating activities		1,217			1,326

Total adjustments		10,079			11,737

Net cash provided by operating activities		11,391			12,151

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and prepayments of investment securities, available-for- sale		35,745			34,125
Proceeds from maturities and prepayments of investment securities, held-to-maturity		1,170			—
Proceeds from sales of investment securities		—			6,178
Proceeds from redemption of Federal Home Loan Bank stock		1,925			1,622
Proceeds from the sale of other real estate		4,912			3,616
Purchase of premises and equipment, net		(420	)		(450	)
Purchase of investment securities available-for-sale		(16,296	)		(42,367	)
Purchase of investment securities held-to-maturity		(12,189	)		—
Net increase in federal funds sold		(5,000	)		—
Net change in loan portfolio		27,158			(5,739	)
Net effect of deconsolidating of variable interest entity		—			5,010

Net cash provided by investing activities		37,005			1,995

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in customer deposits		(20,446	)		27,782
Exercise of stock options		26			—
Dividends paid		—			(241	)
Decrease in borrowings		(19,023	)		(9,663	)
Purchase of treasury stock		—			(3	)
Reissuance of treasury stock		85			—

Net cash (used in) provided by financing activities		(39,358	)		17,875

NET INCREASE IN CASH AND CASH EQUIVALENTS		9,038			32,021

CASH AND CASH EQUIVALENTS, beginning of period		52,797			13,531

CASH AND CASH EQUIVALENTS, end of period	$	61,835		$	45,552

SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest	$	3,935		$	6,992
Income Taxes		90			510
NON-CASH TRANSACTIONS:
Other real estate acquired in settlement of loans	$	6,019		$	5,656

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, 2012. While certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“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, 2011. 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, 2011. 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

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 Accounting Standards Codification (“ASC”), which was 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. This ASU became effective for the Company’s interim and annual periods beginning after December 15, 2011 and did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. See Note 5 for the newly-required disclosures.

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. This guidance is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2011. The Company adopted this new guidance with first quarter 2012 financial reporting. In January 2012, the FASB issued accounting guidance that indefinitely defers the effective date of certain provisions concerning the presentation of comprehensive income. The guidance indefinitely defers the requirement to present reclassification adjustments by component in both the statement where net income is presented and the statement where other comprehensive income is presented. See the condensed consolidated statements of comprehensive income for further details.

In December 2011, the FASB issued ASU 2011-11 Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The amendments in this ASU affect all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either ASC 210-20-45 or ASC 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement. The requirements amend the disclosure requirements on offsetting in ASC 210-20-50. This information will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this ASU. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. 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 outstanding during the three- and nine-month periods ended September 30, 2012 and 2011. Diluted net income (loss) attributable to USBI per share for each of the three- and nine-month periods ended September 30, 2012 and 2011 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, 2012 or 2011, 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, 2012 and 2011 (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, 2012	$	1,179			6,023,124	$	0.20
September 30, 2011	$	(1,309	)		6,010,737	$	(0.22	)

For the Nine Months Ended:
September 30, 2012	$	1,312			6,022,648	$	0.22
September 30, 2011	$	414			6,010,781	$	0.07

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 expands 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 willing 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 values of relatively short-term time deposits are 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 and the floating rate borrowings from the FHLB. 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, 2012 and December 31, 2011.

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 and is not significant.

Financial assets measured at fair value on a recurring basis and non-recurring basis at September 30, 2012 and December 31, 2011 are summarized below.


	Fair Value Measurements at September 30, 2012 Using
	Totals at September 30, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Recurring fair value measurements
Mortgage-backed securities	$	87,443	$	—	$	87,443	$	—
Obligations of states, counties and political subdivisions		15,044		—		15,044		—
U.S. treasury securities		75		—		75		—
Equity securities		10		10		—		—
Nonrecurring fair value measurements
Impaired loans		20,101		—		—		20,101
Foreclosed property and other real estate		10,360		—		—		10,360


	Fair Value Measurements at December 31, 2011 Using
	Totals At December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Recurring fair value measurements
Mortgage-backed securities	$	99,691	$	—	$	99,691	$	—
Obligations of states, counties and political subdivisions		15,885		—		15,885		—
Obligations of U.S. government sponsored agencies		6,509		—		6,509
U.S. treasury securities		75		—		75		—
Equity securities		10		10		—		—
Nonrecurring fair value measurements
Impaired loans		16,246		—		—		16,246
Foreclosed property and other real estate		19,274		—		—		19,274

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. In certain cases, where Level 1 or

Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Currently, all of the Company’s available-for-sale securities are considered to be Level 2 securities, except for $10,341 and $10,284 for September 30, 2012 and December 31, 2011, respectively, in equity securities that are considered to be Level 1 securities.

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. When an impaired loan is determined to be collateral dependent, the fair value is determined through the utilization of a third-party appraisal. It is the policy of the Company to update appraisals every 18-24 months. The types of collateral influence the frequency of obtaining updated appraisals. Management knows the market trends of collateral values well and monitors trends in sales and valuations in all of the various categories of collateral. These trends influence how often new appraisals are obtained within the 18-24 month timeframe. For example, a significant number of currently impaired loans are collateralized by residential subdivision lots. The values of this type of collateral have been volatile in recent years, and, therefore, appraisals are generally updated at the lower end of the timeframe (i.e., closer to 18 months), while timberland appraisals would be updated closer to the end of the timeframe (i.e., closer to 24 months), as these values have remained more stable. Any observed trend indicating reduced valuations would require updated appraisals. Based on experience, current appraisals are discounted 9% for estimated costs associated with foreclosures and costs to sell. If a loan is evaluated for impairment under ASC Topic 310-10-35 Accounting by Creditors for Impairment of a Loan, and the appraisal is outdated, a new appraisal is ordered. If the new appraisal is not received in sufficient time to assess any required impairment to meet SEC filing deadlines or other financial reporting obligations, the old appraisal may be discounted to reflect values observed in similar properties. These discounts have ranged from 20% to 30%. These discounts are based on the most recent valuation/appraisal information available related to that particular type of loan/collateral. After the new appraisal is obtained, the analysis is updated to reflect the new valuation. 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 $20,101,082 and $16,245,779 as of September 30, 2012 and December 31, 2011, 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 2012, 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 $794,190 and $5,115,994 (utilizing Level 3 valuation inputs) for the periods ended September 30, 2012 and December 31, 2011, 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 $328,706 for the nine months ended September 30, 2012 and $2,514,983 for the year ended December 31, 2011. Foreclosed assets totaling $9,566,088 for the nine months ended September 30, 2012 and $14,157,679 for the year ended December 31, 2011 were remeasured at fair value, resulting in impairment loss of $3,241,252 for the nine months ended September 30, 2012 and $6,389,774 for the year ended December 31, 2011.

The following table presents detailed information regarding assets and liabilities measured at fair value using significant unobservable inputs (Level 3) as of September 30, 2012. The table includes the valuation techniques and the significant unobservable inputs utilized. The range of each unobservable input, as well as the weighted average within the range utilized at September 30, 2012, are both included. Following the table is a description of the valuation technique and the sensitivity of the technique to changes in the significant unobservable input.


	Level 3 Significant Unobservable Input Assumptions
	Fair Value September 30, 2012		Valuation Technique	Unobservable Input	Quantitative Range of Unobservable Inputs (Weighted- Average)
	(Dollars in Thousands)
Nonrecurring fair value measurements:
Impaired loans	$	20,101	Multiple data points, including discount to appraised value of collateral based on recent market activity	Appraisal compatibility adjustment (discount)	9% - 30% (11.7%)
Foreclosed property and other real estate	$	10,360	Discount to appraised value of property based on recent market activity for sales of similar properties	Appraisal compatibility adjustment (discount)	9% - 10% (9.4%)

NON-RECURRING FAIR VALUE MEASUREMENTS USING SIGNIFICANT UNOBSERVABLE INPUTS

Impaired loans

Impaired loans are valued based on multiple data points indicating the fair value for each loan. The primary data point for non-performing loans is the appraisal value of the underlying collateral to which a discount is applied. Management establishes this discount or comparability adjustment based on recent sales of similar property types. As liquidity in the market increases or decreases, the comparability adjustment and the resulting asset valuation are impacted.

Foreclosed property and other real estate

Foreclosed property and other real estate under contract for sale are valued based on contract price. If no sales contract is pending for a specific property, management establishes a comparability adjustment to the appraised value based on historical activity considering proceeds for properties sold versus the corresponding appraised value. Increases or decreases in realization for properties sold impact the comparability adjustment for similar assets remaining on the balance sheet.

