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

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

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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 June 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 Regulations 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 August 10, 2012
Common Stock, $0.01 par value		6,017,732 shares

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES


		PAGE
	PART I. FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS

Condensed Consolidated Statements of Financial Condition at June 30, 2012 (Unaudited) and December 31, 2011			4

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

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

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 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		30

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		34

ITEM 4.	CONTROLS AND PROCEDURES		35

	PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS		35

ITEM 1A.	RISK FACTORS		36

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

ITEM 6.	EXHIBITS		36

Signature Page			36

FORWARD-LOOKING STATEMENTS

Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). In addition, United Security Bancshares, Inc. and its subsidiaries (the “Company” or “USBI”), through its senior management, from time to time makes forward-looking statements 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. 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)


	June 30, 2012			December 31, 2011
	(Unaudited)
ASSETS
Cash and Due from Banks	$	11,992		$	9,491
Interest Bearing Deposits in Banks		62,809			43,306

Total Cash and Cash Equivalents		74,801			52,797
Investment Securities Available-for-Sale, at fair market value		107,457			122,170
Investment Securities Held-to-Maturity, at cost		5,163			1,170
Federal Home Loan Bank Stock, at cost		1,418			2,861
Loans, net of allowance for loan losses of $20,154 and $22,267, respectively		355,411			381,085
Premises and Equipment, net		9,040			9,050
Cash Surrender Value of Bank-Owned Life Insurance		13,116			12,922
Accrued Interest Receivable		3,370			3,958
Investment in Limited Partnerships		1,416			1,456
Other Real Estate Owned		15,005			16,774
Other Assets		17,088			17,567

Total Assets	$	603,285		$	621,810

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	527,247		$	527,073
Accrued Interest Expense		574			790
Short-Term Borrowings		714			356
Long-Term Debt		—			20,000
Other Liabilities		8,009			7,384

Total Liabilities		536,544			555,603

Commitments and Contingencies (See Note 13)
Shareholders’ Equity:
Common Stock, par value $0.01 per share, 10,000,000 shares authorized; 7,322,560 shares issued; 6,017,732 and 6,015,737 shares outstanding, respectively		73			73
Surplus		9,259			9,259
Accumulated Other Comprehensive Income, net of tax		3,347			3,004
Retained Earnings		75,224			75,091
Less Treasury Stock: 1,304,828 and 1,306,823 shares at cost, respectively		(21,150	)		(21,208	)
Noncontrolling Interest		(12	)		(12	)

Total Shareholders’ Equity		66,741			66,207

Total Liabilities and Shareholders’ Equity	$	603,285		$	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					Six Months Ended
	June 30,					June 30,
	2012		2011			2012			2011
	(Unaudited)					(Unaudited)
INTEREST INCOME:
Interest and Fees on Loans	$	8,883	$	9,270		$	17,966		$	18,357
Interest on Investment Securities		865		1,337			1,792			2,694

Total Interest Income		9,748		10,607			19,758			21,051
INTEREST EXPENSE:
Interest on Deposits		1,147		1,579			2,522			3,176
Interest on Borrowings		30		200			115			470

Total Interest Expense		1,177		1,779			2,637			3,646

NET INTEREST INCOME		8,571		8,828			17,121			17,405
PROVISION FOR LOAN LOSSES		468		1,609			2,683			2,914

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		8,103		7,219			14,438			14,491
NON-INTEREST INCOME:
Service and Other Charges on Deposit Accounts		603		722			1,231			1,438
Credit Life Insurance Income		222		218			341			340
Other Income		506		1,256			1,033			1,607

Total Non-Interest Income		1,331		2,196			2,605			3,385
NON-INTEREST EXPENSE:
Salaries and Employee Benefits		3,714		3,851			7,479			7,421
Occupancy Expense		480		467			928			943
Furniture and Equipment Expense		343		317			653			620
Impairment on Other Real Estate		30		402			2,864			886
Loss on Sale of Other Real Estate		266		169			460			508
Other Expense		2,607		2,945			4,886			5,208

Total Non-Interest Expense		7,440		8,151			17,270			15,586

INCOME (LOSS) BEFORE INCOME TAXES		1,994		1,264			(227	)		2,290
PROVISION FOR (BENEFIT FROM) INCOME TAXES		623		361			(360	)		568

NET INCOME	$	1,371	$	903		$	133		$	1,722

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

NET INCOME ATTRIBUTABLE TO USBI	$	1,371	$	904		$	133		$	1,723

BASIC AND DILUTED NET INCOME ATTRIBUTABLE TO USBI PER SHARE	$	0.23	$	0.15		$	0.02		$	0.29

DIVIDENDS PER SHARE	$	—	$	—		$	—		$	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

(Dollars in Thousands)


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2012		2011			2012		2011
	(Unaudited)					(Unaudited)
Net income attributable to USBI	$	1,371	$	904		$	133	$	1,723

Other comprehensive income:
Change in unrealized holding gains on available-for-sale securities arising during period, net of tax of $246, $364, $205 and $459, respectively		410		608			342		766
Reclassification adjustment for net gains realized on available-for-sale securities realized in net income, net of tax of $-, $150, $- and $150, respectively		—		(251	)		—		(251	)

Other comprehensive income		410		357			342		515

Comprehensive income attributable to USBI	$	1,781	$	1,261		$	475	$	2,238

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

Total comprehensive income	$	1,781	$	1,260		$	475	$	2,237

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)


	Six Months Ended
	June 30,
	2012			2011
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	133		$	1,722
Less net loss attributable to noncontrolling interest		—			(1	)

Net income attributable to USBI	$	133		$	1,723
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		360			350
Amortization of premiums and discounts, net		607			385
Provision for loan losses		2,683			2,914
Gain on sale of securities, net		—			(401	)
Impairment of OREO		2,863			886
Loss on sale of OREO		460			508
Net other operating activities		1,055			1,995

