FIRST US BANCSHARES, INC. - Annual Report: 2013 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

OR

COMMISSION FILE NUMBER: 0-14549

UNITED SECURITY BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)

334-636-5424

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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 Act).    Yes  ¨    No  x

The aggregate market value of the voting common equity held by non-affiliates of the registrant as of June 30, 2013, was $54,790,679.

As of March 14, 2014, the registrant had outstanding 6,043,292 shares of common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for the 2014 Annual Meeting of Shareholders to be held on May 2, 2014, are incorporated by reference into Part III of this Form 10-K.

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United Security Bancshares, Inc.

Annual Report on Form 10-K

for the fiscal year ended

December 31, 2013

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FORWARD-LOOKING STATEMENTS

Statements contained in this Annual Report on Form 10-K 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. (“USBI”) and its subsidiaries (collectively, the “Company”), 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 USBI’s Securities and Exchange Commission filings and other public announcements, including the factors described in this Annual Report on Form 10-K for the year ended December 31, 2013. Specifically, with respect to statements relating to loan demand, growth and earnings potential and the adequacy of the allowance for loan losses, 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 the forward-looking statements are made, except as required by law.

In addition, the Company’s business is subject to a number of general and market risks that would affect any forward-looking statements, including the risks discussed under Item 1A herein entitled “Risk Factors.”

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PART I

United Security Bancshares, Inc. (“USBI”) is a Delaware corporation organized in 1999 as a successor by merger with United Security Bancshares, Inc., an Alabama corporation. USBI is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and it operates one banking subsidiary, First United Security Bank (“FUSB” or “the Bank”).

The Bank conducts a general commercial banking business and offers banking services such as the receipt of demand, savings, individual retirement account and time deposits, personal and commercial loans, safe deposit box services and remote deposit capture. The Bank operates and serves its customers through nineteen banking offices located in Brent, Bucksville, Butler, Calera, Centreville, Coffeeville, Columbiana, Fulton, Gilbertown, Grove Hill, Harpersville, Jackson, Thomasville, Tuscaloosa and Woodstock, Alabama. The Bank has two wholly-owned subsidiaries: Acceptance Loan Company, Inc. (“ALC”) and FUSB Reinsurance, Inc. (“FUSB Reinsurance”). USBI, the Bank, ALC, and FUSB Reinsurance may be referred to collectively or in any combination herein as “the Company.”

ALC is an Alabama corporation with approximately 21,000 consumer and real estate loans outstanding. ALC operates and serves its customers through twenty-four offices in Alabama and southeast Mississippi, including the ALC headquarters located in Jackson, Alabama. ALC’s business is generated through referrals from retail businesses, banks and customer mailings. ALC serves customers with a broad range of consumer loan needs. ALC’s lending guidelines are based on an established company policy that is reviewed regularly by its Loan Committee. The lending guidelines include the consideration of collateral (age, type and loan-to-value), loan term, the borrower’s budget (debt-to-income ratio), employment and residence history, credit score and credit history and prior experience with ALC. ALC’s average loan size is approximately $2,700, with an average term of 24 to 36 months. ALC currently has loans of approximately $70 million, which carry an average yield of 24.5%. Interest rates charged vary depending on the consideration of certain factors, such as credit score and collateral. Approximately 37% of ALC’s current loan portfolio is secured by real estate and single family residence loans, with the remaining portion of the portfolio secured by various other types of collateral, depending on the type of loan being secured. As a result of the continued weakness in the real estate market, ALC suspended making new real estate loans in May 2012.

FUSB Reinsurance is an Arizona corporation that underwrites credit life and credit accident and health insurance policies sold to the Bank’s and ALC’s consumer loan customers. FUSB Reinsurance is responsible for the first level of risk on these policies up to a specified maximum amount, and a primary third-party insurer retains the remaining risk. A third-party insurer and/or a third-party administrator are responsible for performing most of the administrative functions of FUSB Reinsurance on a contract basis.

Employees

USBI has no employees, other than the executive officers discussed in the information incorporated by reference in Part III, Item 10 of this report. As of December 31, 2013, the Bank had 181 full-time equivalent employees, and ALC had 105 full-time equivalent employees. FUSB Reinsurance has no employees.

Competition

The Company faces strong competition in making loans, acquiring deposits and attracting customers for investment services. Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans, other credit and service charges relating to loans, the quality and scope of the services rendered, the convenience of banking facilities and, in the case of loans to commercial borrowers, relative lending limits. The Bank competes with numerous other financial services providers (in excess of thirty

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in its service area), including commercial banks, online banks, credit unions, finance companies, mutual funds, insurance companies, investment banking companies, brokerage firms and other financial intermediaries operating in Alabama and elsewhere. Many of these competitors, some of which are affiliated with large bank holding companies, have substantially greater resources and lending limits. In addition, many of the Bank’s non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally-insured banks.

The financial services industry is likely to become more competitive as further technological advances enable more companies to provide financial services. These technological advances may diminish the importance of depository institutions and other financial intermediaries.

Supervision and Regulation

General

The Company and the Bank are each extensively regulated under both federal and state law. These laws restrict permissible activities and investments and require compliance with various consumer protection provisions applicable to lending, deposit, brokerage and fiduciary activities. They also impose capital adequacy requirements and condition the Company’s ability to repurchase stock or to receive dividends from the Bank. The Company is also subject to comprehensive examination and supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve”), and the Bank is also subject to comprehensive examination and supervision by the Alabama State Banking Department and the Federal Deposit Insurance Corporation (the “FDIC”). These regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of the Company and the Bank. This supervisory framework could materially impact the conduct and profitability of the Company’s and Bank’s activities.

To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the text of the particular statutory and regulatory provisions. Proposals to change the laws and regulations governing the banking industry are frequently raised at both the state and federal level. The likelihood and timing of any changes in these laws and regulations, and the impact such changes may have on the Company and the Bank, are difficult to ascertain. A change in applicable laws and regulations, or in the manner such laws or regulations are interpreted by regulatory agencies or courts, may have a material effect on our business, operations and earnings.

Bank Holding Company Act (the “BHCA”)

The Company is registered as a bank holding company and is subject to regulation and supervision by the Federal Reserve. The BHCA requires the Company to secure the prior approval of the Federal Reserve before it owns or controls, directly or indirectly, more than five percent (5%) of the voting shares or substantially all of the assets of any bank or thrift, or merges or consolidates with another bank or thrift holding company. Further, under the BHCA, the activities of the Company and any nonbank subsidiary are limited to: (i) those activities that the Federal Reserve determines to be so closely related to banking as to be a proper incident thereto, and (ii) investments in companies not engaged in activities closely related to banking, subject to quantitative limitations on the value of such investments. Prior approval of the Federal Reserve may be required before engaging in certain activities. In making such determinations, the Federal Reserve is required to weigh the expected benefits to the public, such as greater convenience, increased competition and gains in efficiency, against the possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, and unsound banking practices.

The BHCA was substantially amended by the Gramm-Leach-Bliley Act (the “GLBA”) in 1999, which, among other things, permits a “financial holding company” to engage in a broader range of non-banking activities, and to engage on less restrictive terms in certain activities than were previously permitted. These expanded activities

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include securities underwriting and dealing, insurance underwriting and sales, and merchant banking activities. To become a financial holding company, the Company must certify that the Bank is both “well capitalized” and “well managed” (as defined by federal law), and has at least a “satisfactory” Community Reinvestment Act (“CRA”) rating. The GLBA also imposes certain privacy requirements on all financial institutions and their treatment of consumer information. At this time, the Company has not elected to become a financial holding company, as the Company does not engage in any non-banking activities which would require us to be a financial holding company.

There are a number of restrictions imposed on the Company and the Bank by law and regulatory policy that are designed to minimize potential loss to the depositors of the Bank and the Deposit Insurance Fund maintained by the FDIC (as discussed in more detail below) in the event the Bank should become insolvent. For example, under the Dodd-Frank Act (as discussed in more detail below), a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. The Federal Reserve also has the authority under the BHCA to require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.

Any capital loan by the Company to the Bank is subordinate in right of payment to deposits and certain other indebtedness of the Bank. In addition, in the event of the Company’s bankruptcy, any commitment by the Company to a federal bank regulatory agency to maintain the capital of the Bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

The Federal Deposit Insurance Act (“FDIA”) provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution (including the claims of the FDIC as a subrogee of insured depositors) and certain claims for administrative expenses of the FDIC as a receiver will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the Company, with respect to any extensions of credit they have made to such insured depository institution.

Supervision and Regulation of the Bank

The operations and investments of the Bank are also limited by federal and state statutes and regulations. The Bank is subject to supervision and regulation by the Alabama State Banking Department and the FDIC. The Bank is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types, amount and terms and conditions of loans it may originate, and limits on the types of other activities in which the Bank may engage and the investments it may make.

The Bank is also subject to federal laws that limit the amount of transactions between the Bank and its nonbank affiliates, including the Company. Under these provisions, transactions (such as a loan or investment) by the Bank with nonbank affiliates are generally limited to 10% of the Bank’s capital and surplus for all covered transactions with any one affiliate, or 20% of capital and surplus for all covered transactions with all affiliates. Any extensions of credit to affiliates, with limited exceptions, must be secured by eligible collateral in specified amounts. The Bank is also prohibited from purchasing any “low quality” assets from an affiliate. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) imposed additional requirements on transactions with affiliates, including an expansion of the definition of “covered transactions” and increasing the amount of time for which collateral requirements regarding covered transactions must be maintained.

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Securities and Exchange Commission

The Company is also under the jurisdiction of the Securities and Exchange Commission (“SEC”) for matters relating to the offering and sale of its securities and is subject to the SEC’s rules and regulations relating to periodic reporting, reporting to shareholders, proxy solicitations and insider-trading regulations.

Monetary Policy

The earnings of the Company are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The monetary policies of the Federal Reserve have a significant effect upon the operating results of commercial banks such as the Bank. The Federal Reserve has a major effect upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of, among other things, the discount rate on borrowings of member banks and the reserve requirements against member banks’ deposits. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies.

Deposit Insurance

The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund (the “DIF”) of the FDIC. The DIF is the successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were merged in 2006. Under the FDIC’s risk-based assessment system in effect through March 31, 2011, insured institutions were assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depended upon the category to which it is assigned, and certain potential adjustments established by FDIC regulations, with less risky institutions paying lower assessments.

On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act changed the assessment base for federal deposit insurance from the amount of insured deposits held by the depository institution to the depository institution’s average total consolidated assets during an assessment period less average tangible equity during that assessment period. It also eliminated the ceiling and increased the floor on the size of the DIF. The Dodd-Frank Act established a minimum designated reserve ratio (“DRR”) of 1.35 percent of the estimated insured deposits, required the FDIC to adopt a restoration plan should the reserve ratio fall below 1.35 percent, and provided for dividends to the industry should the reserve ratio exceed 1.50 percent.