The estimated fair value and related carrying or notional amounts, as well as the level within the fair value hierarchy, of the Company’s financial instruments at September 30, 2012 were as follows:


	September 30, 2012
	Carrying		Estimated
	Amount		Fair Value		Level 1		Level 2		Level 3
	(Dollars in Thousands)
Assets:
Cash and cash equivalents	$	61,835	$	61,835	$	61,835	$	—	$	—
Investment securities available-for-sale		102,572		102,572		10		102,562		—
Investment securities held-to-maturity		12,191		12,179		—		12,179		—
Federal funds sold		5,000		5,000		5,000		—		—
Federal Home Loan Bank stock		936		936		936		—		—
Loans, net of allowance for loan losses		344,733		352,409		—		—		352,409
Liabilities:
Deposits		506,628		508,349		—		508,349		—
Short-term borrowings		1,332		1,332		—		1,332		—

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


	December 31, 2011
	Carrying Amount		Estimated Fair Value
	(Dollars in Thousands)
Assets:
Cash and cash equivalents	$	52,797	$	52,797
Investment securities available-for-sale		122,170		122,170
Investment securities held-to-maturity		1,170		1,170
Federal Home Loan Bank stock		2,861		2,861
Loans, net of allowance for loan losses		381,085		383,879
Liabilities:
Deposits		527,073		528,741
Short-term borrowings		356		356
Long-term debt		20,000		20,383

6. INVESTMENT SECURITIES

Details of investment securities available-for-sale and held-to-maturity at September 30, 2012 and December 31, 2011 were as follows:


	Available-for-Sale
	September 30, 2012
	Amortized		Gross Unrealized		Gross Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
	(Dollars in Thousands)
Mortgage-backed securities	$	83,536	$	4,011	$	(104	)	$	87,443
Obligations of states, counties and political subdivisions		13,401		1,643		—			15,044
U.S. treasury securities		75		—		—			75
Equity securities		9		1		—			10

Total	$	97,021	$	5,655	$	(104	)	$	102,572


	Held-to-Maturity
	September 30, 2012
	Amortized		Gross Unrealized		Gross Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
	(Dollars in Thousands)
U.S. agencies	$	12,191	$	22	$	(34	)	$	12,179


	Available-for-Sale
	December 31, 2011
	Amortized		Gross Unrealized		Gross Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
	(Dollars in Thousands)
Mortgage-backed securities	$	96,104	$	3,903	$	(316	)	$	99,691
Obligations of states, counties and political subdivisions		14,684		1,201		—			15,885
Obligations of U.S. government sponsored agencies		6,490		19		—			6,509
U.S. treasury securities		75		—		—			75
Equity securities		10		—		—			10

Total	$	117,363	$	5,123	$	(316	)	$	122,170


	Held-to-Maturity
	December 31, 2011
	Amortized		Gross Unrealized		Gross Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
	(Dollars in Thousands)
Obligations of states, counties and political subdivisions	$	1,170	$	1	$	—	$	1,171

The scheduled maturities of investment securities available-for-sale and held-to-maturity at September 30, 2012 are presented in the following table:


	Available-for Sale				Held-to-Maturity
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
	(Dollars in Thousands)
Maturing within one year	$	598	$	612	$	—	$	—
Maturing after one to five years		4,175		4,415		—		—
Maturing after five to fifteen years		56,992		60,386		10,160		10,151
Maturing after fifteen years		35,247		37,149		2,031		2,028
Equity securities and Preferred Stock		9		10		—		—

Total	$	97,021	$	102,572	$	12,191	$	12,179

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, 2012 and December 31, 2011. 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, 2012 and December 31, 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, 2012
	Less than 12 Months					12 Months or More
			Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses
	(Dollars in Thousands)
Mortgage-backed securities	$	9,092	$	(15	)	$	4,525	$	(90	)


	Held-to-Maturity
	September 30, 2012
	Less than 12 Months					12 Months or More
			Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses
	(Dollars in Thousands)
Mortgage-backed securities	$	6,993	$	(34	)	$	—	$	—


	Available-for-Sale
	December 31, 2011
	Less than 12 Months					12 Months or More
			Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses
	(Dollars in Thousands)
Mortgage-backed securities	$	16,318	$	(276	)	$	811	$	(40	)

As of September 30, 2012, six debt securities had been in a loss position for more than twelve months, and six debt securities had been in a loss position for less than twelve months. The losses for all securities are considered to be a direct result of the effect that the current interest rate environment has on the value of debt securities and not related to the creditworthiness of the issuers. Further, the Company has the current intent and ability to retain its investments in the issuers for a period of time sufficient to allow for any anticipated recovery in fair value. Therefore, the Company has not recognized any other-than-temporary impairments.

Investment securities available-for-sale with a carrying amount of $66.2 million and $80.0 million at September 30, 2012 and December 31, 2011, respectively, were pledged to secure public deposits and for FHLB advances.

The following chart represents the gross gains and losses realized on securities:


	Gross Gains		Gross Losses		Net Gains (Losses)
	(Dollars in Thousands)
Nine Months Ended:
September 30, 2012	$	—	$	—	$	—
September 30, 2011	$	400	$	—	$	400

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 as investments in funds that invest solely in affordable housing projects. The Company has determined that these structures require valuation as 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 has a 99.9% limited partnership interest. The resulting financial impact to the Company of the consolidation was a net increase to total assets of approximately $69,845 as of September 30, 2012 and $150,000 as of December 31, 2011. The remaining limited partnership investments are unconsolidated and 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 $854,000 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, results of operations or cash flows.

The Bank had no remaining cash commitments to these partnerships at September 30, 2012.

8. LOANS AND ALLOWANCE FOR LOAN LOSSES

At September 30, 2012 and December 31, 2011, the composition of the loan portfolio by reporting segment and portfolio segment was as follows:


	September 30, 2012
	FUSB		ALC		Total
	(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans	$	30,949	$	—	$	30,949
Secured by 1-4 family residential properties		39,558		34,832		74,390
Secured by multi-family residential properties		24,305		—		24,305
Secured by non-farm, non-residential properties		132,980		—		132,980
Other		813		—		813
Commercial and industrial loans		43,255		—		43,255
Consumer loans		15,570		46,872		62,442
Other loans		536		—		536

Total loans	$	287,966	$	81,704	$	369,670
Less: Unearned Interest		175		4,876		5,051
Allowance for loan losses		16,623		3,263		19,886

Net loans	$	271,168	$	73,565	$	344,733


	December 31, 2011
	FUSB		ALC		Total
	(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans	$	40,311	$	—	$	40,311
Secured by 1-4 family residential properties		43,691		40,532		84,223
Secured by multi-family residential properties		26,722		—		26,722
Secured by non-farm, non-residential properties		147,518		—		147,518
Other		820		—		820
Commercial and industrial loans		43,060		—		43,060
Consumer loans		18,886		45,688		64,574
Other loans		910		—		910

Total loans	$	321,918	$	86,220	$	408,138
Less: Unearned Interest		277		4,509		4,786
Allowance for loan losses		18,691		3,576		22,267

Net loans	$	302,950	$	78,135	$	381,085

The Company grants commercial, real estate and installment loans to its customers. Although the Company has a diversified loan portfolio, 71.3% of the portfolio was concentrated in loans secured by real estate as of September 30, 2012.

Portfolio Segments

The Company has divided the loan portfolio into eight portfolio segments, each with different risk characteristics and methodologies for assessing the risk described as follows:

Construction, land development and other land loans – Commercial construction, land and land development loans include the development of residential housing projects, loans for the development of commercial and industrial use property and loans for the purchase and improvement of raw land. These loans are secured in whole or in part by the underlying real estate collateral and are generally guaranteed by the principals of the borrower.

Secured by 1-4 residential properties – These loans include conventional mortgage loans on one-to-four family residential properties. These properties may serve as the borrower’s primary residence, vacation home or investment property. Also included in this portfolio are home equity loans and lines of credit. This type of lending, which is secured by a first or second mortgage on the borrower’s residence, allows customers to borrow against the equity in their home.

Secured by multi-family residential properties – These are mortgage loans secured by apartment buildings.

Secured by non-farm, non-residential properties – Commercial real estate loans include loans secured by commercial and industrial properties, office or mixed-use facilities, strip shopping centers or other commercial property. These loans are generally guaranteed by the principals of the borrower.

Other real estate loans – Other real estate loans are loans primarily for agricultural production, secured by mortgages on farm land.

Commercial and industrial loans – Includes loans to commercial customers for use in normal business to finance working projects. These credits may be loans and lines to financially strong borrowers, secured by inventories, equipment or receivables, and are generally guaranteed by the principals of the borrower.