Total adjustments		8,028			6,637

Net cash provided by operating activities		8,161			8,360

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and prepayments of investment securities, available for sale		22,911			23,248
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		1,444			1,059
Proceeds from the sale of other real estate		1,633			2,721
Purchase of premises and equipment, net		(289	)		(300	)
Purchase of investment securities available-for-sale		(8,258	)		(28,895	)
Purchase of investment securities held-to-maturity		(5,161	)		—
Net change in loan portfolio		19,803			(9,841	)
Net effect of deconsolidating of variable interest entity		—			5,010

Net cash provided by (used in) investing activities		33,253			(820	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in customer deposits		174			21,174
Dividends paid		—			(241	)
Decrease in borrowings		(19,642	)		(9,859	)
Purchase of treasury stock		—			(3	)
Reissuance of treasury stock		58			—

Net cash (used in) provided by financing activities		(19,410	)		11,071

NET INCREASE IN CASH AND CASH EQUIVALENTS		22,004			18,611

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

CASH AND CASH EQUIVALENTS, end of period	$	74,801		$	32,142

SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest	$	2,853		$	5,242
Income Taxes		82			498
NON-CASH TRANSACTIONS:
Other real estate acquired in settlement of loans	$	3,187		$	3,754

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)

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 condensed consolidated 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”) and previously known as Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. The amendments will improve comparability of fair value measurements presented and disclosed in financial statements prepared with GAAP and International Financial Reporting Standards (“IFRS”). The amendments also clarify the application of existing fair value measurement requirements. These amendments include (1) the application of the highest and best use and valuation premise concepts, (2) measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity and (3) disclosing quantitative information about the unobservable inputs used within the Level 3 hierarchy. 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 Update 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 Update. 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 ATTRIBUTABLE TO USBI PER SHARE

Basic net income attributable to USBI per share is computed by dividing net income attributable to USBI by the weighted average shares during the three- and six-month periods ended June 30, 2012 and 2011. Diluted net income attributable to USBI per share for each of the three- and six-month periods ended June 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 three- and six-month periods ended June 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 attributable to USBI per share calculations for the three- and six-month periods ended June 30, 2012 and 2011 (dollars in thousands, except per share data):


					Basic and
					Diluted Net
			Weighted		Income
	Net Income		Average		Attributable
	Attributable		Shares		to USBI
	to USBI		Outstanding		Per Share
For the Three Months Ended:
June 30, 2012	$	1,371		6,017,732	$	0.23
June 30, 2011	$	904		6,010,749	$	0.15
For the Six Months Ended:
June 30, 2012	$	133		6,017,410	$	0.02
June 30, 2011	$	1,723		6,010,803	$	0.29

4.	COMPREHENSIVE INCOME

Comprehensive income consists of net income 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, certain reclassification adjustments are made to avoid double counting items that are displayed as part of net income for a period that also had been displayed as part of other comprehensive income 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 June 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.

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


	Fair Value Measurements at June 30, 2012 Using
			Quoted
			Prices in
			Active		Significant
	Totals		Markets for		Other		Significant
	at		Identical		Observable		Unobservable
	June 30,		Assets		Inputs		Inputs
	2012		(Level 1)		(Level 2)		(Level 3)
	(Dollars in Thousands)
Mortgage-backed securities	$	87,284	$	—	$	87,284	$	—
Obligations of states, counties and political subdivisions		15,075		—		15,075		—
Obligations of U.S. government sponsored agencies		5,013		—		5,013		—
U.S. treasury securities		75		—		75		—
Equity securities		10		10		—		—

	Fair Value Measurements at December 31, 2011 Using
			Quoted
			Prices in
			Active		Significant
	Totals		Markets for		Other		Significant
	At		Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
	2011		(Level 1)		(Level 2)		(Level 3)
	(Dollars in Thousands)
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		—		—

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 $10,313 and $10,284 for June 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. 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 $16,052,303 and $16,245,779 as of June 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 $302,740 and $5,115,994, (utilizing Level 3 valuation inputs) for the periods ended June 30, 2012 and December 31, 2011, respectively. In connection with the measurement and initial recognition of the foregoing foreclosed assets, the Company recognized charge-offs of the allowance for possible loan losses totaling approximately $238,929 for the six months ended June 30, 2012 and $2,514,983 for the year ended December 31, 2011. Foreclosed assets totaling $8,525,171 for the six months ended June 30, 2012, and $14,157,679 for the year ended December 31, 2011, were remeasured at fair value, resulting in impairment loss of $2,863,446 for the six months ended June 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 June 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 June 30, 2012 is 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 June 30, 2012		Valuation Technique	Unobservable Input	Quantitative Range of Unobservable Inputs and Weighted-Average
	(Dollars in thousands)
Nonrecurring fair value measurements:
Impaired loans	$	16,052	Multiple data points, including discount to appraised value of collateral based on recent market activity	Appraisal compatibility adjustment (discount)	6% - 9%
Foreclosed property and other real estate	$	303	Discount to appraised value of property based on recent market activity for sales of similar properties	Appraisal compatibility adjustment (discount)	6% - 9%

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 of the Company’s financial instruments at June 30, 2012 and December 31, 2011 were as follows:


	June 30, 2012				December 31, 2011
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(Dollars in Thousands)
Assets:
Cash and cash equivalents	$	74,801	$	74,801	$	52,797	$	52,797
Investment securities available-for-sale		107,457		107,457		122,170		122,170
Investment securities held-to-maturity		5,163		5,205		1,170		1,170
Federal Home Loan Bank stock		1,418		1,418		2,861		2,861
Accrued interest receivable		3,370		3,370		3,958		3,958
Loans, net of allowance for loan losses		355,411		357,605		381,085		383,879
Liabilities:
Deposits		527,247		528,953		527,073		528,741
Short-term borrowings		714		714		356		356
Long-term debt		—		—		20,000		20,383
Accrued interest payable		574		574		790		790