On February 7, 2011, the Board of Directors of the FDIC approved a final rule on assessments, dividend assessment base and large bank pricing (the “Final Rule”), which became effective on April 1, 2011. The Final Rule implements the changes to the deposit insurance assessment system mandated by the Dodd-Frank Act, including, among other things, changing the assessment base for insured depository institutions from adjusted domestic deposits to the average consolidated total assets during an assessment period less average tangible equity capital during that assessment period. Tangible equity is defined in the Final Rule as Tier 1 Capital and is calculated monthly, unless, like the Bank, the insured depository institution has less than $1 billion in assets, in which case the insured depository institution will calculate the Tier 1 Capital on an end-of-quarter basis. Parents or holding companies of other insured depository institutions are required to report separately from their subsidiary depository institutions.

The Final Rule retains the unsecured debt adjustment, which lowers an insured depository institution’s assessment rate for any unsecured debt on its balance sheet. In general, the unsecured debt adjustment in the Final Rule equals the initial base assessment rate plus 40 basis points and is capped at the lesser of 5 basis points or 50 percent of the depository institution’s initial base assessment rate. The Final Rule also contains a brokered deposit adjustment for assessments. The Final Rule provides an exemption to the brokered deposit adjustment to financial institutions that are “well capitalized” and have composite CAMEL ratings of 1 or 2. CAMEL ratings are confidential ratings used by the federal and state regulators for assessing the soundness of financial institutions. These ratings range from 1 to 5, with a rating of 1 being the highest rating.

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The Final Rule also creates a new rate schedule that intends to provide more predictable assessment rates to financial institutions. The revenue under the new rate schedule will be approximately the same. Moreover, it indefinitely suspends the requirement that the FDIC pay dividends from the DIF when the reserve ratio reaches 1.5 percent of insured deposits, to increase the probability that the reserve ratio in the DIF will reach a sufficient level to withstand a future crisis. In lieu of dividend payments, the FDIC has adopted progressively lower assessment rate schedules that become effective when the reserve ratio exceeds 1.15 percent, 2 percent and 2.5 percent.

The Dodd-Frank Act permanently raised the limit for federal deposit insurance to $250,000, increased the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000, and provided temporary unlimited federal deposit insurance for noninterest-bearing demand transaction accounts at all insured depository institutions that expired on December 31, 2012.

In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. This payment is established quarterly and, for each of the four quarters in calendar year 2013, equaled 0.64 basis points of assessable deposits.

The FDIC has authority to increase insurance assessments. A significant increase in insurance assessments would likely have an adverse effect on our operating expenses and results of operations. Management cannot predict what insurance assessment rates will be in the future.

Deposit insurance may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

Dividend Restrictions

Under applicable Alabama law, the Company is not permitted to pay dividends on its capital stock if, following the payment of the dividend, (1) it would be unable to pay its debts as they become due in the usual course of business or (2) its total assets would be less than the sum of its total liabilities and (unless the articles of incorporation permit otherwise) the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. Further, it is the policy of the Federal Reserve that bank holding companies should pay dividends only out of current earnings and only if future retained earnings would be consistent with the Company’s capital, asset quality and financial condition.

Since it has no significant independent sources of income, the ability of the Company to pay dividends is dependent on its ability to receive dividends from the Bank. Under Alabama law, a state-chartered bank must annually transfer to surplus at least 10% of its “net earnings” (defined as the remainder of all earnings from current operations plus actual recoveries on loans and investments and other assets, less all current operating expenses, actual losses, accrued dividends on preferred stock, and all federal, state and local taxes) until the bank’s surplus is at least 20% of its capital. Until the bank’s surplus reaches this level, a bank may not declare a dividend in excess of 90% of its net earnings. Once a bank’s surplus equals or exceeds 20% of its capital, if the total of all dividends declared by the bank in a calendar year will exceed the sum of its net earnings for that year and its retained net earnings for the preceding two years (less any required transfers to surplus), then the bank must obtain prior written approval from the Superintendent of the Alabama State Banking Department. The Bank may not pay any dividends or make any withdrawals or transfers from surplus without the prior written approval of the Superintendent. The FDIC prohibits payment of cash dividends if, as a result, the institution would be undercapitalized or the Bank is in default with respect to any assessment due to the FDIC, including a deposit insurance assessment. These restrictions could materially influence the Company’s and the Bank’s ability to pay dividends.

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Capital Adequacy Guidelines

In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation (“Basel III”). Basel III requires bank holding companies and their bank subsidiaries to maintain a higher level of capital than previously required, with a greater emphasis on common equity. The Dodd-Frank Act adopted the Basel III capital framework for the United States financial system and mandated that the federal bank regulatory agencies adopt rules and regulations to implement the Basel III requirements.

Among other things, the Dodd-Frank Act requires the Federal Reserve to apply consolidated capital requirements to a bank holding company that are no less stringent than those currently applied to depository institutions. In July 2013, the federal banking agencies, including the Federal Reserve and the FDIC, adopted a final rule (the “Basel III Final Rule”) implementing these standards. Under the Basel III Final Rule, trust preferred securities are excluded from Tier I capital unless such securities were issued prior to May 19, 2010 by a bank holding company with less than $15 billion in assets, subject to certain limits. The Dodd-Frank Act additionally requires capital requirements to be countercyclical so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness. Under the Basel III Final Rule, which implements this requirement, the Bank must maintain a capital conservation buffer consisting of additional common equity Tier 1 capital equal to 2.5% of risk-weighted assets above each of the required minimum capital levels in order to avoid limitations on paying dividends, engaging in share repurchases and paying certain discretionary bonuses. This new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019.

The Federal Reserve and the FDIC have promulgated substantially similar risk-based capital guidelines applicable to the banking organizations they supervise. These guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks, to account for off-balance sheet exposures, and to minimize disincentives for holding liquid assets. Under those guidelines, assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.

Bank assets are given risk-weights of 0%, 20%, 50% or 100%. In addition, certain off-balance sheet items are assigned certain credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk-weighting will apply. Those computations result in the total risk-weighted assets. Most loans are assigned to the 100% risk category, except for performing first mortgage loans fully secured by residential property, which carry a 50% risk-weighting. Most investment securities (including, primarily, general obligation claims of states or other political subdivisions of the United States) are assigned to the 20% category. Exceptions include municipal or state revenue bonds, which have a 50% risk-weighting, and direct obligations of the U.S. Treasury or obligations backed by the full faith and credit of the U.S. Government, which have a 0% risk-weighting. In converting off-balance sheet items, direct credit substitutes, including general guarantees and standby letters of credit backing financial obligations, are given a 100% risk-weighting. Transaction-related contingencies such as bid bonds, standby letters of credit backing non-financial obligations and undrawn commitments (including commercial credit lines with an initial maturity of more than one year) have a 50% risk-weighting. Short-term commercial letters of credit have a 20% risk-weighting, and certain short-term unconditionally cancelable commitments have a 0% risk-weighting.

Under the Basel III Final Rule, beginning on January 1, 2015, the minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) will be 8%. The required ratio of “Tier 1 Capital” (consisting generally of shareholders’ equity and qualifying preferred stock, less certain goodwill items and other intangible assets) to risk-weighted assets is currently 4% but increases to 6% in January 2015. While there is currently no required ratio of “Common Equity Tier 1 Capital” (which generally consists of common stock, retained earnings, certain qualifying capital instruments issued by consolidated subsidiaries, and AOCI, subject to certain adjustments) to risk-weighted assets, a required minimum

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ratio of 4.5% takes effect in January 2015 as well. The remainder of total capital, or “Tier 2 Capital,” may consist of (a) the allowance for loan losses of up to 1.25% of risk-weighted assets, (b) preferred stock not qualifying as Tier 1 Capital, (c) hybrid capital instruments, (d) perpetual debt, (e) mandatory convertible securities and (f) certain subordinated debt and intermediate-term preferred stock up to 50% of Tier 1 Capital. Total Capital is the sum of Tier 1 Capital and Tier 2 Capital (which is included only to the extent of Tier 1 Capital), less reciprocal holdings of other banking organizations’ capital instruments, investments in unconsolidated subsidiaries, and any other deductions as determined by the FDIC. At December 31, 2013, the Company’s and the Bank’s Tier 1 and Total Capital ratios were 17.93% and 19.20%, respectively, for the Company and 18.07% and 19.34%, respectively, for the Bank.

In addition, the Federal Reserve and FDIC have established minimum leverage ratio requirements for banking organizations they supervise, calculated as the ratio of Tier 1 Capital to adjusted average consolidated assets. For banks and bank holding companies that meet certain specified criteria, including having the highest regulatory rating and not experiencing significant growth or expansion, these requirements provide for a minimum leverage ratio of Tier 1 Capital to adjusted average quarterly assets equal to 3%. Other banks and bank holding companies generally are required to maintain a minimum leverage ratio between 4% and 5%. Under the Basel III Final Rule, the required minimum leverage ratio for all banks will be 4%. At December 31, 2013, the Company’s and the Bank’s leverage ratios were 10.88% and 10.97%, respectively.

As an additional means to identify problems in the financial management of depository institutions, the FDIA requires federal bank regulatory agencies to establish certain non-capital safety and soundness standards for institutions for which they are the primary federal regulator. The standards relate generally to operations and management, asset quality, interest rate exposure and executive compensation. The agencies are authorized to take action against institutions that failed to meet such standards.

Prompt Corrective Action

In addition to the required minimum capital levels described above, federal law establishes a system of “prompt corrective actions” that Federal banking agencies are required to take, and certain actions that they have discretion to take, based upon the capital category into which a Federally regulated depository institution falls. Regulations set forth detailed procedures and criteria for implementing prompt corrective action in the case of any institution which is not adequately capitalized. Under the regulations, an institution will be deemed “well capitalized” if its leverage ratio, Common Equity Tier 1 ratio, Tier 1 Capital ratio and Total Risk-Based Capital ratio meet or exceed 5%, 6.5%, 8% and 10%, respectively. An institution will be deemed to be “adequately capitalized” or better if its leverage, Common Equity Tier 1, Tier 1 Capital, and Total Risk-Based Capital ratios meet or exceed the minimum federal regulatory capital requirements, and “undercapitalized” if it fails to meet these minimum capital requirements. An institution is “significantly undercapitalized” if its leverage, Common Equity Tier 1, Tier 1, and Total risk-based capital ratios fall below 3%, 3%, 4% and 6%, respectively, and “critically undercapitalized” if the institution has a ratio of tangible equity to total assets that is equal to or less than 2%.

The prompt corrective action rules require an undercapitalized institution to file a written capital restoration plan, along with a performance guaranty by its holding company or a third party. In addition, an undercapitalized institution becomes subject to certain automatic restrictions, including a prohibition on payment of dividends, a limitation on asset growth and expansion in certain cases, a limitation on the payment of bonuses or raises to senior executive officers, and a prohibition on the payment of certain “management fees” to any “controlling person.” Institutions that are classified as undercapitalized are also subject to certain additional supervisory actions, including: increased reporting burdens and regulatory monitoring; a limitation on the institution’s ability to make acquisitions, open new branch offices, or engage in new lines of business; obligations to raise additional capital; restrictions on transactions with affiliates; and restrictions on interest rates paid by the institution on deposits. In certain cases, bank regulatory agencies may require replacement of senior executive officers or directors, or sale of the institution to a willing purchaser. If an institution is deemed to be “critically undercapitalized” and continues in that category for 90 days, the statute requires, with certain narrowly limited exceptions, that the institution be placed in receivership.