Consumer loans – Includes a variety of secured and unsecured personal loans, including automobile loans, loans for household and personal purpose and all other direct consumer installment loans.

Other loans – Other loans comprise overdrawn checking accounts reclassified to loans and overdraft lines of credit.

Related Party Loans

In the ordinary course of business, the Bank makes loans to certain officers and directors of the Company, the Bank and ALC, 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, 2012, December 31, 2011 and September 30, 2011 were $2,584,848, $3,036,740 and $3,037,316, respectively. During the nine-month period ended September 30, 2012, new loans to these parties totaled $83,383, and repayments by active related parties were $529,895. Director Dan Barlow retired from the Board of Directors of the Company and the Bank in May of 2012; his loan totaling $5,380 was eliminated from the September 30, 2012 balance. During the twelve-month period ended December 31, 2011, new loans to these parties totaled $1,301,901, and repayments were $426,665. During the nine-month period ended September 30, 2011, new loans to these parties totaled $1,271,801, and repayments were $373,015.

Allowance for Loan Losses

Changes in the allowance for loan losses and recorded investment in loans were as follows:


	FUSB
	September 30, 2012
			Commercial					Residential
	Commercial		Real Estate		Consumer			Real Estate			Other			Unallocated			Total
	(Dollars in Thousands)
Allowance for loan losses:
Beginning balance	$	889	$	16,533	$	306		$	684		$	78		$	201		$	18,691
Charge-offs		867		3,274		134			133			11			—			4,419
Recoveries		139		606		61			22			—			—			828
Provision		1,044		539		(38	)		(5	)		(12	)		(5	)		1,523

Ending balance		1,205		14,404		195			568			55			196			16,623

Ending balance individually evaluated for impairment		760		10,849		—			—			—			—			11,609

Ending balance collectively evaluated for impairment	$	445	$	3,555	$	195		$	568		$	55		$	196		$	5,014

Loan receivables:
Ending balance		43,255		189,047		15,570			39,558			536			—			287,966

Ending balance individually evaluated for impairment		1,037		56,762		—			208			—			—			58,007

Ending balance collectively evaluated for impairment	$	42,218	$	132,285	$	15,570		$	39,350		$	536		$	—		$	229,959


	ALC
	September 30, 2012
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other		Unallocated		Total
	(Dollars in Thousands)
Allowance for loan losses:
Beginning balance	$	—	$	—	$	2,542	$	1,034	$	—	$	—	$	3,576
Charge-offs		—		—		2,099		531		—		—		2,630
Recoveries		—		—		629		36		—		—		665
Provision		—		—		1,315		337		—		—		1,652

Ending balance		—		—		2,387		876		—		—		3,263

Ending balance individually evaluated for impairment		—		—		—		—		—		—		—

Ending balance collectively evaluated for impairment	$	—	$	—	$	2,387	$	876	$	—	$	—	$	3,263

Loan receivables:
Ending balance		—		—		46,872		34,832		—		—		81,704

Ending balance individually evaluated for impairment		—		—		—		—		—		—		—

Ending balance collectively evaluated for impairment	$	—	$	—	$	46,872	$	34,832	$	—	$	—	$	81,704


	FUSB and ALC
	September 30, 2012
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other			Unallocated			Total
	(Dollars in Thousands)
Allowance for loan losses:
Beginning balance	$	889	$	16,533	$	2,848	$	1,718	$	78		$	201		$	22,267
Charge-offs		867		3,274		2,233		664		11			—			7,049
Recoveries		139		606		690		58		—			—			1,493
Provision		1,044		539		1,277		332		(12	)		(5	)		3,175

Ending balance		1,205		14,404		2,582		1,444		55			196			19,886

Ending balance individually evaluated for impairment		760		10,849		—		—		—			—			11,609

Ending balance collectively evaluated for impairment	$	445	$	3,555	$	2,582	$	1,444	$	55		$	196		$	8,277

Loan receivables:
Ending balance		43,255		189,047		62,442		74,390		536			—			369,670

Ending balance individually evaluated for impairment		1,037		56,762		—		208		—			—			58,007

Ending balance collectively evaluated for impairment	$	42,218	$	132,285	$	62,442	$	74,182	$	536		$	—		$	311,663


	FUSB
	December 31, 2011
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other			Unallocated		Total
	(Dollars in Thousands)
Allowance for loan losses:
Beginning balance	$	988	$	15,206	$	375	$	359	$	99		$	—	$	17,027
Charge-offs		407		12,915		420		973		3			—		14,718
Recoveries		152		44		121		172		—			—		489
Provision		156		14,198		230		1,126		(18	)		201		15,893

Ending balance		889		16,533		306		684		78			201	$	18,691

Ending balance individually evaluated for impairment		509		10,575		—		—		—			—		11,084

Ending balance collectively evaluated for impairment	$	380	$	5,958	$	306	$	684	$	78		$	201	$	7,607

Loan receivables:
Ending balance		43,060		215,371		18,886		43,691		910			—		321,918

Ending balance individually evaluated for impairment		1,603		60,127		—		186		—			—		61,916

Ending balance collectively evaluated for impairment	$	41,457	$	155,244	$	18,886	$	43,505	$	910		$	—	$	260,002


	ALC
	December 31, 2011
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other		Unallocated		Total
	(Dollars in Thousands)
Allowance for loan losses:
Beginning balance	$	—	$	—	$	2,663	$	1,246	$	—	$	—	$	3,909
Charge-offs		—		—		2,993		1,049		—		—		4,042
Recoveries		—		—		707		93		—		—		800
Provision		—		—		2,165		744		—		—		2,909

Ending balance		—		—		2,542		1,034		—		—		3,576

Ending balance individually evaluated for impairment		—		—		—		—		—		—		—

Ending balance collectively evaluated for impairment	$	—	$	—	$	2,542	$	1,034	$	—	$	—	$	3,576

Loan receivables:
Ending balance		—		—		45,688		40,532		—		—		86,220

Ending balance individually evaluated for impairment		—		—		—		—		—		—		—

Ending balance collectively evaluated for impairment	$	—	$	—	$	45,688	$	40,532	$	—	$	—	$	86,220


	FUSB and ALC
	December 31, 2011
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other			Unallocated		Total
	(Dollars in Thousands)
Allowance for loan losses:
Beginning balance	$	988	$	15,206	$	3,038	$	1,605	$	99		$	—	$	20,936
Charge-offs		407		12,915		3,413		2,022		3			—		18,760
Recoveries		152		44		828		265		—			—		1,289
Provision		156		14,198		2,395		1,870		(18	)		201		18,802

Ending balance		889		16,533		2,848		1,718		78			201		22,267

Ending balance individually evaluated for impairment		509		10,575		—		—		—			—		11,084

Ending balance collectively evaluated for impairment	$	380	$	5,958	$	2,848	$	1,718	$	78		$	201	$	11,183

Loan receivables:
Ending balance		43,060		215,371		64,574		84,223		910			—		408,138

Ending balance individually evaluated for impairment		1,603		60,127		—		186		—			—		61,916

Ending balance collectively evaluated for impairment	$	41,457	$	155,244	$	64,574	$	84,037	$	910		$	—	$	346,222


	FUSB
	September 30, 2011
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other			Unallocated		Total
	(Dollars in Thousands)
Allowance for loan losses:
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
Provision		122		2,635		134		443		(57	)		—		3,277

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

Ending balance individually evaluated for impairment		—		5,313		—		—		—			—		5,313

Ending balance collectively evaluated for impairment	$	936	$	4,406	$	329	$	435	$	42		$	—	$	6,148

Loan receivables:
Ending balance		43,584		209,538		19,836		41,971		610			—		315,539

Ending balance individually evaluated for impairment		1,642		42,938		—		—		—			—		44,580

Ending balance collectively evaluated for impairment	$	41,942	$	166,600	$	19,836	$	41,971	$	610		$	—	$	270,959


	ALC
	September 30, 2011
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other		Unallocated		Total
	(Dollars in Thousands)
Allowance for loan losses:
Beginning balance	$	—	$	—	$	2,663	$	1,246	$	—	$	—	$	3,909
Charge-offs		—		—		1,991		652		—		—		2,643
Recoveries		—		—		551		84		—		—		635
Provision		—		—		1,408		491		—		—		1,899

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

Ending balance individually evaluated for impairment		—		—		—		—		—		—		—

Ending balance collectively evaluated for impairment	$	—	$	—	$	2,631	$	1,169	$	—	$	—	$	3,800

Loan receivables:
Ending balance		—		—		44,697		42,084		—		—		86,781

Ending balance individually evaluated for impairment		—		—		—		—		—		—		—

Ending balance collectively evaluated for impairment	$	—	$	—	$	44,697		42,084	$	—	$	—	$	86,781


	FUSB and ALC
	September 30, 2011
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other			Unallocated		Total
	(Dollars in Thousands)
Allowance for loan losses:
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
Provision		122		2,635		1,542		934		(57	)		—		5,176

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

Ending balance individually evaluated for impairment		—		5,313		—		—		—			—		5,313

Ending balance collectively evaluated for impairment	$	936	$	4,406	$	2,960	$	1,604	$	42		$	—	$	9,948

Loan receivables:
Ending balance		43,584		209,538		64,533		84,055		610			—		402,320

Ending balance individually evaluated for impairment		1,642		42,938		—		—		—			—		44,580

Ending balance collectively evaluated for impairment	$	41,942	$	166,600	$	64,533	$	84,055	$	610		$	—	$	357,740

Credit Quality Indicators

The Bank has established a credit risk rating system to assess and manage risk in the loan portfolio. It establishes a uniform framework and common language for assessing and monitoring risk in the portfolio.