6.	INVESTMENT SECURITIES

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


	Available-for-Sale
	June 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in Thousands)
Mortgage-backed securities	$	83,442	$	3,988	$	(146	)	$	87,284
Obligations of states, counties and political subdivisions		13,582		1,493		—			15,075
Obligations of U.S. government sponsored agencies		4,994		19		—			5,013
U.S. treasury securities		75		—		—			75
Equity securities		9		1		—			10

Total	$	102,102	$	5,501	$	(146	)	$	107,457


	Held-to-Maturity
	June 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(Dollars in Thousands)
U.S. agencies	$	5,163	$	42	$	—	$	5,205


	Available-for-Sale
	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated 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 Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated 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 June 30, 2012 are presented in the following table:


	Available-for Sale				Held-to-Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(Dollars in Thousands)
Maturing within one year	$	120	$	121	$	—	$	—
Maturing after one to five years		4,875		5,133		—		—
Maturing after five to fifteen years		57,508		60,870		5,163		5,205
Maturing after fifteen years		39,590		41,323		—		—
Equity securities and Preferred Stock		9		10		—		—

Total	$	102,102	$	107,457	$	5,163	$	5,205

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 June 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 June 30, 2012 and December 31, 2011, based on the aforementioned considerations, management did not record other-than-temporary impairment on any security that was in an unrealized loss position.


	Available-for-Sale
	June 30, 2012
	Less than 12 Months					12 Months or More
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in Thousands)
Mortgage-backed securities	$	10,256	$	(52	)	$	4,073	$	(94	)


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

As of June 30, 2012, six debt securities had been in a loss position for more than twelve months, and five 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 $72.1 million and $80.0 million at June 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)
Three Months Ended:
June 30, 2012	$	—	$	—	$	—
June 30, 2011	$	401	$	—	$	401
Six Months Ended:
June 30, 2012	$	—	$	—	$	—
June 30, 2011	$	401	$	—	$	401

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 $148,510 as of June 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 $1.4 million recorded investment.

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

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

8.	LOANS AND ALLOWANCE FOR LOAN LOSSES

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


	June 30, 2012
	FUSB		ALC		Total
	(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans	$	38,370	$	—	$	38,370
Secured by 1-4 family residential properties		40,239		36,770		77,009
Secured by multi-family residential properties		24,344		—		24,344
Secured by non-farm, non-residential properties		136,019		—		136,019
Other		802		—		802
Commercial and industrial loans		39,488		—		39,488
Consumer loans		16,393		46,978		63,371
Other loans		1,213		—		1,213

Total loans	$	296,868	$	83,748	$	380,616
Less: Unearned interest		210		4,841		5,051
Allowance for loan losses		16,796		3,358		20,154

Net loans	$	279,862	$	75,549	$	355,411


	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, 72.7% of the portfolio is concentrated in loans secured by real estate.

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 resident, 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 June 30, 2012, December 31, 2011and June 30, 2011 were $2,711,659, $3,036,740 and $2,450,038, respectively. During the six-month period ended June 30, 2012, new loans to these parties totaled $53,283, and repayments by active related parties were $372,984. 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 June 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 six-month period ended June 30, 2011, new loans to these parties totaled $449,601, and repayments were $138,093.

Allowance for Loan Losses

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


	FUSB
	June 30, 2012
	Commercial		Commercial Real Estate		Consumer			Residential Real Estate		Other			Total
	(Dollars in Thousands)
Beginning balance	$	889	$	16,533	$	306		$	684	$	279		$	18,691
Charge-offs		482		3,073		87			115		11			3,768
Recoveries		115		192		41			3		—			351

Net charge-offs		367		2,881		46			112		11			3,417
Provision		279		1,426		(36	)		81		(227	)		1,523

Ending balance	$	801	$	15,078	$	224		$	653	$	41		$	16,797


	ALC
	June 30, 2012
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other		Total
	(Dollars in Thousands)
Beginning balance	$	—	$	—	$	2,542	$	1,034	$	—	$	3,576
Charge-offs		—		—		1,383		472		—		1,855
Recoveries		—		—		448		28		—		476

Net charge-offs		—		—		935		444		—		1,379
Provision		—		—		777		383		—		1,160

Ending balance	$	—	$	—	$	2,384	$	973	$	—	$	3,357


	FUSB & ALC
	June 30, 2012
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other			Total
	(Dollars in Thousands)
Beginning balance	$	889	$	16,533	$	2,848	$	1,718	$	279		$	22,267
Charge-offs		482		3,073		1,470		587		11			5,623
Recoveries		115		192		489		31		—			827

Net charge-offs		367		2,881		981		556		11			4,796
Provision		279		1,426		741		464		(227	)		2,683

Ending balance	$	801	$	15,078	$	2,608	$	1,626	$	41		$	20,154


	FUSB
	December 31, 2011
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other			Total
	(Dollars in Thousands)
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

Net charge-offs		255		12,871		299		801		3			14,229
Provision		156		14,198		230		1,126		183			15,893

Ending balance	$	889	$	16,533	$	306	$	684	$	279		$	18,691


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

Net charge-offs		—		—		2,286		956		—			3,242
Provision		—		—		2,165		744		—			2,909

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


	FUSB & ALC
	December 31, 2011
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other			Total
	(Dollars in Thousands)
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

Net charge-offs		255		12,871		2,585		1,757		3			17,471
Provision		156		14,198		2,395		1,870		183			18,802