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As of December 31, 2013, the Company and the Bank were classified as “well capitalized.” This classification is primarily for the purpose of applying the federal prompt corrective action provisions and is not intended to be and should not be interpreted as a representation of overall financial condition or prospects of the Bank.

Community Reinvestment Act

The CRA requires that banks meet the credit needs of all of their assessment area (as established for these purposes in accordance with applicable regulations based principally on the location of branch offices), including those of low-income areas and borrowers. The CRA also requires the FDIC to assess all financial institutions that it regulates to determine whether these institutions are meeting the credit needs of the communities that they serve. Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve” or “unsatisfactory.” The Bank’s record in meeting the requirements of the CRA is made publicly available and is taken into consideration in connection with any applications with Federal regulators to engage in certain activities, including approval of a branch or other deposit facility, mergers and acquisitions, office relocations, or expansions into non-banking activities. As of December 31, 2013, the bank maintains a “satisfactory” CRA rating.

USA Patriot Act

Under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions and foreign customers. Under the USA PATRIOT Act, financial institutions must establish anti-money laundering programs meeting the minimum standards specified by the Act and implementing regulations. The USA PATRIOT Act also requires the Federal banking regulators to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions.

The Bank has implemented the required internal controls to ensure proper compliance with the USA PATRIOT Act.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) comprehensively revised the laws affecting corporate governance, auditing and accounting, executive compensation and corporate reporting for entities, such as the Company, with equity or debt securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Among other things, Sarbanes-Oxley and its implementing regulations established new membership requirements and additional responsibilities for the Company’s audit committee, imposed restrictions on the relationship between the Company and its outside auditors (including restrictions on the types of non-audit services our auditors may provide to the Company), imposed additional responsibilities for the Company’s external financial statements on the Company’s chief executive officer and chief financial officer, and expanded the disclosure requirements for the Company’s corporate insiders. The requirements are intended to allow stockholders to more easily and efficiently monitor the performance of companies and directors. The Company and its Board of Directors have, as appropriate, adopted or modified the Company’s policies and practices in order to comply with these regulatory requirements and to enhance the Company’s corporate governance practices.

Pursuant to Sarbanes-Oxley, the Company has adopted a Code of Business Conduct and Ethics applicable to its Board, executives and employees. This Code of Conduct can be found on the Company’s website at http://www.firstusbank.com under the tabs “About Us – Investor Relations.”

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Privacy of Customer Information

The GLBA and the implementing regulations issued by the various federal regulatory agencies require financial institutions (including banks, insurance agencies and broker/dealers) to adopt policies and procedures regarding the disclosure of nonpublic personal information about their customers with non-affiliated third parties. In general, financial institutions are required to explain to customers their policies and procedures regarding the disclosure of such nonpublic personal information, and, unless otherwise required or permitted by law, financial institutions are prohibited from disclosing such information except as provided in their policies and procedures. Specifically, the GLBA established certain information security guidelines that require each financial institution, under the supervision and ongoing oversight of its Board of Directors or an appropriate committee thereof, to develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, to protect against anticipated threats or hazards to the security or integrity of such information and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer.

The Consumer Financial Protection Bureau

The Dodd-Frank Act created the Consumer Financial Protection Bureau (the “CFPB”), which is an independent bureau with broad authority to regulate the consumer finance industry, including regulated financial institutions like the Bank, as well as non-banks and others involved in extending credit to consumers. The CFPB has authority through rulemaking, orders, policy statements, guidance and enforcement actions to administer and enforce federal consumer finance laws, to oversee several entities and market segments not previously under the supervision of a federal regulator, and to impose its own regulations and pursue enforcement actions when it determines that a practice is unfair, deceptive or abusive. Many consumer laws previously enforced by other federal banking agencies are now the CFPB’s responsibility. The federal consumer finance laws and all of the functions and responsibilities associated with them were transferred to the CFPB on July 21, 2011. While the CFPB has the exclusive power to interpret, administer and enforce federal consumer finance laws, the Dodd-Frank Act provides that the FDIC continues to have examination and enforcement powers over the Bank relating to the matters within the jurisdiction of the CFPB because the Bank has less than $10 billion in assets. The Dodd-Frank Act also gives state attorneys general the ability to enforce federal consumer protection laws.

Mortgage Loan Origination

The Dodd-Frank Act also authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages, including a determination of the borrower’s ability to repay. Under the Dodd-Frank Act and the implementing final rule adopted by the CFPB (the “ATR/QM Rule”), a financial institution may not make a residential mortgage loan to a consumer unless it first makes a “reasonable and good faith determination” that the consumer has a “reasonable ability” to repay the loan. In addition, the ATR/QM Rule limits prepayment penalties and permits borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. For this purpose, the ATR/QM Rule defines a “qualified mortgage” to include a loan with a borrower debt-to-income ratio of less than or equal to 43% or, alternatively, a loan eligible for purchase by Fannie Mae or Freddie Mac while they operate under Federal conservatorship or receivership, and loans eligible for insurance or guarantee by the Federal Housing Administration, Veterans Administration or United States Department of Agriculture. Additionally, a qualified mortgage may not: (i) contain excess upfront points and fees; (ii) have a term greater than 30 years; or (iii) include interest-only or negative amortization payments. The ATR/QM Rule specifies the types of income and assets that may be considered in the ability-to-repay determination, the permissible sources for verification and the required methods of calculating the loan’s monthly payments. The ATR/QM Rule became effective January 10, 2014, and the Company continues to evaluate the expected impact of the rule on our mortgage production operations.

In addition, Section 941 of the Dodd-Frank Act amended the Exchange Act to require sponsors of asset-backed securities (ABS) to retain at least 5 percent of the credit risk of the assets underlying the securities and to prohibit

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sponsors from transferring or hedging that credit risk. The federal banking agencies, including the Federal Reserve and the FDIC, issued a proposed rule in April 2011 to implement this requirement, followed by a revised notice of proposed rulemaking published in September 2013 (as revised, the “Proposed Risk Retention Rule”). Among other things, the Proposed Risk Retention Rule provides that the securitizer must bear the risk in any securitization transaction, and loan originators are only required to retain risk in limited circumstances and at their option. The Proposed Risk Retention Rule also provides for an exemption to the risk retention requirements for “Qualified Residential Mortgages” (“QRMs”) and ties the definition of QRMs to the definition of “qualified mortgage” established by the CFPB for purposes of evaluating a consumer’s ability to repay a mortgage loan. The federal banking agencies are considering whether to add additional factors to the QRM determination, however, including borrower credit history and a 70 percent loan-to-value (LTV) cap. Finally, the Proposed Risk Retention Rule adopts the “fair value” measurement system for risk retention instruments. The comment period for the Proposed Risk Retention Rule ended on October 30, 2013, and no final rule has yet been issued. The Company continues to monitor the status of this rule and will be able to more effectively determine its impact on the Company’s mortgage origination business when a final rule is issued.

Mortgage Loan Servicing

On January 17, 2013, the CFPB issued a series of final rules as part of an ongoing effort to address mortgage servicing reforms and create uniform standards for the mortgage servicing industry. The rules contain additional requirements for communications with borrowers, address the maintenance of customer account records, govern procedures for responding to written borrower requests and complaints of errors, and provide guidance regarding servicing delinquent loans, foreclosure proceedings and loss mitigation efforts, among other measures. These rules became effective on January 10, 2014 and will likely lead to increased costs to service loans across the mortgage industry. The Company is continuing to evaluate the full impact of these rules and their effect on the servicing of the Company’s mortgage loans.

The Volcker Rule

On December 10, 2013, five federal financial regulatory agencies, including the Federal Reserve and the FDIC, adopted final rules (the “Final Rules”) implementing the so-called “Volcker Rule” embodied in Section 13 of the Bank Holding Company Act, which was added by Section 619 of the Dodd-Frank Act. The Final Rules complete the process begun in October 2011, when the agencies introduced proposed implementing rules for comment. In general, the Final Rules prohibit banking entities from (1) engaging in short-term proprietary trading for their own accounts, and (2) having certain ownership interests in, and relationships with, hedge funds or private equity funds. The Final Rules are intended to provide greater clarity with respect to both the extent of those primary prohibitions and of the related exemptions and exclusions.

The Final Rules also require each regulated entity to establish an internal compliance program that is consistent with the extent to which it engages in activities covered by the Volcker Rule, which must include (for the largest entities) making regular reports about those activities to regulators. Community and small banks, including the Bank, are afforded some relief under the Final Rules. If such banks are engaged only in exempted proprietary trading, such as trading in U.S. government, agency, state and municipal obligations, they are exempt entirely from compliance program requirements. Moreover, even if a community or small bank engages in proprietary trading or covered fund activities under the Final Rules, they need only incorporate references to the Volcker Rule into their existing policies and procedures. The Final Rules are effective April 1, 2014, but the conformance period has been extended from its statutory end date of July 21, 2014 until July 21, 2015. Beginning June 30, 2014, banking entities with $50 billion or more in trading assets and liabilities must report quantitative metrics; on April 30, 2016, banking entities with at least $25 billion but less than $50 billion must report; and on December 31, 2016, banking entities with at least $10 billion but less than $25 billion must report.

On January 15, 2014, the federal banking agencies issued an interim final rule (the “Interim Rule”) that exempts certain collateralized debt obligations backed by trust-preferred securities, also known as “TruPS

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CDOs,” from the broad restrictions of the Final Rules. Specifically, the Interim Rule provides that the covered fund restrictions of the Final Rules are inapplicable to a banking entity’s owning an interest in, or sponsoring, any issuer of TruPS CDOs, provided that: (1) the TruPS CDOs were issued before May 19, 2010, by a holding company with $15 billion or less in total consolidated assets, and (2) the banking entity acquired the interest in the TruPS CDOs on or before December 10, 2013, or acquired the interest in the course of a merger with or acquisition of a banking entity that itself acquired the interest on or before that date.

The Company is currently evaluating the Final Rules and the Interim Rule, which are lengthy and detailed, but does not at this time expect the Final Rules or Interim Rule to have a material impact on its operations.

Other Provisions of the Dodd-Frank Act

The Dodd-Frank Act, which became law on July 21, 2010, implements far-reaching changes across the financial regulatory landscape. In addition to the reforms and provisions previously mentioned, the Dodd-Frank Act also:

While designed primarily to reform the financial regulatory system, the Dodd-Frank Act also contains a number of corporate governance provisions that will affect public companies with securities registered under the Exchange Act. The Dodd-Frank Act requires the SEC to adopt rules that may affect the Company’s executive compensation policies and disclosure. It also exempts “smaller reporting companies,” like USBI, from the requirement, originally enacted under Section 404(b) of the Sarbanes-Oxley Act of 2002, that the company’s independent auditor also attest to and report on management’s assessment of internal control over financial reporting.