The following is the guide utilized by the Bank for an 8-grade system of credit risk:

Minimal Risk: Borrowers in this category have the lowest risk of any resulting loss. Borrowers are of the highest quality, presently and prospectively.

Better Than Average Risk: Borrowers in the high end of medium range between borrowers who are definitely sound and those with minor risk characteristics.

Moderate Risk: Borrowers in this category have little chance of resulting in a loss. This category should include the average loan, under average economic conditions.

Acceptable Risk: Borrowers in this category have a limited chance of resulting in a loss.

Special Mention (Potential Weakness): Borrowers in this category exhibit potential credit weaknesses or downward trends deserving bank management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset at some future date. Special Mention loans are not adversely classified and do not expose our institution to sufficient risk to warrant adverse classification.

Included in Special Mention assets could be workout or turnaround situations, as well as those borrowers previously rated 2-4 who have shown deterioration, for whatever reason, indicating a downgrading from the better grade. The Special Mention rating is designed to identify a specific level of risk and concern about a loan’s and/or borrower’s quality. Although a Special Mention asset has a higher probability of default than previously rated categories, its default is not imminent.

Substandard (Definite Weakness – Loss Unlikely): These are borrowers with defined weaknesses that jeopardize the orderly liquidation of debt. A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned. There is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified as substandard.

Doubtful: Borrowers classified as doubtful have all the weaknesses found in substandard borrowers with the added provision that the weaknesses make collection of debt in full, based on currently existing facts, conditions and values, highly questionable and improbable. Serious problems exist to the point where partial loss of principal is likely. The possibility of loss is extremely high, but, because of certain important, reasonably specific pending factors that may work to strengthen the assets, the loans’ classification as estimated losses is deferred until a more exact status may be determined. Pending factors include proposed merger, acquisition or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans. Additional factors include whether management has a demonstrated history of failing to live up to agreements, unethical or dishonest business practices and/or conviction on criminal charges.

Loss: Borrowers deemed incapable of repayment of unsecured debt. Loans to such borrowers are considered uncollectible and of such little value that continuance as active assets of the bank is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off these worthless assets, even though partial recovery may be affected in the future.

The table below illustrates the carrying amount of loans by credit quality indicator at September 30, 2012.


	FUSB
	Pass 1-4		Special Mention 5		Substandard 6		Doubtful 7		Total
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	12,468	$	1,168	$	17,313	$	—	$	30,949
Secured by 1-4 family residential properties		33,050		1,687		4,707		114		39,558
Secured by multi-family residential properties		11,532		4,115		8,658		—		24,305
Secured by non-farm, non-residential properties		94,557		4,515		33,887		21		132,980
Other		813		—		—		—		813
Commercial and industrial loans		40,394		800		2,025		36		43,255
Consumer loans		14,340		208		953		69		15,570
Other loans		535		—		1		—		536

Total	$	207,689	$	12,493	$	67,544	$	240	$	287,966


	ALC
	Performing		Nonperforming		Total
	(Dollars in Thousands)
Loans secured by real estate:
Secured by 1-4 family residential properties	$	33,467	$	1,365	$	34,832
Consumer loans		44,697		2,175		46,872

Total	$	78,164	$	3,540	$	81,704

The table below illustrates the carrying amount of loans by credit quality indicator at December 31, 2011.


	FUSB
	Pass 1-4		Special Mention 5		Substandard 6		Doubtful 7		Total
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	18,047	$	699	$	21,327	$	238	$	40,311
Secured by 1-4 family residential properties		38,573		627		4,445		46		43,691
Secured by multi-family residential properties		23,838		—		2,884		—		26,722
Secured by non-farm, non-residential properties		105,590		11,579		30,349		—		147,518
Other		820		—		—		—		820
Commercial and industrial loans		39,676		845		2,498		41		43,060
Consumer loans		17,617		383		867		19		18,886
Other loans		909		—		1		—		910

Total	$	245,070	$	14,133	$	62,371	$	344	$	321,918


	ALC
	Performing		Nonperforming		Total
	(Dollars in Thousands)
Loans secured by real estate:
Secured by 1-4 family residential properties	$	38,550	$	1,982	$	40,532
Consumer loans		43,675		2,013		45,688

Total	$	82,225	$	3,995	$	86,220

The following table provides an aging analysis of past due loans by class at September 30, 2012.


	FUSB
	As of September 30, 2012
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	15	$	26	$	7,742	$	7,783	$	23,166	$	30,949	$	—
Secured by 1-4 family residential properties		1,504		425		691		2,620		36,938		39,558		43
Secured by multi-family residential Properties		—		—		2,884		2,884		21,421		24,305		—
Secured by non-farm, non-residential properties		1,833		2,660		14,416		18,909		114,071		132,980		—
Other		—		—		—		—		813		813		—
Commercial and industrial loans		515		819		463		1,797		41,458		43,255		—
Consumer loans		466		48		136		650		14,920		15,570		7
Other loans		—		—		6		6		530		536		6

Total	$	4,333	$	3,978	$	26,338	$	34,649	$	253,317	$	287,966	$	56


	ALC
	As of September 30, 2012
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Secured by 1-4 family residential properties		467		310		1,145		1,922		32,910		34,832		985
Secured by multi-family residential properties		—		—		—		—		—		—		—
Secured by non-farm, non-residential properties		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		—
Commercial and industrial loans		—		—		—		—		—		—		—
Consumer loans		993		599		1,191		2,783		44,089		46,872		1,047
Other loans		—		—		—		—		—		—		—

Total	$	1,460	$	909	$	2,336	$	4,705	$	76,999	$	81,704	$	2,032

The following table provides an aging analysis of past due loans by class at December 31, 2011.


	FUSB
	As of December 31, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	621	$	2,515	$	3,005	$	6,141	$	34,170	$	40,311	$	—
Secured by 1-4 family residential properties		1,358		208		597		2,163		41,528		43,691		38
Secured by multi-family residential properties		—		—		2,884		2,884		23,838		26,722		—
Secured by non-farm, non-residential properties		1,189		93		7,650		8,932		138,586		147,518		88
Other		—		—		—		—		820		820		—
Commercial and industrial loans		1,077		364		160		1,601		41,459		43,060		13
Consumer loans		575		104		108		787		18,099		18,886		72
Other loans		3		—		13		16		894		910		13

Total	$	4,823	$	3,284	$	14,417	$	22,524	$	299,394	$	321,918	$	224


	ALC
	As of December 31, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Secured by 1-4 family residential properties		808		377		1,585		2,770		37,762		40,532		1,462
Secured by multi-family residential properties		—		—		—		—		—		—		—
Secured by non-farm, non-residential properties		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		—
Commercial and industrial loans		—		—		—		—		—		—		—
Consumer loans		942		551		1,038		2,531		43,157		45,688		646
Other loans		—		—		—		—		—		—		—

Total	$	1,750	$	928	$	2,623	$	5,301	$	80,919	$	86,220	$	2,108

The following table provides an analysis of nonaccruing loans by class at September 30, 2012 and December 31, 2011.