Ending balance	$	889	$	16,533	$	2,848	$	1,718	$	279		$	22,267


	FUSB
	June 30, 2011
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other			Total
	(Dollars in Thousands)
Beginning balance	$	988	$	15,205	$	375	$	360	$	99		$	17,027
Charge-offs		237		2,611		227		509		—			3,584
Recoveries		34		24		54		2		—			114

Net charge-offs		203		2,587		173		507		—			3,470
Provision		238		685		152		568		60			1,703

Ending balance	$	1,023	$	13,303	$	354	$	421	$	159		$	15,260


	ALC
	June 30, 2011
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other		Total
	(Dollars in Thousands)
Beginning balance	$	—	$	—	$	2,663	$	1,246	$	—	$	3,909
Charge-offs		—		—		1,271		536		—		1,807
Recoveries		—		—		384		53		—		437

Net charge-offs		—		—		887		483		—		1,370
Provision		—		—		762		449		—		1,211

Ending balance	$	—	$	—	$	2,538	$	1,212	$	—	$	3,750


	FUSB & ALC
	June 30, 2011
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other		Total
	(Dollars in Thousands)
Beginning balance	$	988	$	15,205	$	3,038	$	1,606	$	99	$	20,936
Charge-offs		237		2,611		1,498		1,045		—		5,391
Recoveries		34		24		438		55		—		551

Net charge-offs		203		2,587		1,060		990		—		4,840
Provision		238		685		914		1,017		60		2,914

Ending balance	$	1,023	$	13,303	$	2,892	$	1,633	$	159	$	19,010

Impaired Loan Evaluations

The following table details loans individually evaluated for impairment at June 30, 2012 and December 31, 2011:


	June 30, 2012				December 31, 2011
	Loans Evaluated Individually for Impairment				Loans Evaluated Individually for Impairment
	Recorded Investment		Balance in Allowance for Loan Losses		Recorded Investment		Balance in Allowance for Loan Losses
	(Dollars in Thousands)				(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans	$	18,490	$	7,365	$	19,674	$	6,800
Secured by 1-4 family residential properties		—		—		186		—
Secured by multi-family residential properties		2,884		75		2,884		—
Secured by non-farm, non-residential properties		27,698		2,467		37,569		3,775
Other		—		—		—		—
Commercial and industrial loans		1,305		359		1,603		509
Consumer loans		—		—		—		—
Other loans		—		—		—		—

Total loans	$	50,377	$	10,266	$	61,916	$	11,084

The following table details loans collectively evaluated for impairment at June 30, 2012 and December 31, 2011:


	June 30, 2012				December 31, 2011
	Loans Evaluated Collectively for Impairment				Loans Evaluated Collectively for Impairment
	Recorded Investment		Balance in Allowance for Loan Losses		Recorded Investment		Balance in Allowance for Loan Losses
	(Dollars in Thousands)				(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans	$	19,880	$	2,117	$	20,637	$	2,873
Secured by 1-4 family residential properties		77,009		1,627		84,037		113
Secured by multi-family residential properties		21,460		164		23,838		170
Secured by non-farm, non-residential properties		108,321		2,836		109,949		2,965
Other		802		3		820		1,555
Commercial and industrial loans		38,181		364		41,457		380
Consumer loans		63,372		2,607		64,574		2,848
Other loans		1,214		170		910		279

Total loans	$	330,239	$	9,888	$	346,222	$	11,183

Credit Quality Indicators

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

The following is a guide 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 or in our credit position 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 substandard.

Doubtful: Borrowers classified 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 June 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	$	17,067	$	523	$	20,747	$	33	$	38,370
Secured by 1-4 family residential properties		34,493		1,308		4,434		4		40,239
Secured by multi-family residential properties		21,460		—		2,884		—		24,344
Secured by non-farm, non-residential properties		97,842		7,542		30,635		—		136,019
Other		802		—		—		—		802
Commercial and industrial loans		36,752		456		2,244		36		39,488
Consumer loans		15,159		184		1,026		24		16,393
Other loans		1,212		—		1		—		1,213

Total	$	224,787	$	10,013	$	61,971	$	97	$	296,868


	ALC
	Performing		Nonperforming		Total
	(Dollars in Thousands)
Loans secured by real estate:
Secured by 1-4 family residential properties	$	35,609	$	1,161	$	36,770
Consumer loans		45,073		1,905		46,978

Total	$	80,682	$	3,066	$	83,748

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 and nonaccruing loans by class at June 30, 2012.


	FUSB
	Past Due
	30-89 Days		Greater than 90 Days		Total		Nonaccrual		Current Loans		Total Loans
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	3,568	$	37	$	3,605	$	3,065	$	31,700	$	38,370
Secured by 1-4 family residential properties		920		—		920		448		38,871		40,239
Secured by multi-family residential properties		—		—		—		2,884		21,460		24,344
Secured by non-farm, non-residential properties		4,608		—		4,608		8,720		122,691		136,019
Other		—		—		—		—		802		802
Commercial and industrial loans		604		4		608		917		37,963		39,488
Consumer loans		438		—		438		53		15,902		16,393
Other loans		—		—		—		—		1,213		1,213

Total past due loans	$	10,138	$	41	$	10,179	$	16,087	$	270,602	$	296,868


	ALC
	Past Due
	30-89 Days		Greater than 90 Days		Total		Nonaccrual		Current Loans		Total Loans
	(Dollars in Thousands)
Loans secured by real estate:
Secured by 1-4 family residential properties	$	862	$	861	$	1,723	$	300	$	34,747	$	36,770
Consumer loans		1,329		759		2,088		1,146		43,744		46,978