Although a significant number of the rules and regulations mandated by the Dodd-Frank Act have been finalized, many of the new requirements called for have yet to be implemented and will likely be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various agencies, the full extent of the impact such requirements will have on financial institutions’ operations is unclear. The Dodd-Frank Act could require the Company to make material expenditures, particularly in the form of personnel training costs and additional compliance expenses, or otherwise adversely affect the Company’s business, financial condition,

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results of operations or cash flow. It could also require the Company to change certain of the Company’s business practices, adversely affect the Company’s ability to pursue business opportunities that the Company might otherwise consider pursuing, cause business disruptions and/or have other impacts that are as of yet unknown to the Company. Failure to comply with these laws or regulations, even if inadvertent, could result in negative publicity, fines or additional expenses, any of which could have an adverse effect on the Company’s business, financial condition, results of operations, or cash flow.

Federal Home Loan Bank Membership

The Bank is a member of the Federal Home Loan Bank of Atlanta (“FHLBA”). Each member of the FHLBA is required to maintain a minimum investment in the Class B stock of the FHLBA. The Board of Directors of the FHLBA can increase the minimum investment requirements in the event it has concluded that additional capital is required to allow it to meet its own regulatory capital requirements. Any increase in the minimum investment requirements outside of specified ranges requires the approval of the Federal Housing Finance Agency. Because the extent of any obligation to increase the Bank’s investment in the FHLBA depends entirely upon the occurrence of a future event, the Company is unable to determine the extent of future required potential payments to the FHLBA at this time. Additionally, in the event that the Bank fails, the right of the FHLBA to seek repayment of funds loaned to the Bank will take priority (a “super lien”) over the claims of all other creditors.

Other Laws and Regulations

The Company and the Bank are subject to a variety of laws and regulations that are not limited to banking organizations. For example, in lending to commercial and consumer borrowers, and in owning and operating its own property, the Bank is subject to regulations and potential liabilities under state and federal environmental laws.

The Company and the Bank are heavily regulated by regulatory agencies at the federal and state levels. Like most of the Company’s and the Bank’s competitors, the Company and the Bank have faced and expect to continue to face increased regulation and regulatory and political scrutiny, which creates significant uncertainty for the Company and the Bank, as well as the financial services industry in general.

Future Legislation and Regulation

Regulators have increased their focus on the regulation of the financial services industry in recent years. Proposals that could substantially intensify the regulation of the financial services industry have been and are expected to continue to be introduced in the U.S. Congress, in state legislatures and by applicable regulatory authorities. These proposals may change banking statutes and regulation and the Company’s operating environment in substantial and unpredictable ways. If enacted, these proposals could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any of these proposals will be enacted and, if enacted, the effect that these proposals, or any implementing regulations, would have on the Company’s business, results of operations or financial condition.

Website Information

The Bank’s website address is http://www.firstusbank.com. USBI does not maintain a separate website. USBI makes available free of charge on the Bank’s website, under the tabs “About Us” – “Investor Relations,” its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 (“Exchange Act”) as soon as reasonably practicable after such material is electronically filed with the SEC. These reports are also available on the SEC’s website, http://www.sec.gov. USBI will provide paper copies of

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these reports to shareholders free of charge upon written request. USBI is not including the information contained on or available through the Bank’s website as a part of, or incorporating such information into, this Annual Report on Form 10-K.

Making or continuing an investment in common stock issued by USBI involves certain risks that you should carefully consider. The risks and uncertainties described below are not the only risks that may have a material adverse effect on the Company. Additional risks and uncertainties also could adversely affect our business and results of operations. If any of the following risks actually occur, our business, financial condition or results of operations could be negatively affected, the market price of your common stock could decline and you could lose all or a part of your investment. Further, to the extent that any of the information contained in this Annual Report on Form 10-K constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause the Company’s actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of USBI.

Difficult conditions in the financial services markets may materially and adversely affect the business and results of operations of the Company.

Dramatic declines in the housing market during recent years, along with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative securities, have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions, and, in some cases, to fail. Many lenders and institutional investors have reduced, and in some cases, ceased to provide funding to borrowers, including other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally, and a continuation of these trends could have a material adverse effect on the Company’s business and operations. Further negative market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates, which may impact the Company’s charge-offs and provisions for loan and credit losses. Continuing economic deterioration that affects household and/or corporate incomes could also result in reduced demand for credit or fee-based products and services. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on the Company and others in the financial services industry.

The Company’s business activities have been and may continue to be adversely affected by current conditions in the financial markets and economic conditions generally.

Over the past few years, the capital and credit markets have experienced unprecedented levels of volatility and disruption. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain companies without regard to those companies’ underlying financial strength. As a consequence of the recession from which the United States is currently emerging, business activities across a wide range of industries continue to face serious difficulties due to a lack of consumer spending and liquidity in the global credit markets. Unemployment has also significantly impeded the economic recovery. A sustained weakness or weakening in business and economic conditions generally or specifically in the principal markets in which the Company does business could have one or more of the following adverse effects on the Company’s business:

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Overall, for the past few years, the general business environment has had an adverse effect on the Company’s business, and there can be no assurance that the economy will recover in the near term. Until conditions improve, the Company’s business, financial condition and results of operations could be adversely affected by external economic forces.

Any litigation, regulatory investigations, proceedings, inquiries or changes could have a significant impact on the Company.

The financial services industry has experienced unprecedented market value declines caused primarily by the current recession and real estate market deterioration. As a result of these adverse market conditions, financial institutions now face a heightened risk of litigation, proceedings, inquiries or regulatory changes. Such actions or changes could result in significant costs and thereby adversely affect the Company’s financial condition and results of operations.

The banking industry is highly competitive, which could result in loss of market share and adversely affect our business.

The Company encounters strong competition in making loans, acquiring deposits and attracting customers for investment services. The Company competes with commercial banks, online banks, credit unions, finance companies, mutual funds, insurance companies, investment banking companies, brokerage firms and other financial intermediaries operating in Alabama and elsewhere in various segments of the financial services market. Many of these competitors, some of which are affiliated with large bank holding companies, have substantially greater resources and lending limits. In addition, many of the Company’s non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally-insured banks, and, as a result, may be able to offer certain products and services at a lower cost than the Company is able to offer, which could adversely affect the Company’s business.

The Company is subject to extensive governmental regulation, and the costs of complying with such regulation could have an adverse impact on the Company’s operations.

The financial services industry is extensively regulated and supervised under both federal and state laws. We are subject to the regulation and supervision of the Federal Reserve, the FDIC and the Alabama State Banking Department. These regulations are intended primarily to protect depositors, the public and the FDIC insurance funds and are not intended to protect shareholders. Additionally, the Company is subject to regulation, supervision and examination by other regulatory authorities, such as the SEC, the National Association of Securities Dealers, Inc. and state securities and insurance regulators. The Company is subject to changes in federal and state laws, as well as regulations and governmental policies, income tax laws and accounting principles. Regulations affecting banks and other financial institutions are undergoing continuous change, and the ultimate effect of such changes cannot be predicted. Regulations and laws may be modified at any time, and new legislation may be enacted that could affect the Company. The Company cannot assure you that any changes in regulations or new laws will not adversely the Company’s performance or results of operations. The Company’s regulatory position is discussed in greater detail under “Item 1. Business – Supervision and Regulation.”

Governmental responses to recent market disruptions may be inadequate and may have unintended consequences.

In response to recent market disruptions, legislators and financial regulators have taken a number of steps to stabilize the financial markets. In recent years, these measures have included the enactment and implementation

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of the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009, the provision of direct and indirect assistance to financial institutions, assistance by the banking regulatory authorities in arranging acquisitions of weakened banks and broker-dealers, implementation of programs by the Federal Reserve to provide liquidity to the commercial paper markets, and the expansion of deposit insurance coverage. More recently, President Obama signed into law the Dodd-Frank Act, which provides for sweeping changes to financial sector regulation and oversight, including new substantive authorities and practices in government regulation and supervision, and a restructuring of the regulatory system, including the creation of new federal agencies, offices, and councils.

Although many of these legislative measures and regulatory efforts have been in place for several years, their aggregate effect on the financial markets remains uncertain. Implementation of the provisions of the Dodd-Frank Act through rulemaking by federal regulatory authorities has resulted in a continuous series of significant changes to the banking industry as a whole, which could adversely affect the Company’s business, financial condition, results of operations and prospects.

In addition, the Company competes with a number of financial services companies that are not subject to the same degree of regulatory oversight to which the Company is subject. The impact of the existing regulatory framework and any future changes to it could negatively affect the Company’s ability to compete with these institutions, which could have a material and adverse effect on the Company’s results of operations and prospects.

Changes to the deposit insurance assessment regime could increase the cost to the Bank of holding deposits and thereby adversely affect the Company’s financial results.

The Dodd-Frank Act changed the method of calculation for FDIC insurance assessments. Under the previous system, the assessment base was domestic deposits minus certain allowable exclusions, such as pass-through reserve balances. Under the Dodd-Frank Act, assessments for any calculation period are based on the depository institution’s average consolidated total assets, less its average amount of tangible equity, during that period. On February 7, 2011, the FDIC approved a final rule to implement these changes. In addition to changing the assessment base, the final rule defines and limits certain assessment adjustments, such as those based on unsecured debt or brokered deposits. It also creates a new base assessment rate schedule in an attempt to provide more predictable assessment rates to insured financial institutions while collecting approximately the same amount of revenue as under the old rate schedule. The FDIC has authority to increase insurance assessments, and any significant increase in insurance assessments would likely have an adverse effect on the Bank and thereby negatively impact the Company’s results of operations.

The cost of complying with the regulations and policies of the Consumer Financial Protection Bureau could adversely affect the Company’s business.

The Dodd-Frank Act created the CFPB, a new regulatory entity with broad powers to supervise and enforce consumer protection laws. The CFPB has extensive rulemaking authority for a wide range of consumer protection laws that apply to banks and other types of lenders, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. It also has examination and enforcement authority over all banks with more than $10 billion in assets. Institutions with less than $10 billion in assets, like the Bank, are examined for compliance with consumer laws by their primary bank regulators, but these regulators defer to the CFPB’s rules and interpretations in evaluating a bank’s compliance with consumer protection laws. Therefore, although the CFPB does not directly supervise the Bank, the actions of the CFPB significantly impact the Bank’s operations.

The CFPB has set forth numerous rules and guidance documents since its inception concerning a wide range of consumer protection laws, many of which are directly applicable to the Company’s operations. For example, the CFPB recently imposed new requirements regarding the origination and servicing of residential mortgage loans, limitations on the manner in which loan originators may be compensated, mandatory disclosures on documentation given to borrowers, and an obligation on the part of lenders to verify a borrower’s “ability to

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repay” a residential mortgage loan before extending credit, among others. The CFPB likely will continue to make rules relating to consumer protection, and it is difficult to predict which products and services offered by the Company will be subject to these rules or how these rules will be implemented. However, compliance with CFPB regulations likely will result in additional operating and compliance costs that could have a material adverse effect on the Company’s business, financial condition and results of operations.

Rapid and significant changes in market interest rates may adversely affect the Company’s performance.