	Loans on Nonaccrual Status
	September 30,		December 31,
	2012		2011
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	7,774	$	3,087
Secured by 1-4 family residential properties		1,093		1,399
Secured by multi-family residential properties		2,884		2,884
Secured by non-farm, non-residential properties		17,383		7,563
Commercial and industrial		1,182		129
Consumer Loans		1,259		1,441

Total	$	31,575	$	16,503

Impaired Loans

At September 30, 2012, the carrying amount of impaired loans consisted of the following:


	September 30, 2012
			Unpaid
	Carrying		Principal		Related
Impaired loans with no related allowance recorded	Amount		Balance		Allowances
Impaired loans with no related allowance recorded	(Dollars in Thousands)
Loans secured by real estate
Construction, land development and other land loans	$	3,867	$	3,867	$	—
Secured by 1-4 family residential properties		208		208		—
Secured by multi-family residential properties		2,694		2,694		—
Secured by non-farm, non-residential properties		19,528		19,528		—
Commercial and industrial		—		—		—

Total loans with no related allowance recorded	$	26,297	$	26,297	$	—


Impaired loans with an allowance recorded
Loans secured by real estate
Construction, land development and other land loans	$	13,405	$	13,405	$	7,278
Secured by multi-family residential properties		5,964		5,964		1,553
Secured by non-farm, non-residential properties		11,304		11,304		2,018
Commercial and industrial		1,037		1,037		760

Total loans with an allowance recorded	$	31,710	$	31,710	$	11,609


Total impaired loans
Loans secured by real estate
Construction, land development and other land loans	$	17,272	$	17,272	$	7,278
Secured by 1-4 family residential properties		208		208		—
Secured by multi-family residential properties		8,658		8,658		1,553
Secured by non-farm, non-residential properties		30,832		30,832		2,018
Commercial and industrial		1,037		1,037		760

Total impaired loans	$	58,007	$	58,007	$	11,609

At December 31, 2011, the carrying amount of impaired loans consisted of the following:


	December 31, 2011
			Unpaid
	Carrying		Principal		Related
Impaired loans with no related allowance recorded	Amount		Balance		Allowances
Impaired loans with no related allowance recorded	(Dollars in Thousands)
Loans secured by real estate
Construction, land development and other land loans	$	7,005	$	7,005	$	—
Secured by 1-4 family residential properties		186		186		—
Secured by multi-family residential properties		2,884		2,884		—
Secured by non-farm, non-residential properties		24,411		24,411		—
Commercial and industrial		100		100		—

Total loans with no related allowance recorded	$	34,586	$	34,586	$	—


Impaired loans with an allowance recorded
Loans secured by real estate
Construction, land development and other land loans	$	12,669	$	12,669	$	6,800
Secured by non-farm, non-residential properties		13,159		13,159		3,775
Commercial and industrial		1,502		1,502		509

Total loans with an allowance recorded	$	27,330	$	27,330	$	11,084


Total impaired loans
Loans secured by real estate
Construction, land development and other land loans	$	19,674	$	19,674	$	6,800
Secured by 1-4 family residential properties		186		186		—
Secured by multi-family residential properties		2,884		2,884		—
Secured by non-farm, non-residential properties		37,570		37,570		3,775
Commercial and industrial		1,602		1,602		509

Total impaired loans	$	61,916	$	61,916	$	11,084

The average net investment in impaired loans and interest income recognized and received on impaired loans as of September 30, 2012 and December 31, 2011 were as follows:


	September 30, 2012
	Average Recorded		Interest Income		Interest Income
	Investment		Recognized		Received
	(Dollars in Thousands)
Loans secured by real estate
Construction, land development and other land loans	$	19,185	$	827	$	883
Secured by 1–4 family residential properties		95		—		—
Secured by multi-family residential properties		3,461		—		—
Secured by non-farm, non-residential properties		30,980		575		653
Commercial and industrial		1,281		14		21

Total impaired loans	$	55,002	$	1,416	$	1,557


	December 31, 2011
	Average Recorded		Interest Income		Interest Income
	Investment		Recognized		Received
	(Dollars in Thousands)
Loans secured by real estate
Construction, land development and other land loans	$	12,173	$	649	$	687
Secured by 1–4 family residential properties		37		—		—
Secured by multi-family residential properties		3,313		—		1,587
Secured by non-farm, non-residential properties		32,572		1,429		—
Commercial and industrial		1,634		140		141

Total impaired loans	$	49,729	$	2,218	$	2,415

Loans on which the accrual of interest has been discontinued amounted to $31,574,607 and $16,502,314 at September 30, 2012 and December 31, 2011, respectively. If interest on those loans had been accrued, such income would have approximated $1,058,646 and $1,459,843 for the nine months ended September 30, 2012 and the twelve months ended December 31, 2011, respectively. Interest income actually recorded on those loans amounted to $341,069 and $35,519 for the nine months ended September 30, 2012 and the twelve months ended December 31, 2011, respectively. Accruing loans past due 90 days or more amounted to $2,088,799 and $2,331,718 for the nine months ended September 30, 2012 and twelve months ended December 31, 2011, respectively.

Troubled Debt Restructurings

Loans are considered restructured loans if concessions have been granted to borrowers that are experiencing financial difficulty. The concessions granted generally involve the modification of terms of the loan, such as changes in payment schedule or interest rate, which generally would not otherwise be considered. Restructured loans can involve loans remaining on nonaccrual, moving to nonaccrual or continuing on accrual status, depending on the individual facts and circumstances of the borrower. Nonaccrual restructured loans are included and treated with all other nonaccrual loans. In addition, all accruing restructured loans are reported as troubled debt restructurings. Generally, restructured loans remain on nonaccrual until the customer has attained a sustained period of repayment performance under the modified loan terms (generally a minimum of six months). However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms and whether the loan should be returned to or maintained on nonaccrual status. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan remains on nonaccrual. Based on the above, the Company had $6,377,496 and $1,821,696 of non-accruing loans that were restructured and remained on nonaccrual status at September 30, 2012 and December 31, 2011, respectively. In addition, the Company had $1,434,339 and $2,488,060 of restructured loans that were restored to accrual status based on a sustained period of repayment performance at September 30, 2012 and December 31, 2011, respectively.

The following table provides the number of loans modified in a troubled debt restructuring by loan portfolio during the periods ended September 30, 2012 and December 31, 2011, as well as the recorded investment and unpaid principal balance as of September 30, 2012 and December 31, 2011.


	September 30, 2012						December 31, 2011
	Number of Loans		Pre- Modification Outstanding Principal Balance		Post- Modification Principal Balance		Number of Loans		Pre- Modification Outstanding Principal Balance		Post- Modification Principal Balance
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans		12	$	11,534	$	10,276		9	$	3,182	$	2,488
Secured by 1-4 family residential properties		1		126		123
Secured by non-farm, non-residential properties		6		3,620		2,780		3		2,583		1,747
Commercial loans		4		322		281		2		80		75

Total		23	$	15,602	$	13,460		14	$	5,845	$	4,310


	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
Troubled debt restructurings that subsequently defaulted
Troubled debt restructurings:
Secured by non-farm, non-residential properties		3	$	1,743		—		—
Commercial		2		68		—		—

		5	$	1,811		—	$	0

Restructured loan modifications may include payment schedule modifications, interest rate concessions, maturity date extensions, modification of note structure, principal reduction or some combination of these concessions. During the periods ended September 30, 2012 and December 31, 2011, restructured loan modifications of loans secured by real estate, commercial and industrial loans primarily included maturity date extensions and payment schedule modifications.

The change in troubled debt restructuring as of September 30, 2012 was as follows:


	September 30, 2012		December 31, 2011		Change
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	10,276	$	2,488	$	7,788
Secured by non-farm, non-residential properties		2,780		1,747		1,033
Secured by 1-4 family residential properties		123		—		123
Commercial and industrial loans		281		75		206

Total	$	13,460	$	4,310	$	9,150

All loans $500,000 and over modified in a troubled debt restructuring are evaluated for impairment. The nature and extent of impairment of restructured loans, including those that have experienced a subsequent payment default, are considered in the determination of an appropriate level of allowance for loan losses. This evaluation resulted in an allowance for loan losses of $6,119,359 and $494,352 as of September 30, 2012 and December 31, 2011, respectively.

9. OTHER REAL ESTATE OWNED

Other real estate and certain other assets acquired in foreclosure are reported at the lower of the investment in the loan or fair value of the property less estimated costs to sell. The following table summarizes foreclosed property activity for the nine months ended September 30, 2012 and 2011.


	September 30, 2012
	FUSB			ALC			TOTAL
	(Dollars in Thousands)
Balance 12-31-2011	$	12,606		$	4,168		$	16,774
Transfers from loans		5,337			682			6,019
Sales proceeds		(3,670	)		(1,242	)		(4,912	)
Gross gains		11			63			74
Gross losses		(528	)		(578	)		(1,106	)

Net losses		(517	)		(515	)		(1,032	)
Impairment		(2,735	)		(506	)		(3,241	)

Balance 09-30-2012	$	11,021		$	2,587		$	13,608


	September 30, 2011
	FUSB			ALC			TOTAL
	(Dollars in Thousands)
Balance 12-31-2010	$	19,002		$	6,630		$	25,632
Transfers from loans		4,429			1,227			5,656
Sales proceeds		(2,298	)		(1,319	)		(3,617	)
Gross gains		4			29			33
Gross losses		(474	)		(395	)		(869	)

Net losses		(470	)		(366	)		(836	)
Impairment		(2,974	)		(868	)		(3,842	)

Balance 09-30-2011	$	17,689		$	5,304		$	22,993

Valuation adjustments are primarily recorded in other non-interest expense; adjustments are also recorded as a charge to the allowance for loan losses if incurred within 60 days after the date of transfer from loans. Valuation adjustments are primarily post-foreclosure write-downs that are a result of continued declining property values based on updated appraisals or other indications of value, such as offers to purchase. Foreclosed property sold represents the net book value of the properties sold.