Total past due loans	$	2,191	$	1,620	$	3,811	$	1,446	$	78,491	$	83,748

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


	FUSB
	Past Due
	30-89 Days		Greater than 90 Days		Total		Nonaccrual		Current Loans		Total Loans
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	3,094	$	—	$	3,094	$	3,087	$	34,130	$	40,311
Secured by 1-4 family residential properties		1,324		38		1,362		879		41,450		43,691
Secured by multi-family residential properties		—		—		—		2,884		23,838		26,722
Secured by non-farm, non-residential properties		1,281		88		1,369		7,563		138,586		147,518
Other		—		—		—		—		820		820
Commercial and industrial loans		1,459		13		1,472		129		41,459		43,060
Consumer loans		670		72		742		74		18,070		18,886
Other loans		3		13		16		—		894		910

Total past due loans	$	7,831	$	224	$	8,055	$	14,616	$	299,247	$	321,918


	ALC
	Past Due
	30-89 Days		Greater than 90 Days		Total		Nonaccrual		Current Loans		Total Loans
	(Dollars in Thousands)
Loans secured by real estate:
Secured by 1-4 family residential properties	$	1,135	$	1,462	$	2,597	$	520	$	37,415	$	40,532
Consumer loans		1,310		646		1,956		1,367		42,365		45,688

Total past due loans	$	2,445	$	2,108	$	4,553	$	1,887	$	79,780	$	86,220

Impaired Loans

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


	June 30, 2012
	Carrying Amount		Unpaid Principal Balance		Related Allowances
	(Dollars in Thousands)
Impaired loans with no related allowance recorded
Loans secured by real estate
Construction, land development and other land loans	$	4,679	$	4,679	$	—
Secured by 1-4 family residential properties		—		—		—
Secured by multi-family residential properties		895		895		—
Secured by non-farm, non-residential properties		17,971		17,971		—
Commercial and industrial		514		514		—

Total loans with no related allowance recorded	$	24,059	$	24,059	$	—

Impaired loans with an allowance recorded
Loans secured by real estate
Construction, land development and other land loans	$	13,811	$	13,811	$	7,365
Secured by multi-family residential properties		1,989		1,989		75
Secured by non-farm, non-residential properties		9,727		9,727		2,467
Commercial and industrial		791		791		359

Total loans with an allowance recorded	$	26,318	$	26,318	$	10,266

Total impaired loans
Loans secured by real estate
Construction, land development and other land loans	$	18,490	$	18,490	$	7,365
Secured by 1-4 family residential properties		—		—		—
Secured by multi-family residential properties		2,884		2,884		75
Secured by non-farm, non-residential properties		27,698		27,698		2,467
Commercial and industrial		1,305		1,305		359

Total impaired loans	$	50,377	$	50,377	$	10,266

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


	December 31, 2011
	Carrying Amount		Unpaid Principal Balance		Related Allowances
	(Dollars in Thousands)
Impaired loans with no related allowance recorded
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 June 30, 2012 and December 31, 2011 were as follows:


	June 30, 2012
	Average Recorded Investment		Interest Income Recognized		Interest Income Received
	(Dollars in Thousands)
Loans secured by real estate
Construction, land development and other land loans	$	19,514	$	339	$	315
Secured by 1–4 family residential properties		107		—		—
Secured by multi-family residential properties		2,884		—		—
Secured by non-farm, non-residential properties		31,475		597		582
Commercial and industrial		1,376		16		17

Total impaired loans	$	55,356	$	952	$	914


	December 31, 2011
	Average Recorded Investment		Interest Income Recognized		Interest Income 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 $17,532,838 and $16,502,314 at June 30, 2012 and December 31, 2011, respectively. If interest on those loans had been accrued, such income would have approximated $713,200 and $1,459,843 for the six months ended June 30, 2012 and for the twelve months ended December 31, 2011, respectively. Interest income actually recorded on those loans amounted to $12,211 and $35,519 for the six months ended June 30, 2012 and for the twelve months ended December 31, 2011, respectively. Accruing loans past due 90 days or more amounted to $1,660,876 and $2,331,718 for the six months ended June 30, 2012 and for the 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 being 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 $1,844,536 and $1,821,696 of non-accruing loans that were restructured and remained on nonaccrual status at June 30, 2012 and December 31, 2011, respectively. In addition, the Company had $1,735,471 and $2,488,060 of restructured loans that were restored to accrual status based on a sustained period of repayment performance at June 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 June 30, 2012 and December 31, 2011, as well as the recorded investment and unpaid principal balance as of June 30, 2012 and December 31, 2011.


	June 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		9	$	3,182	$	1,736		9	$	3,182	$	2,488
Secured by non-farm, non-residential properties		4		2,620		1,776		3		2,583		1,747
Commercial loans		2		80		68		2		80		75

Total		15	$	5,882	$	3,580		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		1	$	1,311				—	$	—

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 June 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 June 30, 2012 was as follows:


	June 30, 2012		December 31, 2011		Change
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	1,736	$	2,488	$	(752	)
Secured by non-farm, non-residential properties		1,776		1,747		29
Commercial and industrial loans		68		75		(7	)

Total	$	3,580	$	4,310	$	(730	)

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, is considered in the determination of an appropriate level of allowance for loan losses. This evaluation resulted in an allowance for loan losses of $865,434 and $494,352 as of June 30, 2012 and December 31, 2011, respectively.

9.	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 June 30, 2012 or December 31, 2011. There were no treasury tax and loan deposits outstanding at June 30, 2012 and 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 June 30, 2012 and December 31, 2011 were $714,355 and $355,787, respectively.

At June 30, 2012, the Bank had $7.8 million in available federal fund lines from correspondent banks.

10.	LONG-TERM DEBT

The Company uses FHLB advances as an alternative to funding sources with similar maturities, such as certificates of deposit or other deposit programs. These advances generally offer more attractive rates when compared to other mid-term financing options. They are also flexible, allowing the Company to quickly obtain the necessary maturities and rates that best suit its overall asset/liability strategy. At June 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 June 30, 2012, the Bank had $181.0 million in available credit from the FHLB.