Most of the Company’s assets and liabilities are monetary in nature and are therefore subject to significant risks from changes in interest rates. The Company’s profitability depends to a large extent on net interest income, and changes in interest rates can impact the Company’s net interest income as well as the valuation of the Company’s assets and liabilities. The Company’s results of operations are affected by changes in interest rates and the Company’s ability to manage interest rate risks. Changes in market interest rates, changes in the relationships between short-term and long-term market interest rates and changes in the relationships between different interest rate indices can affect the interest rates charged on interest-earning assets differently than the interest rates paid on interest-bearing liabilities. These differences could result in an increase in interest expense relative to interest income or a decrease in the Company’s interest rate spread. For a more detailed discussion of these risks and the Company’s management strategies for these risks, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The Company’s net interest margin depends on many factors that are partly or completely out of the Company’s control, including competition, federal economic monetary and fiscal policies and general economic conditions. Despite the implementation of strategies to manage interest rate risks, changes in interest rates may have a material adverse impact on the Company’s profitability.

The performance of the Company’s investment portfolio is subject to fluctuations due to changes in interest rates and market conditions.

Changes in interest rates can negatively affect the performance of most of the Company’s investments. Interest rate volatility can reduce gains or create losses in the Company’s investment portfolios. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond the Company’s control. Fluctuations in interest rates affect returns on, and the market value of, investment securities. The fair market value of the securities in the Company’s portfolio and the investment income from these securities also fluctuate depending on general economic and market conditions. In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations. The potential effect of these factors is heightened due to the current conditions in the financial markets and economic conditions generally.

Changes in the policies of monetary authorities and other government action could adversely affect the Company’s profitability.

The Company’s results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve. The instruments of monetary policy employed by the Federal Reserve include open market operations in United States government securities, changes in the discount rate or the federal funds rate on bank borrowings and changes in reserve requirements against bank deposits. In view of changing conditions in the national economy and in the money markets, particularly in light of the continuing threat of terrorist attacks, the current political unrest in the Middle East and Eastern Europe and the volatile conditions in the financial markets and economic conditions generally, the Company cannot predict future changes in interest rates, deposit levels, loan demand or our business and earnings. Furthermore, the actions of the United States government and other governments in responding to such conditions may result in currency fluctuations, exchange controls, market disruption and other adverse effects.

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If loan losses are greater than anticipated, the Company’s earnings may be adversely affected.

As a lender, the Company is exposed to the risk that customers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans may not be sufficient to assure repayment. Credit losses are inherent in the business of making loans and could have a material adverse effect on our operating results. The Company’s credit risk with respect to its real estate and construction loan portfolio relates principally to the creditworthiness of individuals and the value of the real estate serving as security for the repayment of loans, and the credit risk with respect to its commercial and consumer loan portfolio relates principally to the general creditworthiness of businesses and individuals within the local markets in which the Company operates. The Company makes various assumptions and judgments about the collectability of its loan portfolio and provides an allowance for potential loan losses based on a number of factors. The Company believes that the allowance for loan losses is adequate. However, if estimates, assumptions or judgments used in calculating this allowance are incorrect, the allowance for loan losses may not be sufficient to cover actual loan losses. The actual amount of future provisions for loan losses cannot be determined at this time and may vary from the amounts of past provisions.

The Company’s profitability and liquidity may be affected by changes in economic conditions in the areas where the Company’s operations or loans are concentrated.

The Company’s success depends to a certain extent on the general economic conditions of the geographic markets served by the Bank and its subsidiaries in the states of Alabama and Mississippi. The local economic conditions in these areas have a significant impact on the Company’s commercial, real estate and construction loans, the ability of borrowers to repay these loans and the value of the collateral securing these loans. Adverse changes in the economic conditions of the southeastern United States in general or any one or more of these local markets could negatively impact the financial results of the Company’s banking operations and have a negative effect on profitability. For example, at present, significant unemployment in the timber industry has caused widespread economic distress in many of the areas served by the Company. A continuation of this trend or similar trends in other portions of the Company’s loan portfolio could have a significant negative effect on the profitability of the Company.

Further disruptions in the residential real estate market could adversely affect the Company’s performance.

Since 2008, the residential real estate market in the United States has experienced a variety of unfavorable economic conditions that have adversely affected the performance and market value of the Company’s residential construction and mortgage loans. Across the United States, delinquencies, foreclosures and losses with respect to residential construction and mortgage loans have reached historically high levels and could increase in the future. In addition, housing prices and appraisal values in many markets have not returned to pre-recession levels and are even continuing to decline in some areas. An extended period of flat or declining housing values could result in additional increases in delinquencies and further losses on residential construction and mortgage loans.

USBI cannot guarantee that it will pay dividends to shareholders in the future.

Dividends from the Bank are USBI’s primary source of funds for the payment of dividends to its shareholders, and there are various legal and regulatory limits regarding the extent to which the Bank may pay dividends or otherwise supply funds to USBI. The ability of the Bank to pay dividends, as well as USBI’s ability to pay dividends to its shareholders, will continue to be subject to and limited by the results of operations of the Bank and by certain legal and regulatory restrictions. Further, any lenders making loans to USBI may impose financial covenants that may be more restrictive than the legal and regulatory requirements with respect to the payment of dividends to shareholders. There can be no assurance of whether or when USBI may pay dividends to its shareholders.

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Extreme weather could cause a disruption in the Company’s operations, which could have an adverse impact on the Company’s profitability.

Some of the Company’s operations are located in areas bordering the Gulf of Mexico, a region that is susceptible to hurricanes and other forms of extreme weather. Such weather events could disrupt the Company’s operations and have a material adverse effect on its overall results of operations. Further, a hurricane or other extreme weather event in any of the Company’s market areas could adversely impact the ability of borrowers to timely repay their loans and may adversely impact the value of any collateral held by the Company.

The Company needs to stay current on technological changes in order to compete and meet customer demands.

The financial services market, including banking services, is undergoing rapid changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and may enable financial institutions to reduce costs. The Company’s future success may depend, in part, on its ability to use technology to provide products and services that provide convenience to customers and create additional efficiencies in operations.

The Company faces security risks with respect to the receipt and storage of personal data about its customers and employees.

A fundamental requirement for electronic commerce is the secure storage and transmission of personal information about customers and employees. Use of this information is regulated by various privacy and information security laws that are constantly changing. Compliance with these laws and regulations may result in cost increases due to necessary systems changes and the development of new processes. Although the Company has developed systems and processes that are designed to protect consumer information and prevent fraudulent transactions and other security breaches on the Bank’s website and otherwise, failure to prevent or mitigate such fraud or breaches, or to discover such fraud or breaches that may go undetected for an extended period of time, may adversely affect the Company’s business or results of operations, damage its reputation or subject it to legal or regulatory risk.

Securities issued by USBI, including its common stock, are not insured.

Securities issued by USBI, including its common stock, are not savings or deposit accounts or other obligations of any bank and are not insured by the DIF maintained by the FDIC or by any other governmental agency or instrumentality, or any private insurer, and are subject to investment risk, including the possible loss of principal.

Future issuances of additional securities could result in dilution of your ownership.

USBI may decide from time to time to issue additional securities in order to raise capital, support growth or fund acquisitions. Further, USBI may issue stock options or other stock grants to retain and motivate employees. Such issuances of securities by USBI would dilute the respective ownership interests of USBI shareholders.

USBI’s common stock price is volatile, which could result in substantial losses for individual shareholders.

The market price of USBI’s common stock has been volatile and likely will continue to be volatile. In particular, USBI’s common stock may be subject to significant fluctuations in response to a variety of factors, including, but not limited to:

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Due to these factors, you may not be able to sell your stock at or above the price you paid for it, which could result in substantial losses.

USBI’s results of operations depend upon the results of operations of its subsidiaries.

There are various regulatory restrictions on the ability of USBI’s subsidiaries to pay dividends or to make other payments to USBI. In addition, USBI’s right to participate in any distribution of assets of any of its subsidiaries upon a subsidiary’s liquidation or otherwise will be subject to the prior claims of creditors of that subsidiary.

The Company’s performance and results of operations depend in part upon the soundness of other financial institutions.

The Company’s ability to engage in routine investment and banking transactions, as well as the quality and value of the Company’s investments in equity securities and obligations of other financial institutions, could be adversely affected by the actions, financial condition and profitability of such other financial institutions with which the Company transacts, including, without limitation, the FHLBA and the Bank’s correspondent banks. Financial services institutions are interrelated as a result of shared credits, trading, clearing, counterparty and other relationships. As a result, defaults by, or even rumors or questions about, one or more financial institutions, or the financial services industry generally, have led to market-wide liquidity problems, losses of depositor, creditor or counterparty confidence in certain institutions and could lead to losses or defaults by other institutions, and in some cases, failure of such institutions. Any losses, defaults by, or failures of, the institutions with whom the Company transacts could adversely affect the Company’s debt and equity holdings in such other institutions, the Bank’s participation interests in loans originated by other institutions, and the Company’s business, including its liquidity, financial condition and earnings.

Liquidity risks could affect the Company’s operations and jeopardize its financial condition.

Liquidity is essential to the Company’s business. An inability to raise funds through deposits, borrowings, the repayment or sale of loans and other sources could have a substantial negative effect on the Company’s liquidity. The Company’s funding sources include federal funds, purchased securities sold under repurchase agreements, core and non-core deposits, and short- and long-term debt. The Company maintains a portfolio of securities that can be used as a source of liquidity. There are other sources of liquidity available to the Company or the Bank should they be needed, including the ability to acquire additional non-core deposits. USBI may be able, depending upon market conditions, to issue and sell debt securities, and preferred or common securities in public or private transactions. The Company’s access to funding sources in amounts adequate to finance or capitalize the Company’s activities or on acceptable terms could be impaired by factors that affect the Company specifically or the financial services industry or economy in general, such as further disruption in the financial markets, negative views and expectations about the prospects for the financial services industry, continued

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deterioration in credit markets, or the financial condition, liquidity or profitability of the financial institutions with which the Company transacts.

The Company is dependent upon the services of its management team and board of directors, and the unexpected loss of key officers or directors may adversely affect the Company’s operations.

A departure of any of the Company’s executive officers, other key personnel, or directors could adversely affect the Company’s operations. With the exception of James F. House’s Amended and Restated Executive Employment Agreement and Thomas S. Elley’s Change in Control Agreement, the Company does not have employment agreements or non-competition agreements with any of its executive officers. In the absence of these types of agreements, the Company’s executive officers are free to resign their employment at any time and accept an offer of employment from another company, including a competitor. Additionally, the community involvement of the Company’s executive officers and directors and the Company’s directors’ diverse and extensive local business relationships are important to the Company’s success. A material change in the composition of the Company’s management team or board of directors could cause the Company’s business to suffer.

None.

The Company, through the Bank, owns all of its offices, including its executive offices, without encumbrances, with the exception of the banking office in Columbiana, office space in Pelham and a parking lot in Brent, which are leased. ALC owns a commercial building in Jackson, Alabama, which houses its Jackson branch office, and ALC leases additional office space throughout Alabama and southeast Mississippi. The Company believes that its properties are sufficient for its operations at the current time.