10. SHORT-TERM BORROWINGS

Short-term borrowings consist of federal funds purchased and securities sold under repurchase agreements. Federal funds purchased generally mature within one to four days. There were no federal funds purchased outstanding at September 30, 2012 or December 31, 2011. There were no treasury tax and loan deposits outstanding at September 30, 2012 or December 31, 2011.

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, 2012 and December 31, 2011 were $1,332,380 and $355,787, respectively.

At September 30, 2012, the Bank had $17.8 million in available federal fund lines from correspondent banks.

11. 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, 2012, there were no advances outstanding, and no investment securities or mortgage loans pledged to secure these borrowings. At December 31, 2011, investment securities and mortgage loans amounting to $22.6 million were pledged to secure these borrowings in the amount of $20.0 million.

At September 30, 2012, the Bank had $175.3 million in available credit from the FHLB.

12. INCOME TAXES

The Company files a consolidated income tax return with the federal government and the State of Alabama. ALC files a Mississippi state income tax return on its Mississippi branches. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and the states in which it files for the years ended December 31, 2008 through 2011.

As of September 30, 2012, the Company had no unrecognized tax benefits related to federal or state income tax matters and does not anticipate any material increase or decrease in unrecognized tax benefits relative to any tax positions taken prior to September 30, 2012. As of September 30, 2012, the Company had accrued no interest and no penalties related to uncertain tax positions.

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, 2012			September 30, 2011
	(Dollars in Thousands)
Income tax (benefit) expense at federal statutory rate	$	499		$	—
Increase (decrease) resulting from:
Tax-exempt interest		(274	)		(305	)
State income tax (benefit) expense, net of federal income tax benefit		43			(34	)
Other		(111	)		(72	)

Total	$	157		$	(411	)

Net deferred tax assets totaled $9.3 million at September 30, 2012 and $10.4 million at December 31, 2011. Net deferred tax assets are included in other assets, and no valuation allowance is recorded.

The Company is in a cumulative pretax loss position for the trailing three-year period ended September 30, 2012. Under current accounting guidance, this represents significant negative evidence in the determination of the need for a valuation allowance. Included in the three-year pretax loss position is $28.1 million related to provision for loan losses and impairment of other real estate owned related to real estate loans on undeveloped and residential lots.

The Company conducted an interim analysis to assess the need for a valuation allowance at September 30, 2012. As part of this analysis, management considered negative evidence associated with the trailing cumulative loss position against positive evidence associated with the taxable income generated in the first nine months of 2012, a long history of taxable income and projected pre-tax income in future years. While realization of the deferred tax benefit is not assured, it is management’s judgment, after review of all available evidence and based on the weight of such evidence, that a valuation allowance is not required, as realization of these benefits meets the “more likely than not” standard under generally accepted accounting principles.

13. 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, 2011. 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, 2012:
Net interest income	$	4,617		$	3,675	$	5	$	—		$	8,297
Provision for loan losses		—			492		—		—			492
Total non-interest income		1,017			361		1,610		(1,535	)		1,453
Total non-interest expense		4,803			2,562		394		(197	)		7,562

Income before income taxes		831			982		1,221		(1,338	)		1,696
Provision for income taxes		136			379		2		—			517

Net income	$	695		$	603	$	1,219	$	(1,338	)	$	1,179

Other significant items:
Total assets	$	584,884		$	79,629	$	74,280	$	(154,471	)	$	584,322
Total investment securities		114,688			—		75		—			114,763
Total loans, net		335,487			73,565		—		(64,319	)		344,733
Investment in subsidiaries		802			—		69,080		(69,877	)		5
Fixed asset addition		99			32		—		—			131
Depreciation and amortization expense		127			38		—		—			165
Total interest income from external customers		4,701			4,627		—		—			9,328
Total interest income from affiliates		952			—		5		(957	)		—
For the nine months ended September 30, 2012:
Net interest income	$	14,548		$	10,856	$	14	$	—		$	25,418
Provision for loan losses		1,523			1,652		—		—			3,175
Total non-interest income		2,987			1,020		2,254		(2,203	)		4,058
Total non-interest expense		16,506			8,124		763		(561	)		24,832

Income (loss) before income taxes		(494	)		2,100		1,505		(1,642	)		1,469
Provision for (benefit from) income taxes		(660	)		812		5		—			157

Net income	$	166		$	1,288	$	1,500	$	(1,642	)	$	1,312

Other significant items:
Fixed asset addition	$	211		$	209	$	—	$	—		$	420
Depreciation and amortization expense		408			116		—		—			524
Total interest income from external customers		15,296			13,790		—		—			29,086
Total interest income from affiliates		2,935			—		13		(2,948	)		—


	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	)		—

14. GUARANTEES, COMMITMENTS AND CONTINGENCIES

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 periods ended September 30, 2012 and 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, 2012		December 31, 2011
	(Dollars in Thousands)
Standby Letters of Credit	$	1,042	$	1,172
Commitments to Extend Credit	$	28,850	$	45,736

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, 2012 and December 31, 2011 was $1.0 million, and $1.2 million, respectively.

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, 2012 and December 31, 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, 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. On December 12, 2011, Graves Automotive filed its fourth amended complaint, this time asserting only two counts, breach of contract and unjust enrichment. Despite removing the fraud claims, the fourth amended complaint still requests punitive damages. On January 11, 2012, ALC filed a motion to dismiss the fourth amended complaint and to strike Graves Automotive’s request for punitive damages. This motion remains pending and has been set for oral argument on November 27, 2012. ALC continues to deny the allegations against it in the underlying lawsuit and intends to vigorously defend itself in this matter. Given the pendency of ALC’s motion 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.

The Bank was informed by letter dated June 5, 2012 from the U.S. Department of Labor – Occupational Safety and Health Administration (“OSHA”) that a former employee of the Bank had filed complaint with OSHA alleging that, in connection with the former employee’s separation from the Bank in April of 2012, the Bank committed certain discriminatory employment practices in violation of the Sarbanes Oxley-Act of 2002 and the Consumer Financial Protection Act of 2010. The Company believes that the complaint is wholly without merit. At the request of OSHA, the Bank has furnished a written statement and other information in response to the complaint and will continue to cooperate fully with OSHA throughout its investigation. Although the Bank intends to vigorously defend itself in this matter, it is too early to assess the likelihood of a resolution of this matter or the possibility of an unfavorable outcome.

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

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 and results of operations 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 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, 2011.

The emphasis of this discussion is a comparison of assets, liabilities and shareholders’ equity as of September 30, 2012 to year-end 2011, while comparing income and expense for the three- and nine-month periods ended September 30, 2012 and 2011, respectively.

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, 2011.

COMPARING THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2012 TO THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2011

Net income attributable to USBI in the third quarter of 2012 was $1.2 million, compared to net loss attributable to USBI of $1.3 million for the third quarter of 2011, resulting in an increase of basic net income per share from $(0.22) per share for the third quarter of 2011 to $0.20 per share for the same quarter of 2012.

For the three-month period ended September 30, 2012, the Bank had net income of $695,000, compared to net loss of $1.3 million for the same quarter of 2011. For the nine-month period ended September 30, 2012, the Bank had net income of $166,000, compared to net loss of $3,000 for the same period in 2011. For the nine-month period, the increase in net income for the Bank resulted primarily from lower impairment charges on other real estate owned and lower provisions for loan losses. The impairments in 2011 and the first quarter of 2012 resulted mainly from foreclosed property associated with commercial real estate loans. Further declines in market values would require additional impairment charges, however, substantially all of the other real estate at the Bank was reappraised in the first quarter of 2012, and management does not anticipate significant charges in the fourth quarter of the year.

Net income for ALC for the three-month period ended September 30, 2012 was $603,000, compared to $82,000 for the same quarter of 2011. For the nine-month period ended September 30, 2012, net income for ALC was $1.3 million, compared to $720,000 for the same period in 2011. Improvement in both periods for ALC primarily resulted from lower provisions for loan losses.