11.	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 though 2011.

As of June 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 June 30, 2012. As of June 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:


	June 30, 2012			June 30, 2011
	(Dollars in Thousands)
Income tax (benefit) expense at federal statutory rate	$	(77	)	$	779
Increase (decrease) resulting from:
Tax-exempt interest		(175	)		(202	)
State income tax (benefit) expense, net of federal income tax benefit		(24	)		43
Low income housing tax credits		—			—
Other		(84	)		(52	)

Total	$	(360	)	$	568

12.	SEGMENT REPORTING

Under ASC Topic 280 Segment Reporting, certain information is disclosed for the two reportable operating segments of the Company. The reportable segments were determined using the internal management reporting system. These segments 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 June 30, 2012:
Net interest income	$	4,946		$	3,620	$	5	$	—		$	8,571
Provision for loan losses		20			448		—		—			468
Total non-interest income		957			334		1,666		(1,626	)		1,331
Total non-interest expense		4,707			2,696		219		(182	)		7,440

Income before income taxes		1,176			810		1,452		(1,444	)		1,994
Provision for income taxes		308			314		1		—			623

Net income	$	868		$	496	$	1,451	$	(1,444	)	$	1,371

Other significant items:
Total assets	$	604,227		$	82,382	$	72,921	$	(156,245	)	$	603,285
Total investment securities		112,545			—		75		—			112,620
Total loans, net		347,404			75,549		—		(67,542	)		355,411
Investment in subsidiaries		1,286			—		67,645		(68,926	)		5
Fixed asset addition		58			17		—		—			75
Depreciation and amortization expense		141			39		—		—			180
Total interest income from external customers		5,153			4,595		—		—			9,748
Total interest income from affiliates		975			—		5		(980	)		—

For the six months ended June 30, 2012:
Net interest income	$	9,932		$	7,180	$	9	$	—		$	17,121
Provision for loan losses		1,523			1,160		—		—			2,683
Total non-interest income		1,970			658		644		(667	)		2,605
Total non-interest expense		11,703			5,563		369		(365	)		17,270

Income (loss) before income taxes		(1,324	)		1,115		284		(302	)		(227	)
Provision for (benefit from) income taxes		(796	)		433		3		—			(360	)

Net income (loss)	$	(528	)	$	682	$	281	$	(302	)	$	133

Other significant items:
Fixed asset addition	$	112		$	177	$	—	$	—		$	289
Depreciation and amortization expense		282			78		—		—			360
Total interest income from external customers		10,594			9,164		—		—			19,758
Total interest income from affiliates		1,983			—		9		(1,992	)		—


	FUSB		ALC		All Other			Eliminations			Consolidated
	(Dollars in Thousands)
For the three months ended June 30, 2011:
Net interest income	$	5,553	$	3,260	$	15		$	—		$	8,828
Provision for loan losses		885		724		—			—			1,609
Total non-interest income		1,475		676		1,325			(1,280	)		2,196
Total non-interest expense		5,288		2,675		361			(173	)		8,151

Income before income taxes		855		537		979			(1,107	)		1,264
Provision for income taxes		151		205		5			—			361

Net income	$	704	$	332	$	974		$	(1,107	)	$	903

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

Net income attributable to USBI	$	704	$	332	$	975		$	(1,107	)	$	904

Other significant items:
Total assets	$	632,232	$	86,882	$	83,939		$	(170,366	)	$	632,687
Total investment securities		137,189		—		207			—			137,396
Total loans, net		385,552		77,651		—			(72,551	)		390,652
Goodwill		3,111		—		987			—			4,098
Investment in subsidiaries		1,365		—		77,603			(78,963	)		5
Fixed asset addition		150		150		—			—			300
Depreciation and amortization expense		141		35		—			—			176
Total interest income from external customers		6,075		4,532		—			—			10,607
Total interest income from affiliates		1,272		—		14			(1,286	)		—

For the six months ended June 30, 2011:
Net interest income	$	10,928	$	6,452	$	25		$	—		$	17,405
Provision for loan losses		1,703		1,211		—			—			2,914
Total non-interest income		2,543		851		2,386			(2,395	)		3,385
Total non-interest expense		10,321		5,059		555			(349	)		15,586

Income before income taxes		1,447		1,033		1,856			(2,046	)		2,290
Provision for income taxes		165		395		8			—			568

Net income		1,282		638		1,848			(2,046	)		1,722

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

Net income attributable to USBI	$	1,282	$	638	$	1,849		$	(2,046	)	$	1,723

Other significant items:
Fixed asset addition	$	150	$	150	$	—		$	—		$	300
Depreciation and amortization expense		284		66		—			—			350
Total interest income from external customers		12,025		9,024		2			—			21,051
Total interest income from affiliates		2,572		—		23			(2,595	)		—

13.	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 June 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 condensed consolidated financial statements. A summary of these commitments and contingent liabilities is presented below:


	June 30, 2012		December 31, 2011
	(Dollars in Thousands)
Standby Letters of Credit	$	1,045	$	1,172
Commitments to Extend Credit	$	35,436	$	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 June 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 June 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 ALC has requested oral arguments. 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.

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

The 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 USBI’s consolidated financial statements or results of operations.

ITEM 2.

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

The following discussion and consolidated 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 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 June 30, 2012 to year-end 2011, while comparing income and expense for the three- and six-month periods ended June 30, 2012 and 2011.

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 SIX-MONTH PERIODS ENDED JUNE 30, 2012 TO THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2011

Net income attributable to USBI in the second quarter of 2012 was $1.4 million, compared to net income attributable to USBI of $904,000 for the second quarter of 2011, resulting in an increase of basic net income per share from $0.15 per share during the second quarter of 2011 to $0.23 per share in the same quarter of 2012.