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 USBI, 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 USBI, 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

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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 was heard on November 27, 2012, and the Circuit Court struck the punitive damages claim but allowed the breach of contract and unjust enrichment claims to go forward. Because Graves Automotive had been unable to produce any documents supporting these remaining claims, on September 30, 2013, the court entered an order requiring Graves Automotive to produce a number of categories of specific documents evidencing the unreimbursed work it had allegedly performed for ALC. After the deadline to produce the documents had passed, ALC filed a Motion to Dismiss for failure to comply with the discovery order or, in the alternative, Motion for Summary Judgment based upon Graves Automotive’s inability to produce evidence supporting its claims. In response, Graves recently submitted an affidavit and produced a number of documents purportedly supporting its claims and damages. ALC is currently in the process of supplementing its Motion to Dismiss, or in the Alternative, Motion for Summary Judgment to address Graves Automotive’s recent production. This motion is set for hearing on May 20, 2014. ALC also has made a nominal settlement offer to avoid the costs associated with additional litigation. ALC has yet to receive a response to this offer. ALC continues to deny the allegations against it in the lawsuit with respect to the remaining claims and intends to vigorously defend itself in this matter. Given 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 December 2, 2013, Wayne Allen Russell filed a lawsuit against the Bank in the Circuit Court of Tuscaloosa County, alleging that the Bank wrongfully foreclosed on a parcel of property owned by Russell that was subject to a mortgage in favor of the Bank. Mr. Russell alleges that the loan secured by the mortgage had been satisfied in full from the proceeds of a prior foreclosure of additional properties subject to the same mortgage. Mr. Russell seeks an unspecified amount of damages. The Bank denies Mr. Russell’s allegations and will vigorously defend the lawsuit. However, given the lack of discovery conducted, 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 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 other litigation should not have a material adverse effect on the Company’s consolidated financial statements or results of operations.

Not applicable.

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PART II

USBI’s common stock is listed on the Nasdaq Capital Market under the symbol “USBI.” As of March 14, 2014, USBI had approximately 820 shareholders of record.

The following table sets forth, for the calendar quarter indicated, the high and low sales prices per share for USBI’s common stock as reported on the Nasdaq Capital Market, and the cash dividends declared per share in each such quarter.

The last reported sales price of USBI’s common stock as reported on the Nasdaq Capital Market on March 14, 2014, was $7.92.

Dividends are paid at the discretion of USBI’s Board of Directors, based on the Company’s operating performance and financial position, including earnings, capital and liquidity. Dividends from the Bank are USBI’s primary source of funds for the payment of dividends to its shareholders, and there are various legal and regulatory limits regarding the extent to which the Bank may pay dividends or otherwise supply funds to USBI. In addition, federal and state regulatory agencies have the authority to prevent USBI from paying a dividend to its shareholders. USBI can make no assurances that it will be able to or be permitted to pay dividends in the future. See Note 14, “Shareholders’ Equity,” in the “Notes to Consolidated Financial Statements” included in this Annual Report on Form 10-K.

The following table sets forth purchases made by or on behalf of USBI or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, of shares of USBI’s common stock during the fourth quarter of 2013.

As a smaller reporting company, USBI is not required to provide this information.

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Introduction and Overview

United Security Bancshares, Inc., a Delaware corporation (“USBI”), is a bank holding company with its principal offices in Thomasville, Alabama. USBI operates one commercial banking subsidiary, First United Security Bank (the “Bank” or “FUSB”). As of December 31, 2013, the Bank operated and served its customers through nineteen banking offices located in Brent, Bucksville, Butler, Calera, Centreville, Coffeeville, Columbiana, Fulton, Gilbertown, Grove Hill, Harpersville, Jackson, Thomasville, Tuscaloosa and Woodstock, Alabama.

The Bank owns all of the stock of Acceptance Loan Company, Inc. (“ALC”), an Alabama corporation. ALC is a finance company organized for the purpose of making and purchasing consumer loans. ALC operates twenty-three finance company offices located in Alabama and southeast Mississippi. The headquarters of ALC is located in Jackson, Alabama. The Bank is the funding source for ALC.

The Bank provides a wide range of commercial banking services to small and medium-sized businesses, property managers, business executives, professionals and other individuals, while ALC’s business is consumer oriented.

FUSB Reinsurance, Inc. (“FUSB Reinsurance”), an Arizona corporation and a wholly-owned subsidiary of the Bank, reinsures or “underwrites” credit life and credit accident and health insurance policies sold to the Bank’s and ALC’s consumer loan customers. FUSB Reinsurance is responsible for the first level of risk on these policies up to a specified maximum amount, and a primary third-party insurer retains the remaining risk. The third-party insurer is also responsible for performing most of the administrative functions of FUSB Reinsurance on a contract basis.

Delivery of the best possible financial services to customers remains an overall operational focus of USBI and its subsidiaries (collectively, the “Company”). We recognize that attention to details and responsiveness to customers’ desires are critical to customer satisfaction. The Company continues to upgrade technology, both in its financial services and in the training of its 286 full-time equivalent employees, to ensure customer satisfaction and convenience.

The following discussion and financial information are presented to aid in an understanding of the current consolidated financial position, changes in financial position, results of operations and cash flows of the Company and should be read in conjunction with the Audited Consolidated Financial Statements and Notes thereto included herein. The emphasis of this discussion is on the years 2013 and 2012. All yields presented and discussed herein are based on the accrual basis and not on the tax-equivalent basis, unless otherwise indicated.

Forward-Looking Statements

Statements contained in this Annual Report on Form 10-K that are not historical facts are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). In addition, the Company, 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 USBI’s Securities and Exchange Commission filings and other public announcements, including the factors described in this Annual Report on Form 10-K for the year ended December 31, 2013. Specifically, with respect to statements relating to loan demand, growth and earnings potential and the adequacy of the allowance for loan losses, these factors include, but are not limited to, the rate of growth (or lack thereof) in the economy, the relative

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strength and weakness in the consumer and commercial credit sectors and in the real estate markets and collateral values. Readers are cautioned not to place undue reliance on any forward-looking statements made by or on behalf of the Company. 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 the forward-looking statements are made, except as required by law.

In addition, the Company’s business is subject to a number of general and market risks that would affect any forward-looking statements, including the risks discussed under Item 1A herein entitled “Risk Factors.”

Critical Accounting Estimates

The preparation of the Company’s consolidated financial statements requires management to make subjective judgments associated with estimates. These estimates are necessary to comply with accounting principles generally accepted in the United States of America and general banking practices. These areas include accounting for the allowance for loan losses, other real estate owned and valuation of deferred tax assets.

Allowance for Loan Losses

The Company maintains the allowance for loan losses at a level deemed adequate by management to absorb probable losses from loans in the portfolio at the balance sheet date. In determining the adequacy of the allowance for loan losses, management considers numerous factors, including, but not limited to, management’s estimate of: (a) loan loss experience, (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.

Other Real Estate Owned

Other real estate owned (“OREO”) consists of properties obtained through foreclosure or in satisfaction of loans, and is reported at the lower of cost or fair value, less estimated costs to sell at the date acquired, with any loss at the date of foreclosure recognized as a charge-off through the allowance for loan losses. Additional OREO losses for subsequent valuation adjustments are determined on a specific property basis and are included as a component of other non-interest expense along with holding costs. Any gains or losses on disposal realized at the time of disposal are reflected in non-interest expense. Significant judgments are required in estimating the fair value of OREO, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility. As a result, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales and other estimates used to determine the fair value of OREO.

Deferred Tax Asset Valuation

A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it is more likely than not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of a deferred tax asset is dependent upon the generation of future taxable income during the periods in

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which the temporary differences that resulted in the deferred tax asset become deductible. Management’s determination of the realization of deferred tax assets is based upon judgments regarding various future events and uncertainties, including the timing and amount of future income earned by subsidiaries and the implementation of various tax planning strategies to maximize realization of the deferred tax asset. Management believes that USBI’s subsidiaries will be able to generate sufficient operating earnings to realize the deferred tax assets recorded as of December 31, 2013. However, the amount of deferred tax asset considered realizable could be reduced if estimates of future taxable income are reduced.

Fair Value Measurements

A portion of the Company’s assets and liabilities is carried at fair value, with changes in fair value recorded either in earnings or accumulated other comprehensive income (loss). These include securities available for sale and impaired loans. Additionally, other real estate and certain other assets acquired in foreclosure are reported at the lower of the recorded investment or fair value of the property, less estimated cost to sell. Fair value is generally defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. While management uses judgment when determining the price at which willing market participants would transact when there has been a significant decrease in the volume or level of activity for the asset or liability in relation to “normal” market activity, management’s objective is to determine the point within the range of fair value estimates that is most representative of a sale to a third-party investor under current market conditions. The value to the Company if the asset or liability was held to maturity is not included in the fair value estimates.

A fair value measure should reflect the assumptions that market participants would use in pricing the asset or liability, including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. Fair value is measured based on a variety of inputs that the Company utilizes. Fair value may be based on quoted market prices for identical assets or liabilities traded in active markets (Level 1 valuations). If market prices are not available, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market are used (Level 2 valuations). Where observable market data is not available, the valuation is generated from model-based techniques that use significant assumptions not observable in the market, but observable based on Company-specific data (Level 3 valuations). These unobservable assumptions reflect the Company’s own estimates for assumptions that market participants would use in pricing the asset or liability.

Other Significant Accounting Policies

Other significant accounting policies, not involving the same level of measurable uncertainties as those discussed above, are nevertheless important to an understanding of the consolidated financial statements. Policies related to revenue recognition, investment securities and long-lived assets require difficult judgments on complex matters that are often subject to multiple and recent changes in the authoritative guidance. Certain of these matters are among topics currently under re-examination by accounting standard setters and regulators. Specific conclusions have not been reached by these standard setters, and outcomes cannot be predicted with confidence. Also, see Note 2 to our consolidated financial statements, as it discusses accounting policies that we have selected from acceptable alternatives.

Overview of 2013

The following discussion should be read in conjunction with our consolidated financial statements, accompanying notes, and other schedules presented herein.

For the year ended December 31, 2013, net income of the Company was $3.9 million, compared with $2.2 million for the year ended December 31, 2012. Basic and diluted net income per common share was $0.65 for the year ended December 31, 2013, compared with $0.36 for 2012.

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Other results for the Company as of and for the year ended December 31, 2013 were as follows:

These items are discussed in further detail throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section.

Results of Operations

Summary of Consolidated Operating Results for the Company

Net Interest Income and Margin

Net interest income measures how well management has matched interest-earning assets and interest-bearing liabilities and is the Company’s principal source of income. Fluctuations in interest rates materially affect net interest income. Although market rates were relatively stable during 2013, the yield on earning assets

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declined by 53 basis points, while the cost of interest-bearing liabilities declined by 29 basis points, as longer-term time deposits repriced at lower rates, decreasing net interest margin by 26 basis points, from 6.21% in 2012 to 5.95% in 2013. The table, “Yields Earned on Average Interest-Earning Assets and Rates Paid on Average Interest-Bearing Liabilities,” summarizes the results of net interest income and net yield on earning-assets, comparing 2013 to 2012.

Net interest income decreased 10.1% to $30.7 million in 2013, compared to an increase of 3.2% in 2012. The decrease in net interest income in 2013 was primarily due to a decline in interest-earning assets along with a decrease in the yield on earning assets. These decreases were somewhat offset by a decline in the cost of interest-bearing liabilities.