Interest income for USBI for the 2012 third quarter decreased $1.4 million, or 12.8%, compared to the third quarter of 2011. For the nine months ended September 30, 2012, interest income decreased $2.7 million, or 8.4%, compared with the same period in 2011. The decrease in interest income during the periods was primarily due to a decrease in interest earned on loans and investment securities resulting from an overall decrease in the average yield and average volume of loans and investment securities.

Interest income at the Bank for the 2012 third quarter decreased $1.2 million, or 20.8%, compared to the same period in 2011. For the nine months ended September 30, 2012, interest income decreased $2.7 million, or 14.8%, compared with the same period of 2011. These decreases were due to an overall decrease in the average yield and average volume of loans and investment securities. At the Bank, average loans for the third quarter of 2012 declined $31.9 million when compared to the same quarter in 2011. For the nine-month period ended September 30, 2012, loans at the Bank declined $23.3 million when compared to the same period in 2011. Loan demand continues to be weak due to continuing difficult economic conditions. Also at the Bank, average investment securities declined $23.7 million for the third quarter of 2012 and $19.9 million for the nine-month period ended September 30, 2012, when compared to the same periods in 2011. Cash flows from loans and investment securities were reinvested at lower rates, resulting in lower interest income.

Average loans for the third quarter of 2012 at ALC declined $3.7 million compared to the same period in 2011. For the third quarter of 2012, loans secured by real estate declined $5.8 million, and consumer loans increased $2.1 million at ALC. The increased yield on consumer loans was not sufficient to offset the decreased income on the real estate loans, and, as a result, the third quarter 2012 interest income declined $127,000. For the nine-month period ended September 30, 2012, average loans declined $3.0 million at ALC, with consumer loans increasing $3.1 million and real estate loans declining $6.1 million compared to the same period in 2011. The increased yield on the increased consumer loans offset the loss of interest income on the real estate loans, resulting in an increase of $12,000 in interest income for the nine-month period ending September 30, 2012 when compared to the same period in 2011. Management expects real estate loans at ALC to continue to decline due to efforts to focus on traditional consumer finance activities at ALC.

Interest expense for USBI in the 2012 third quarter decreased $696,000, or 40.3%, compared to the third quarter of 2011. Interest expense decreased $1.7 million, or 31.7%, to $3.7 million for the first nine months of 2012, compared to $5.4 million for the first nine months of 2011. These decreases were the result of lower interest rates paid on certificates of deposit and borrowed funds. As longer term certificates of deposit mature, they reprice at lower rates, as rates on deposits and borrowed funds remain at record lows. If the current rate environment continues, interest expense should continue to decline as compared to the prior year expense, until market interest rates increase.

Net interest income for USBI decreased $675,000, or 7.5%, for the third quarter of 2012, and decreased $959,000, or 3.6%, for the first nine months of 2012, compared to the same periods in 2011, respectively. The net interest margin declined from 6.18% for the nine months ended September 30, 2011 to 6.07% for the nine months ended September 30, 2012, and from 6.19% for the third quarter of 2011 to 6.04% for the third quarter of 2012. Loan and investment yields declined for the three- and nine-month periods ended September 30, 2012 compared to the same periods in 2011. The cost of funds declined due to a decline in interest rates paid on interest bearing deposits and borrowed funds. We believe that 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 for USBI was $492,000, or 0.5% annualized of average loans, in the third quarter of 2012, compared to $2.3 million, or 2.2% annualized of average loans, in the third quarter of 2011. The provision for loan losses decreased to $3.2 million for the nine months ended September 30, 2012, compared to $5.2 million for the same period in 2011. The annualized provision as a percent of average loans was 1.1% and 1.7% for the first nine months of 2012 and 2011. No provision for loan losses was required at the Bank for the 2012 third quarter.

The provision for loan losses at the Bank for the nine months ended September 30, 2012 decreased to $1.5 million, as compared to $3.3 million for the same period in 2011. Net charge-offs at the Bank decreased $5.3 million for the nine months ended September 30, 2012, and decreased $5.2 million in the quarter ended September 30, 2012, when compared to the same periods in 2011. The provision for loan losses at ALC decreased to $492,000 for the third quarter of 2012, compared to $688,000 for the same period in 2011. For the nine-month period ending September 30, 2012, the provision for loan losses at ALC decreased $247,000 to $1.7 million, compared to $1.9 million for the same nine-month period in 2011. At the Company level, net charge-offs were $5.6 million for the nine-month period ended September 30, 2012 and $10.9 million for the same period in 2011. Net charge-offs year-to-date as of September 30, 2012 were $3.6 million for the Bank and $2.0 million for ALC. Net charge-offs have declined when compared to the two previous years. The largest losses experienced in the previous two years were in one type of loan – real estate development. Of the loan loss provision expensed in 2010, 65.3%, or $12.5 million, was in the loan category of speculative real estate loan or undeveloped land or residential lots. Of the loan loss provision expensed in 2011, 44.0%, or $8.3 million, was in the loan category of real estate development loans, raw land or residential lots. It is now the Bank’s policy to no longer make residential or commercial real estate development loans except in rare instances where it is in the Bank’s best interest to do so. The Company has identified non-performing loans in the real estate development category, measured the impairment and established a reserve for loan losses that management believes to be adequate to absorb future losses. Management is making every effort to improve the Bank’s position relative to these impaired loans by acquiring more collateral or modifying terms to prevent further exposure. Although uncertainty in the economic outlook still exists, management believes that loss exposure in this segment of the portfolio is identified, reserved against and adequately monitored to ensure that changes are promptly addressed in the analysis of overall reserve adequacy.

Total non-interest expense decreased $3.0 million, or 28.6%, for the 2012 third quarter, and decreased $1.3 million, or 5.1%, for the nine months ended September 30, 2012, compared to the same periods in 2011. Salary and employee benefits decreased $384,000 when comparing third quarter 2012 to the same period in 2011, and decreased $326,000 for the nine months ended September 30, 2012 compared to the same period in 2011. For the 2012 third quarter, impairment on other real estate decreased $2.6 million, and realized loss on sale of other real estate owned increased $244,000. For the nine months ended September 30, 2012, impairment on other real estate owned decreased $601,000, and realized loss on sale of other real estate owned increased $196,000.

Total non-interest expense at the Bank declined $2.6 million, or 34.0%, for the third quarter of 2012, and declined $1.4 million, or 7.7%, for the nine months ended September 30, 2012, compared to the same periods in 2011. Salary and employee benefits declined $415,000 for the third quarter of 2012 compared to the third quarter of 2011. For the nine months ended September 30, 2012, salary and employee benefits declined $640,000 compared to the same period in 2011. Impairment on other real estate owned declined $2.4 million for the 2012 third quarter and $239,000 for the nine months ended September 30, 2012, compared with the same periods last year. Realized loss on the sale of other real estate owned increased $282,000 for the third quarter of 2012 and $46,000 for the nine-month period ended September 30, 2012, compared to the same periods in 2011. Appraisals on foreclosed properties, which were updated in the first quarter of 2012, reflected decreased values, primarily on commercial real estate, and required the impairment charges. There remains approximately $2.0 million in foreclosed property that is scheduled to be reappraised in the fourth quarter of this year. These updated appraisals could result in decreased market values, which would require additional impairment charges.

At ALC, total non-interest expense increased $449,000, or 14.9%, for the 2012 third quarter, and increased $54,000, or 0.7%, for the nine months ended September 30, 2012, compared to the same periods in 2011. Salary and employee benefits increased $31,000 when comparing the 2012 third quarter to the same period in 2011, and increased $315,000 for the nine-months ended September 30, 2012 compared to the same period in 2011. For the 2012 third quarter, impairment on other real estate decreased $192,000, and realized loss on sale of other real estate owned decreased $38,000, both as compared to the same period in 2011. For the nine-months ended September 30, 2012, impairment on other real estate owned decreased $361,000, and realized loss on sale of other real estate owned increased $150,000, both as compared to the same period in 2011.

All other non-interest expenses for both the Bank and ALC remained fairly consistent for the third quarter and nine-month periods in 2012 when compared to the same periods in 2011.

Income tax expense for the third quarter of 2012 was $517,000, compared to income tax benefit of $979,000 in the third quarter of 2011. Income tax benefit of $411,000 for the nine months ended September 30, 2011 increased to a tax expense of $157,000 for the same period in 2012. Management estimates the effective tax rate for the Company to be approximately 31.0% of pre-tax income for the period ended September 30, 2012.