For the three-month period ended June 30, 2012, the Bank had net income of $868,000, compared to net income of $704,000 for the same quarter of 2011. For the six-month period ended June 30, 2012, the Bank had net loss of $528,000, compared to net income of $1.3 million for the same period in 2011. For the six month period, the decrease in net income for the Bank resulted from higher impairment charges on other real estate owned. These impairments resulted mainly from foreclosed property associated with commercial real estate loans, as real estate values continue to decline and market conditions continue to be depressed. Further declines in market value would require additional impairment charges.

Net income for ALC for the three-month period ended June 30, 2012 was $496,000, compared to $332,000 for the same quarter of 2011. For the six-month period ended June 30, 2012, net income for ALC was $682,000, compared to $638,000 for the same period in 2011. Improvement in both periods for ALC resulted from lower provisions for loan losses.

Interest income for the 2012 second quarter decreased $859,000, or 8.1%, compared to the second quarter of 2011. For the six months ended June 30, 2012, interest income decreased $1.3 million, or 6.1%, 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 second quarter decreased $1.2 million, or 16.6%, compared to the same period of 2011. For the six months ended June 30, 2012, interest income decreased $2.0 million, or 13.8%, 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. Loan demand continues to be weak due to continuing difficult economic conditions. Cash flows from loans and investment securities were reinvested at lower rates, resulting in lower interest income. Interest income at ALC increased $63,000 for the second quarter of 2012 compared to the same quarter of 2011. Interest income at ALC increased $140,000 for the six-month period ended June 30, 2012 compared to the same period in 2011. These increases at ALC resulted from an increase in average consumer loans. The increase in yield on these loans offset the loss of interest income on decreased real estate loans at ALC.

Interest expense for USBI in the 2012 second quarter decreased $602,000, or 33.8%, compared to the second quarter of 2011. Interest expense decreased $1.0 million, or 27.7%, to $2.6 million for the first six months of 2012, compared to $3.6 million for the first six 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 very low rate environment continues, interest expense should continue to decline as compared to the prior year expense.

Net interest income for USBI decreased $257,000, or 2.9%, for the second quarter of 2012, and decreased $284,000, or 1.6%, for the first six months of 2012, compared to the same periods in 2011, respectively. The net interest margin declined from 6.18% for the six months ended June 30, 2011 to 6.09% for the six months ended June 30, 2012, and from 6.17% for the second quarter of 2011 to 6.16% for the second quarter of 2012. Loan and investment yields declined for the three- and six-month periods ended June 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. 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 $468,000, or 0.5% annualized of average loans, in the second quarter of 2012, compared to $1.6 million, or 1.6% annualized of average loans, in the second quarter of 2011. The provision for loan losses decreased to $2.7 million for the six months ended June 30, 2012, compared to $2.9 million for the same period in 2011. The annualized provision as a percent of average loans was 1.4% for each of the first six months of 2012 and 2011. The provision for loan losses at the Bank declined to $20,000 for the 2012 second quarter and decreased to $1.5 million for the six months ended June 30, 2012. Net charge-offs decreased $53,000 for the six months ended June 30, 2012 and decreased $1.4 million in the quarter ended June 30, 2012, when compared to the same periods in 2011 at the Bank. The provision for loan losses at ALC decreased to $448,000 for the second quarter of 2012, compared to $724,000 for the same period of 2011. For the six month period ending June 30, 2012 the provision for loan losses decreased $51,000 to $1,160,000 compared to $1,211,000 for the same six month period in 2011. At the Company

level, net charge-offs were $4.8 million for each of the six month periods ended June 30, 2012 and 2011. Net charge-offs year-to-date as of June 30, 2012 were $3.4 million for the Bank and $1.4 million for ALC.

Total non-interest income for USBI decreased $865,000, or 39.4%, for the second quarter of 2012 and decreased $780,000, or 23.0%, for the first six months of 2012. Service charges on deposit accounts decreased $119,000 for the second quarter of 2012, and $207,000 for the six month period ended June 30, 2012, when compared to the same periods in 2011, primarily due to decreased fees generated from customer overdrafts and non-sufficient funds in both quarters of 2012. All other fees decreased $750,000 for the second quarter of 2012, and $574,000 for the first six months of 2012. The 2011 second quarter fees included a $401,000 gain on sale of securities and a $258,000 reimbursement of attorney fees from a previous fidelity bond claim. No similar gains or reimbursements were booked in the second quarter of 2012.

Total non-interest expense decreased $711,000, or 8.7%, for the 2012 second quarter, and increased $1.7 million, or 10.8%, for the six months ended June 30, 2012, compared to the same periods in 2011. Salary and employee benefits decreased $137,000 when comparing second quarter 2012 to the same period in 2011, and increased $58,000 for the six months ended June 30, 2012 compared to the same period in 2011. For the 2012 second quarter, impairment on other real estate decreased $372,000, and realized loss on sale of other real estate owned increased $97,000. For the six months ended June 30, 2012, impairment on other real estate owned increased $2.0 million, and realized loss on sale of other real estate owned decreased $48,000. 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 third quarter of this year. These updated appraisals could result in decreased market values, which would require additional impairment charges. All other non-interest expenses remained fairly consistent for the second quarter and six month periods in 2012 when compared to the same periods in 2011.

Income tax expense for the second quarter of 2012 was $623,000, compared to income tax expense of $361,000 in the second quarter of 2011. Income tax expense of $568,000 for the period ending June 30, 2011 decreased to a tax benefit of $360,000 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 June 30, 2012.