Interest income declined $5.1 million in 2013; $4.3 million was the result of decreased interest-earning assets, and $0.8 million was due to the 53 basis point decline in the yield on interest-earning assets. Interest expense declined $1.7 million in 2013; $0.6 million resulted from decreased interest-bearing liabilities, and $1.1 million was due to the 29 basis point decline in the cost of interest-bearing liabilities.

Overall, volume and yield changes in interest-earning assets and interest-bearing liabilities contributed to the decrease in net interest income during 2013. As to volume, the Company’s average earning assets decreased $33.5 million during 2013, or 6.1%, while average interest-bearing liabilities decreased $40.7 million, or 8.8%. The Company’s average loans declined by $48.6 million, or 12.9%, during 2013, and average investment securities increased by $12.2 million, or 7.1%. Average borrowings declined $2.7 million, average time deposits declined $44.4 million, average savings deposits increased $1.4 million, and average interest-bearing demand deposits increased $4.9 million.

Interest margins are affected by several factors, one of which is the relationship of rate-sensitive earning assets to rate-sensitive interest-bearing liabilities. This factor determines the effect that fluctuating interest rates will have on net interest income. Rate-sensitive earning assets and interest-bearing liabilities are those that can be repriced to current market rates within a relatively short time. The Company’s objective in managing interest rate sensitivity is to achieve reasonable stability in the interest margin throughout interest rate cycles by maintaining the proper balance of rate-sensitive assets and interest-bearing liabilities. For further analysis and discussion of interest rate sensitivity, refer to the section entitled “Liquidity and Interest Rate Sensitivity Management.”

The percentage of earning assets funded by interest-bearing liabilities also affects the Company’s interest margin. The Company’s earning assets are funded by interest-bearing liabilities, non-interest-bearing demand deposits and shareholders’ equity. The net return on earning assets funded by non-interest-bearing demand deposits and shareholders’ equity exceeds the net return on earning assets funded by interest-bearing liabilities. The Company’s percentage of earning assets funded by interest-bearing liabilities decreased to 81.8% in 2013, compared with 84.2% in 2012.

The Table, “Changes in Interest Earned and Interest Expense Resulting from Changes in Volume and Changes in Rates,” summarizes the impact of changes in both the volume of interest-earning assets and interest-bearing liabilities, and the average rate earned or incurred on interest-earning assets and interest-bearing liabilities. As indicated by this table, the decrease in net interest income in 2013 is primarily attributable to decreases in the volume of interest-earning assets. One of the major challenges we face at the Bank and ALC is investing in quality interest-earning assets. Average loans have declined over the last two years at the Bank and ALC. Difficult economic conditions and fierce competition among lenders for quality loans will continue to affect our ability to grow loans. Reducing non-performing assets and attracting and retaining quality loan customers at the Bank and ALC remain the primary focus of management.

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Yields Earned on Average Interest-Earning Assets and

Rates Paid on Average Interest-Bearing Liabilities

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Changes in Interest Earned and Interest Expense Resulting from

Changes in Volume and Changes in Rates

The following table sets forth the effect that varying levels of interest-earning assets and interest-bearing liabilities and the applicable rates had on changes in net interest income for 2013 versus 2012 and 2012 versus 2011.

Provision for Loan Losses

The provision for loan losses is an expense used to establish the allowance for loan losses. Actual loan losses, net of recoveries, are charged directly to the allowance for loan losses. The expense recorded each year is a reflection of actual net losses experienced during the year and management’s judgment as to the adequacy of the allowance to absorb losses inherent in the portfolio. The provision for loan losses for the Company was a credit of $0.6 million and a charge of $4.3 million for the years ended December 31, 2013 and 2012, respectively. The reduction in provision expense resulted from significant recoveries experienced in 2013 related to certain loans that were previously charged off, coupled with an improvement in the credit quality and other inherent risks of the loan portfolio at December 31, 2013.

Net charge-offs for the Company totaled $9.2 million in 2013, compared with $7.3 million in 2012. Net charge-offs at the Bank were $6.6 million in 2013, compared to $4.2 million in 2012. The increase in net charge-offs from both a Company and Bank perspective resulted primarily from continued economic weakness in the markets in which the Bank operates, particularly with respect to the real estate market. The real estate market continues to adversely impact real estate values and the ability of borrowers to perform, particularly when performance is based on real estate sales. At ALC, net charge-offs totaled $2.6 million in 2013, a reduction from $3.1 million in 2012. This decrease resulted from management’s ongoing efforts to shift ALC’s loan portfolio to focus more heavily on consumer loans and less heavily on real estate related loans.

The ratio of the allowance for loan losses to loans, net of unearned income for the Company, decreased to 3.03% as of December 31, 2013, compared with 5.40% as of December 31, 2012. For the Bank, this ratio decreased to 2.62% as of December 31, 2013 from 5.60% as of December 31, 2012. These decreases resulted from continued problem asset resolution by Bank management during 2013, lower levels of non-accrual loans, and a continuing shift in the portfolio away from higher risk real estate loans. At ALC, the ratio decreased to

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4.43% as of December 31, 2013 from 4.68% as of December 31, 2012. We believe that growing the loan portfolio at the Bank and ALC with quality customers, along with continued efforts to reduce non-performing loans, should result in continued reduction of the allowance for loan losses as a percentage of loans.

Based on our evaluation of the portfolio, management believes that the allowance for loan losses is adequate to absorb losses inherent in the loan portfolio as of December 31, 2013. While we believe that the methodologies and calculations we use for estimating the allowance for loan losses (which are reviewed from time to time by our regulators) are adequate, our conclusions are based on estimates and judgments and are therefore approximate and imprecise. Factors beyond our control, such as changes in economic conditions impacting the national economy or the local markets in which we operate, may negatively and materially affect asset quality and the adequacy of the allowance for loan losses, as well as the resulting provision for loan losses.

For additional information regarding the Company’s allowance for loan losses, see “Loans and Allowance for Loan Losses.”

Non-Interest Income

Non-interest income represents fees and income derived from sources other than interest-earning assets. Total non-interest income decreased $0.7 million, or 12.6%, in 2013 compared to 2012. The following table presents the major components of non-interest income for the years indicated.

Service Charges and Other Fees on Deposit Accounts

Service charges and fees on deposit accounts decreased $0.8 million, or 31.8%, in 2013, compared to 2012. The decrease in service charges was due primarily to the reversal of approximately $0.6 million in service charges that were designated to be refunded to customers in the fourth quarter of 2013 for a product that was discontinued. The discontinued product provided identification theft protection services to Bank customers, and the refunded service charges were initially recorded as non-interest income from the first quarter 2011 through the third quarter 2013. The remaining $0.2 million reduction in service charges and other fees resulted primarily from reductions in overdraft and non-sufficient funds charges attributable to a changes in regulations that prohibit the Bank from assessing these charges for certain non-recurring electronic transactions. Absent the one-time charge to refund customers that occurred during the fourth quarter of 2013, service charges and fees on deposit accounts generally represent the largest component of non-interest income. Revenues from this source have generally declined in recent years. Management continues to search for new sources of fee income from new financial services and products; however, income from these non-interest sources is expected to continue to decline as a percentage of total revenue for the foreseeable future.

Other Income

Other income increased approximately $0.3 million, or 17%, in 2013 compared with 2012. Other income includes fee income generated by the Bank for ancillary services, such as letters of credit, ATMs, debit and credit cards and wire transfers. In addition, other income is generated at ALC for services including ALC’s auto club program and certain real estate rental. The increase in other income was primarily attributable to a non-recurring fee of approximately $0.5 million received by the Bank in connection with the early payoff of a mortgage-backed

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pool in the Company’s investment portfolio. This increase was partially offset by a decrease in revenues associated with ALC’s auto club program totaling approximately $0.1 million. Given the nature of these fees, there is uncertainty as to the level of revenue that will be sustained from these sources in the future.

Non-Interest Expense

Non-interest expense decreased $1.7 million, or 5.2%, to $30.8 million in 2013, from $32.5 million in 2012. The following table presents the major components of non-interest expense for the years indicated.

Salaries and Employee Benefits

Salaries and employee benefits expense increased $1.7 million, or 11.5%, in 2013, compared to an increase of 0.7% in 2012. The increase was primarily due to cost of living adjustments and annual merit increases, salaries paid to new officers hired in 2013, increases in group health insurance expenses, and increases in accruals for incentive payouts. The Company provides employees who meet established employment requirements with a benefits package that includes medical, life and disability insurance plans, as well as an employee stock ownership plan, the United Security Bancshares, Inc. Stock Ownership Plan (With 401(k) Provisions) (the “401(k) Plan”). The Bank’s matching contributions to the 401(k) Plan totaled approximately $0.3 million in both 2013 and 2012. No discretionary match was made by the Bank to the 401(k) Plan in 2013 or 2012. Salaries and employee benefits also includes the accrual for the long-term incentive compensation plan which totaled approximately $0.3 million in 2013 and $0.4 million in 2012.

Other Real Estate/Foreclosure Expense

Other real estate write-downs for the Company decreased $2.5 million in 2013 compared to 2012, a decline of 51.7%. Other real estate write-downs were $1.4 million at the Bank and $0.9 million at ALC in 2013, compared to $3.6 million at the Bank and $1.3 million at ALC in 2012. The reduction in impairment at both the Bank and ALC resulted from management’s ongoing efforts to sell OREO, along with stabilizing real estate values in certain markets as compared with the prior year.

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Cost of carrying other real estate includes costs such as property taxes, maintenance, and security. Carrying costs for the Company decreased $0.6 million in 2013 compared to 2012, a decline of 42.0%. Carrying costs were $0.7 million and $0.1 million at the Bank and ALC, respectively, in 2013, compared with $1.0 million and $0.3 million at the Bank and ALC respectively, in 2012. The decrease in carrying costs at both the Bank and ALC resulted from continued efforts to sell OREO properties during 2013. Based on these efforts, the balance of OREO was reduced to $9.3 million as of December 31, 2013 compared with $13.3 million as of December 31, 2012.

Although management continues efforts to work through problem assets and sell OREO, there continues to be uncertainty with respect to economic conditions and real estate values in certain of the markets in which both the Bank and ALC operate. If the national or local economy weakens or if real estate values decline further in our primary markets, additional write-downs of existing OREO could be required, and the level of acquisition of properties into OREO could increase, resulting in increased carrying cost.

Provision for Income Taxes

Income tax expense was $1.5 million in 2013, compared to $0.7 million in 2012, resulting in an effective tax rate of 27.8% and 25.3%, respectively. The increase in income tax expense resulted primarily from increased pre-tax earnings.

The calculation of the income tax provision requires the use of estimates and judgments by management. As part of the Company’s overall business strategy, management must take into account tax laws and regulations that apply to specific tax issues faced by the Company each year. This analysis includes an evaluation of the amount and timing of the realization of income tax assets or liabilities. As of December 31, 2013, the Company reported a net deferred tax asset of $10.8 million, compared with $9.5 million as of December 31, 2012.