COMPARING THE SEPTEMBER 30, 2012 STATEMENTS OF FINANCIAL CONDITION TO DECEMBER 31, 2011

In comparing consolidated financial condition at September 30, 2012 to December 31, 2011, total assets decreased $37.5 million to $584.3 million, and liabilities decreased $39.4 million to $516.2 million. Shareholders’ equity increased $1.9 million as a result of net income of $1.3 million, an increase in accumulated other comprehensive income of $466,000 and reissuance of treasury stock of $85,000.

Investment securities for USBI decreased $8.6 million, or 7.0%, during the first nine months of 2012. Investments provide the Company with a stable form of liquidity while maximizing earnings yield. Loans, net of unearned income, decreased $38.7 million, from $403.4 million at December 31, 2011 to $364.6 million at September 30, 2012. Deposits decreased $20.4 million, or 3.9%, during the first nine months of 2012. Loans, net of unearned income at ALC, decreased $4.9 million, from $81.7 million at December 31, 2011 to $76.8 million at September 30, 2012. Loans, net of unearned income at the Bank, after consolidation eliminations, decreased $33.8 million from $321.6 million at December 31, 2011 to $287.8 million at September 30, 2012. Depressed market conditions and weak loan demand may continue to affect the Company’s ability to generate loan growth, and loan volume could continue to decline.

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, 2012, the allowance for loan losses was $19.9 million, or 5.5% of loans net of unearned income, compared to $22.3 million, or 5.5% of loans net of unearned income, at December 31, 2011. The coverage ratio of the allowance for loan losses to non-performing assets decreased to 42.1% at September 30, 2012, compared to 62.5% at December 31, 2011. The increase in non-accrual loans resulted from one large loan relationship that reached 90 days past due, which required it to be placed on non-accrual status. This relationship was included in the ASC 310 analysis at December 31, 2011, and the September 30, 2012 analysis did not indicate that any additional impairment or provision for loan losses was required. At September 30, 2012, loans on non-accrual increased $15.1 million, accruing loans past due 90 days or more decreased $244,000, and real estate acquired in settlement of loans decreased $3.2 million, each as compared to December 31, 2011. The balance in the allowance for loan losses related to loans evaluated collectively for impairment declined from $11.2 million at December 31, 2011 to $8.3 million at September 30, 2012. The decline resulted in part from a decline in historical losses for these loans, and from a decline in recorded investments in these loans of $34.6 million compared to December 31, 2011. Net charge-offs at ALC declined $43,000 for the nine-month period ended September 30, 2012 when compared with the same period in 2011. Net charge-offs at the Bank declined $5.3 million for the nine-month period ended September 30, 2012 when compared with the same period in 2011. The portion of the allowance for loan losses related to loans evaluated individually for impairment increased from $11.1 million at December 31, 2011 to $11.6 million at September 30, 2012. The recorded investment in these loans declined from $61.9 million at December 31, 2011 to $58.0 million at September 30, 2012.

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


	Consolidated
	September 30,			December 31,			September 30,
	2012			2011			2011
Loans Accounted for on a Non-Accrual Basis	$	31,575		$	16,502		$	19,901
Accruing Loans Past Due 90 Days or More		2,088			2,332			3,083
Real Estate Acquired in Settlement of Loans		13,608			16,774			22,993

Total	$	47,271		$	35,608		$	45,977
Non-Performing Assets as a Percentage of Net Loans and Other Real Estate		12.50	%		8.48	%		10.93	%


	FUSB
	September 30,			December 31,			September 30,
	2012			2011			2011
Loans Accounted for on a Non-Accrual Basis	$	30,067		$	14,616		$	18,537
Accruing Loans Past Due 90 Days or More		56			224			383
Real Estate Acquired in Settlement of Loans		11,021			12,606			17,688

Total	$	41,144		$	27,446		$	36,608
Non-Performing Assets as a Percentage of Net Loans and Other Real Estate		13.77	%		8.21	%		10.99	%


	ALC
	September 30,			December 31,			September 30,
	2012			2011			2011
Loans Accounted for on a Non-Accrual Basis	$	1,507		$	1,886		$	1,364
Accruing Loans Past Due 90 Days or More		2,032			2,108			2,700
Real Estate Acquired in Settlement of Loans		2,587			4,168			5,305

Total	$	6,126		$	8,162		$	9,369
Non-Performing Assets as a Percentage of Net Loans and Other Real Estate		7.72	%		9.50	%		10.69	%

Non-performing assets as a percentage of net loans and other real estate was 12.5% at September 30, 2012 and 8.5% at December 31, 2011. Loans on non-accrual status increased $15.1 million, accruing loans past due 90 days or

more decreased $244,000 and real estate acquired in settlement of loans decreased $3.2 million from December 31, 2011. The increase in non-accrual loans was primarily due to one large loan relationship, which reached 90 days past due and was required to be placed on non-accrual status. Although there can be no assurance that various factors will not cause a different result, we are optimistic that the past due status of this loan relationship is temporary in nature and that this relationship will return to accrual status in the fourth quarter with all interest and fees paid at that time. Other real estate owned as of September 30, 2012 consisted of five residential properties totaling $251,412 and thirty-nine commercial properties totaling $10.8 million at the Bank, and seventy-five residential properties totaling $2.3 million and fourteen commercial properties totaling $293,022 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, and the real estate market remains 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 $175.3 million in borrowing capacity from the FHLB and $17.8 million in established federal funds lines.

The Bank is required to maintain certain levels of regulatory capital. At September 30, 2012 and December 31, 2011, 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 14 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 $172.3 million at December 31, 2011 and $130.7 million at September 30, 2012.

Investment securities forecasted to mature or reprice over the next twelve months ending September 30, 2013 are estimated to be $7.1 million, or about 6.9%, of the investment portfolio as of September 30, 2012. For comparison, principal payments on investment securities totaled $23.0 million, or 22.4%, of the investment portfolio at September 30, 2012.

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, 2012, the bond portfolio had an expected average maturity of 3.6 years, and approximately 70.2% of the $102.6 million in bonds was 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, 2012, had long-term debt and short-term borrowings that, on average, represented 1.2% of total liabilities and equity, compared to 3.9% at year-end 2011. FHLB advances totaling $20.0 million were repaid in the first two quarters of 2012.

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 differences 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%, 3% and 4% 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 that are designed to ensure that information required to be disclosed in the Company’s Securities Exchange Act of 1934 (the “Exchange Act”) reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

The management of the Company carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and the 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) as of September 30, 2012, pursuant to the evaluation of these controls and procedures required by Rule 13a-15 of the Exchange Act. Based upon that evaluation, the Company’s management concluded, as of September 30, 2012, 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, 2012 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

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 related 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 Circuit Court granted summary judgment in favor of the Bank and Mr. Morgan on October 29, 2012 as to all claims asserted by both Mr. and Ms. Russell.

See Note 14 to Item 1, “Guarantees, Commitments and Contingencies,” for information regarding certain other 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 14 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

We may be required to establish a valuation allowance on certain deferred tax assets if we are unable to obtain sufficient future profitability.

We have experienced net operating losses in recent periods. In evaluating our ability to realize the deferred tax assets recorded as a result of these losses, we regularly consider all available positive and negative evidence surrounding the four possible sources of future taxable income: (1) the future reversals of taxable temporary differences; (2) future taxable income exclusive of reversing temporary differences and carryforwards; (3) taxable income in prior carryback years; and (4) tax-planning strategies. Our assumptions require significant judgment about future taxable income that have a substantial amount of inherent subjectivity. If we are unable to obtain sufficient future profitability and/or implement appropriate tax planning strategies, then we may be required to provide a valuation allowance related to our deferred tax assets. While recording such a valuation allowance would have no cash flow impact, it would have a material negative impact on our earnings and net assets and unfavorably affect our effective tax rate.

In addition to the risk factor above and 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, 2011 that could materially affect our business, financial condition or future results. The risks described herein and in our Annual Report on Form 10-K 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.

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		7,100	⁽²⁾	$	5.47		—		242,303
August 1 – August 31		—		$	0.00		—		242,303
September 1 – September 30		750	⁽³⁾	$	6.39		—		242,303

Total		7,850		$	5.56		—		242,303

(1)

On December 17, 2011, 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. The expiration date of the extended repurchase program is December 31, 2012. At September 30, 2012 there were 242,303 shares that may still be purchased under the program.

(2)	7,100 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).

(3)	750 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 13, 2012

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 by reference to Exhibit 3(ii) to the Current Report on Form 8-K filed August 29, 2007.

3.2A		First Amendment to the Bylaws of United Security Bancshares, Inc., incorporated by reference to Exhibit 3(ii) to the Current Report on Form 8-K filed February 24, 2012.

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 Files for United Security Bancshares, Inc.’s Form 10-Q for the period ended September 30, 2012.