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

In comparing consolidated financial condition at June 30, 2012 to December 31, 2011, total assets decreased $18.5 million to $603.3 million, while liabilities decreased $19.1 million to $536.5 million. Shareholders’ equity increased $534,000 as a result of net income of $133,000, an increase in accumulated other comprehensive income of $343,000 and reissuance of treasury stock of $58,000.

Investment securities for USBI decreased $10.7 million, or 8.7%, during the first six months of 2012. Investments provide the Company with a stable form of liquidity while maximizing earnings yield. Loans, net of unearned income, decreased $27.8 million, from $403.4 million at December 31, 2011 to $375.6 million at June 30, 2012. Deposits increased $174,000, or 0.03%, during the first six months of 2012. Loans, net of unearned income at ALC, decreased $2.8 million, from $81.7 million at December 31, 2011 to $78.9 million at June 30, 2012. Loans, net of unearned income at the Bank, after consolidation eliminations, decreased $24.9 million from $321.6 million at December 31, 2011 to $296.7 million at June 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 June 30, 2012, the allowance for loan losses was $20.2 million, or 5.4% 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 58.9% at June 30, 2012, compared to 62.5% at December 31, 2011. At June 30, 2012, loans on non-accrual increased $1.0 million, accruing loans past due 90 days or more decreased $0.6 million, and real estate acquired in settlement of loans decreased $1.8 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 $9.9 million at June 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 $16.0 million, as compared to December 31, 2011. The portion of the allowance for loan losses related to loans evaluated individually for impairment declined from $11.1 million at December 31, 2011 to $10.3 million at June 30, 2012. The recorded investment in these loans declined from $61.9 million at December 31, 2011 to $50.4 million at June 30, 2012.

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


	Consolidated
	June 30, 2012			December 31, 2011			June 30, 2011
Loans Accounted for on a Non-Accrual Basis	$	17,533		$	16,502		$	28,934
Accruing Loans Past Due 90 Days or More		1,661			2,332			3,402
Real Estate Acquired in Settlement of Loans		15,005			16,774			25,270

Total	$	34,199		$	35,608		$	57,606
Non-Performing Assets as a Percentage of Net Loans and Other Real Estate		8.76	%		8.48	%		13.24	%


	FUSB
	June 30, 2012			December 31, 2011			June 30, 2011
Loans Accounted for on a Non-Accrual Basis	$	16,087		$	14,616		$	27,479
Accruing Loans Past Due 90 Days or More		41			224			1,168
Real Estate Acquired in Settlement of Loans		12,004			12,606			19,141

Total	$	28,132		$	27,446		$	47,788
Non-Performing Assets as a Percentage of Net Loans and Other Real Estate		9.11	%		8.21	%		13.76	%


	ALC
	June 30, 2012			December 31, 2011			June 30, 2011
Loans Accounted for on a Non-Accrual Basis	$	1,446		$	1,886		$	1,455
Accruing Loans Past Due 90 Days or More		1,620			2,108			2,234
Real Estate Acquired in Settlement of Loans		3,001			4,168			6,129

Total	$	6,067		$	8,162		$	9,818
Non-Performing Assets as a Percentage of Net Loans and Other Real Estate		7.41	%		9.50	%		11.22	%

Non-performing assets as a percentage of net loans and other real estate was 8.8% at June 30, 2012 and 8.5% at December 31, 2011. Loans on non-accrual status increased $1.0 million, accruing loans past due 90 days or more decreased $671,000 and real estate acquired in settlement of loans decreased $1.8 million from December 31, 2011. Other real estate owned as of June 30, 2012 consisted of six residential properties totaling $263,912 and forty commercial properties totaling $11.7 million at the Bank, and eighty-two residential properties totaling $2.7 million and thirteen commercial properties totaling $311,166 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 severely depressed in all of our market areas. Management reviews these non-performing assets and reports to the Board of Directors of the Bank monthly. Loans past due 90 days or more and still accruing are reviewed by management and are allowed to continue accruing only when management believes that underlying collateral values and the financial strength of the borrowers are sufficient to protect the Bank from loss. If at any time management determines that there may be a loss of interest or principal, these loans will be changed to non-accrual status and their asset values downgraded.

LIQUIDITY AND CAPITAL RESOURCES

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

The Bank currently has up to $181.0 million in borrowing capacity from the FHLB and $7.8 million in established federal funds lines.

The Bank is required to maintain certain levels of regulatory capital. At June 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 13 to Item 1, “Guarantees, Commitments and Contingencies,” for a discussion of such claims and legal actions.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The asset portion of the balance sheet provides liquidity primarily from two sources. These are principal payments and maturities of loans and maturities and principal payments from the investment portfolio. Other short-term investments such as federal funds sold are additional sources of liquidity. Loans maturing or repricing in one year or less amounted to $172.3 million at December 31, 2011 and $140.3 million at June 30, 2012.

Investment securities forecasted to mature or reprice over the next twelve months ending June 30, 2013 are estimated to be $7.0 million, or about 6.5%, of the investment portfolio as of June 30, 2012. For comparison, principal payments on investment securities totaled $15.3 million, or 14.3%, of the investment portfolio at June 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 June 30, 2012, the bond portfolio had an expected average maturity of 3.3 years, and approximately 74.9% of the $107.5 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 June 30, 2012, had long-term debt and short-term borrowings that, on average, represented 1.7% 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 June 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 June 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 June 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

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

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

ITEM 1A.

RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2011 that could materially affect our business, financial condition or future results. The risks described 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⁾
April 1 – April 30		100	⁽²⁾	$	5.47		—		242,303
May 1 – May 31		—		$	—		—		242,303
June 1 – June 30		—		$	—		—		242,303
Total		100		$	5.47		—		242,303

(1)

On December 17, 2011, the Board of Directors 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 June 30, 2012, there were 242,303 shares that may still be purchased under the program.

(2)	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: August 10, 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 June 30, 2012.

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company