Management’s determination of the realization of the net deferred tax asset is based upon an evaluation of the four possible sources of taxable income: 1) the future reversals of taxable temporary differences; 2) future taxable income, exclusive of reversing temporary differences and carryforwards; 3) taxable income in prior carryback years; and 4) tax-planning strategies. In making a conclusion, management has evaluated the available positive and negative evidence impacting these sources of taxable income. The primary sources of positive and negative evidence impacting taxable income are summarized below:

Positive Evidence

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Negative Evidence

The Company believes that the positive evidence, when considered in its entirety, outweighs the negative evidence of recent pre-tax losses. See Note 2 “Summary of Significant Accounting Policies” and Note 11 “Income Taxes” to the consolidated financial statements for additional information about income taxes.

Balance Sheet Analysis

Loans and Allowance for Loan Losses

Total loans outstanding, net of unearned interest, decreased by $46.4 million in 2013, with the loan portfolio totaling $310.3 million as of December 31, 2013. Total loans at the Bank declined 14.9% to $239.7 million in 2013. Loans at ALC declined 6.0% to $70.6 million in 2013. For 2013, on an average basis, loans represented 63.5% of the Company’s earning assets and provided 91% of the Company’s interest income. More stringent underwriting standards at the Bank and ALC, and difficult economic conditions, have led to decreased lending activity. Although loan growth is a major focus for management in the coming years, quality loan growth will remain a major challenge.

Real estate loans decreased 14.9% to $218.2 million in 2013. The Bank’s real estate loan portfolio is comprised of construction loans to both businesses and individuals for commercial and residential development, commercial buildings, both rental property and owner occupied, with most of this activity being commercial. Real estate loans also consist of other loans secured by real estate, such as one-to-four family dwellings, including mobile homes, loans on land only, multi-family dwellings, non-farm, non-residential real estate and home equity loans. Real estate loans at the Bank declined $31.7 million, or 14.2%, in 2013 to a balance of $191.6 million as of December 31, 2013. Real estate loans at ALC are primarily secured by residential properties,

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mobile homes and land. These loans declined 19.5% to $26.6 million as of year-end 2013. Real estate loans remain the largest component of the Company’s loan portfolio, comprising 69.2% of total loans outstanding, down from 70.9% at year-end 2012. Real estate lending will likely be the largest segment of the Bank’s loan portfolio for the foreseeable future. However, management will focus on growing owner-occupied and income-generating commercial real estate loans with decreased reliance on development lending in 2014.

Consumer loans represent the second largest component of the Company’s loan portfolio. These loans include loans to individuals for household, family and other personal expenditures, including credit cards and other related credit plans. Consumer loans increased by $1.9 million at ALC and declined by $4.6 million at the Bank during 2013. ALC’s consumer loans represent 83.2% of the total consumer loans, with a balance at year-end 2013 of $48.9 million. These loans at the Bank amounted to $9.9 million as of December 31, 2013. The increase at ALC was the result of a shift of emphasis away from real estate loans to consumer loans. The decline in consumer loans at the Bank resulted from an overall tightening of underwriting standards.

Commercial, financial and agricultural loans decreased by 38.6% during 2013 to $37.8 million as of December 31, 2013. Loans to tax exempt entities, such as municipalities and counties, increased $0.3 million in 2013 and increased $9.2 million in 2012. All other commercial loans declined by $5.3 million in 2013. All of the commercial loans were originated at the Bank.

The allowance for loan losses is maintained at a level that, in management’s judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s evaluation of the collectibility of the loan portfolio, including the nature of the portfolio and changes in its risk profile, credit concentrations, historical trends and economic conditions. This evaluation also considers the balance of impaired loans. Losses on individually-identified impaired loans may be measured based on the present value of expected future cash flows discounted at each loan’s original effective market interest rate. As a practical expedient, impairment may be measured based on the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through the provision and added to the allowance for loan losses. Large pools of smaller balance, homogeneous loans are subjected to a collective evaluation for impairment, considering delinquency and repossession statistics, historical charge-off trends, trends in the economy and other factors. Though management believes the allowance for loan losses to be adequate, taking into consideration the views of regulators, the current economic environment and the amount of subjective judgment involved in the calculation, there can be no assurance that the allowance for loan losses is sufficient, and ultimate losses may vary from their estimates. Estimates are reviewed periodically, and, as adjustments become necessary, they are reported in earnings during the periods in which they become known.

The Bank’s loan policy requires immediate recognition of a loss if significant doubt exists as to the repayment of the principal balance of a loan. Consumer installment loans at the Bank are generally recognized as losses if they become 90 days delinquent. Consumer installment loans at ALC are generally recognized as losses if they become 120 days delinquent. Exceptions are made specifically for loans that are secured by real estate and if the borrower is in a repayment plan under the bankruptcy statutes. At the time of the plan approval, any amount above the cash flow value of the plan is charged off, and as long as the loans are paying in accordance with the bankruptcy plan, the remainder is not charged off.

A credit review of the Bank’s individual loans is conducted periodically. A risk rating is assigned to each loan and is reviewed at least annually. In assigning risk, management takes into consideration the capacity of the borrower to repay, collateral values, current economic conditions and other factors. Management also monitors the credit quality of the loan portfolio through the use of an annual outside comprehensive loan review. Based on the underwriting standards in the loan policy, the Bank does not actively market mortgages to subprime borrowers. However, over time, some of the Bank’s customers could migrate into categories that might demonstrate some of the same characteristics as subprime borrowers. With current underwriting standards and ongoing monitoring of credit quality within the portfolio, the volume of such customers is inconsequential.

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The Bank utilizes a written loan policy, which guides lending personnel in applying consistent underwriting standards. This policy is intended to aid loan officers and lending personnel in making sound credit decisions and to assure compliance with state and federal regulations. The policy is comprehensive in scope and includes guidance on both desirable and undesirable loans. It includes individual loan officer lending limits as well as documentation requirements for various loan types. The lending function is managed by utilizing various committees, consisting of management and board members. The Executive Loan Committee, made up of senior management, has lending authority up to $2.0 million. Loan requests exceeding $2.0 million require approval of the Directors’ Loan Committee, made up of four outside directors and the Chief Executive Officer (“CEO”). Loans in excess of $10.0 million require the approval of the Board of Directors. The Problem Asset Review Committee, composed of the CEO, the Chief Credit Officer (“CCO”), the Executive Vice President (“EVP”), Commercial Division, and the EVP, Retail Division, with attendance of the Vice President, Special Assets Manager, meets monthly to review problem assets. Impaired loans in excess of $0.5 million are reviewed monthly to assist the CCO in calculating and evaluating the adequacy of the allowance for loan losses. OREO with balances of $500,000 and over are also reviewed at the monthly meetings, along with non-performing loans $250,000 and greater. This same committee reviews non-performing loans $50,000 and over on a quarterly basis.

The Credit Policy Committee, chaired by the CCO, consisting of the CEO, the EVP, Commercial Division, the EVP, Retail Division, and one Senior Lender, meets weekly to review loan downgrades, upgrades, charge-offs, and any loan policy changes.

ALC’s management oversees its loan portfolio by establishing credit criteria and underwriting standards through a loan committee comprised of members of ALC’s Board of Directors and ALC’s district and office managers. This Committee is aided by a formal loan policy, which is reviewed at least annually with revisions made as directed by ALC’s Board of Directors and Management. ALC’s individual branches are supervised by three district managers who report to the ALC COO. Because of the very nature of ALC’s business, many of the borrowers served by ALC could be deemed to demonstrate some of the same characteristics as subprime borrowers. Although the Company believes that serving the communities in which ALC is located includes service to these customers, ALC’s management and loan officers remain diligent in making careful loan decisions based on the credit criteria and underwriting standards established by the loan committee.

The following table shows the Company’s loan distribution as of December 31, 2013 and 2012.

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The amounts of total loans (excluding consumer loans) outstanding as of December 31, 2013, which, based on the remaining scheduled repayments of principal, are due in (1) one year or less, (2) more than one year but within five years and (3) more than five years, are shown in the following table.

Variable rate loans totaled approximately $41.0 million and are included in the one-year category.

Non-Performing Assets

At ALC, accruing loans past due 90 days or more as of December 31, 2013 increased to $1.7 million, an increase of $0.1 million compared to 2012. These loans are closely monitored, and, if any deterioration in the borrowers’ ability to pay occurs, they are placed on non-accrual status. There were no accruing loans past 90 days or more as of December 31, 2013 or 2012 at the Bank.

Impaired loans totaled $32.6 million and $54.3 million as of December 31, 2013 and 2012, respectively. The decrease in impaired loans as of December 31, 2013 resulted from paydowns of $8.9 million, charge-offs of $10.1 million, transfers to OREO or repossessions of $1.5 million, and upgrades of $1.0 million. The decline in real estate values from 2007 levels and the severely depressed real estate market have affected the value of the underlying collateral and the borrowers’ ability to service the debt on these loans. There was approximately $3.3 million and $11.1 million in the allowance for loan losses specifically allocated to these impaired loans as of December 31, 2013 and 2012, respectively. Loans totaling $18.1 million and $28.1 million for 2013 and 2012, respectively, although considered impaired under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 310, have no measurable impairment, and no allowance for loan losses is specifically allocated to these loans. The average recorded investment in impaired loans for 2013 and 2012 was approximately $42.5 million and $54.2 million, respectively. Income recognized on impaired loans amounted to approximately $1.6 million in 2013 and $2.5 million in 2012.

Non-performing assets as a percentage of loans net of unearned interest and other real estate was 6.7% as of December 31, 2013, compared to 10.4% as of December 31, 2012. Non-performing assets decreased $16.9 million in 2013 compared to 2012, loans on non-accrual decreased $13.1 million and loans past due 90 days or more and still accruing increased $0.1 million. Other real estate acquired in settlement of loans consisted of 7 residential properties and 29 commercial properties totaling $8.5 million at the Bank and 32 residential properties and 14 commercial properties totaling $0.8 million at ALC. Management is making every effort to dispose of these properties in a timely manner, but the severely depressed real estate market in many of our market areas is negatively impacting this process. Management reviews these loans and reports to the Bank’s Board of Directors monthly.

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 non-accrual, moving to non-accrual or continuing on accrual status, depending on the individual facts and circumstances of the borrower. Non-accrual restructured loans are included and treated with all other non-accrual loans. In addition, all accruing restructured loans are being reported as troubled debt restructurings. Generally, restructured loans remain on non-accrual until the customer has attained

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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 non-accrual status. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan remains on non-accrual. Based on the above, the Company had $5.7 million and $12.4 million of non-accruing loans that were restructured and remained on non-accrual status as of December 31, 2013 and 2012, respectively. In addition, the Company had $2.0 million of restructured loans that were restored to accrual status based on a sustained period of repayment performance as of December 31, 2013, compared to $0.1 million as of December 31, 2012.

The following table presents information on non-performing loans and real estate acquired in settlement of loans.

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Summarized below is information concerning income on those loans with deferred interest or principal payments resulting from deterioration in the financial condition of the borrower.

Allocation of Allowance for Loan Losses

The following table shows an allocation of the allowance for loan losses for the two years indicated.

In establishing the allowance for loan losses, management created the following risk groups for evaluating the loan portfolio:

Net charge-offs as shown in the “Summary of Loan Loss Experience” table below indicate the trend for the last two years.

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Summary of Loan Loss Experience

This table summarizes the Company’s loan loss experience for each of the two years indicated.