UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2013

OR

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

For the transition period from                      to                     

Commission file number: 0-14549

United Security Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)

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

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

(334) 636-5424

(Registrant’s Telephone Number, Including Area Code)

N/A

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

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

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

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

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	x

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

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

Class	Outstanding at November 13, 2013
Common Stock, $0.01 par value	6,028,091 shares

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

		PAGE
	PART I. FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS
Condensed Consolidated Statements of Financial Condition at September  30, 2013 (Unaudited) and December 31, 2012			4
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September  30, 2013 and 2012 (Unaudited)			5
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012 (Unaudited)			6
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September  30, 2013 and 2012 (Unaudited)			7
Notes to Condensed Consolidated Financial Statements (Unaudited)			8
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		36
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		41
ITEM 4.	CONTROLS AND PROCEDURES		42
	PART II. OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS		42
ITEM 1A.	RISK FACTORS		43
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		43
ITEM 6.	EXHIBITS		43
Signature Page			44

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FORWARD-LOOKING STATEMENTS

Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). In addition, United Security Bancshares, Inc. (“USBI”) and its subsidiaries (collectively, the “Company”), through its senior management, from time to time makes forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995) concerning its expected future operations and performance and other developments. The words “estimate,” “project,” “intend,” “anticipate,” “expect,” “forecast,” “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 risk factors described in Part I, Item 1A of USBI’s Annual Report on Form 10-K, for the year ended December 31, 2012. Specifically, with respect to statements relating to loan demand, growth and earnings potential and the adequacy of the allowance for loan losses for the Company, these factors include, but are not limited to, the rate of growth (or lack thereof) in the economy, the relative strength and weakness in the consumer and commercial credit sectors and in the real estate markets and collateral values. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to revise forward-looking statements to reflect circumstances or events that occur after the dates on which the forward-looking statements are made, except as required by law.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in Thousands, Except Share Data)

	September 30,			December 31,
	2013			2012
	(Unaudited)
ASSETS
Cash and Due from Banks	$	12,048		$	12,181
Interest Bearing Deposits in Banks		31,430			41,945
Total Cash and Cash Equivalents		43,478			54,126
Federal Funds Sold		5,000			5,000
Investment Securities Available-for-Sale, at fair value		121,744			92,614
Investment Securities Held-to-Maturity, at amortized cost		35,108			21,136
Federal Home Loan Bank Stock, at cost		906			936
Loans, net of allowance for loan losses of $9,282 and $19,278, respectively		304,778			337,400
Premises and Equipment, net		8,756			8,903
Cash Surrender Value of Bank-Owned Life Insurance		13,565			13,303
Accrued Interest Receivable		2,527			3,101
Investment in Limited Partnerships		819			836
Other Real Estate Owned		11,372			13,286
Other Assets		11,949			16,492
Total Assets	$	560,002		$	567,133
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	476,020		$	489,034
Accrued Interest Expense		263			413
Other Liabilities		7,535			8,401
Short-Term Borrowings		1,777			638
Long-Term Borrowings		5,000			—
Total Liabilities	$	490,595		$	498,486
Commitments and Contingencies
Shareholders’ Equity:
Common Stock, par value $0.01 per share, 10,000,000 shares authorized; 7,327,560 shares issued; 6,028,091 and 6,023,622 shares outstanding, respectively		73			73
Surplus		9,284			9,284
Accumulated Other Comprehensive Income, net of tax		796			3,139
Retained Earnings		80,259			77,287
Less Treasury Stock: 1,299,469 and 1,303,938 shares at cost, respectively		(20,992	)		(21,123	)
Noncontrolling Interest		(13	)		(13	)
Total Shareholders’ Equity		69,407			68,647
Total Liabilities and Shareholders’ Equity	$	560,002		$	567,133

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

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UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except Per Share Data)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
	(Unaudited)				(Unaudited)
INTEREST INCOME:
Interest and Fees on Loans	$	7,413	$	8,488	$	23,020	$	26,454
Interest on Investment Securities		857		840		2,276		2,632
Total Interest Income		8,270		9,328		25,296		29,086
INTEREST EXPENSE:
Interest on Deposits		693		1,027		2,215		3,549
Interest on Borrowings		9		4		13		119
Total Interest Expense		702		1,031		2,228		3,668
NET INTEREST INCOME		7,568		8,297		23,068		25,418
PROVISION FOR LOAN LOSSES		240		492		799		3,175
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		7,328		7,805		22,269		22,243
NON-INTEREST INCOME:
Service and Other Charges on Deposit Accounts		586		639		1,734		1,870
Credit Life Insurance Income		239		272		518		613
Other Income		466		542		1,890		1,575
Total Non-Interest Income		1,291		1,453		4,142		4,058
NON-INTEREST EXPENSE:
Salaries and Employee Benefits		4,029		3,433		12,006		10,912
Occupancy Expense		495		488		1,456		1,416
Furniture and Equipment Expense		301		317		865		970
Impairment on Other Real Estate		215		377		577		3,241
Loss on Sale of Other Real Estate		48		572		753		1,032
Other Expense		2,277		2,375		6,576		7,261
Total Non-Interest Expense		7,365		7,562		22,233		24,832
INCOME BEFORE INCOME TAXES		1,254		1,696		4,178		1,469
PROVISION FOR INCOME TAXES		350		517		1,206		157
NET INCOME	$	904	$	1,179	$	2,972	$	1,312
BASIC AND DILUTED NET INCOME PER SHARE	$	0.15	$	0.20	$	0.49	$	0.22
DIVIDENDS PER SHARE	$	0.00	$	0.00	$	0.00	$	0.00

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

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UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in Thousands)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2013			2012		2013			2012
	(Unaudited)					(Unaudited)
Net income	$	904		$	1,179	$	2,972		$	1,312
Other comprehensive income :
Change in unrealized holding gains (losses) on available-for-sale securities arising during period, net of tax (benefit) of $(384), $74, $(1,406) and $279, respectively		(639	)		123		(2,343	)		465
Total comprehensive income	$	265		$	1,302	$	629		$	1,777

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

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UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

	Nine Months Ended
	September 30,
	2013			2012
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,972		$	1,312
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		520			524
Amortization of premiums and discounts, net		641			890
Provision for loan losses		799			3,175
Impairment of OREO		577			3,241
Loss on sale of OREO		753			1,032
Net other operating activities		4,969			1,217
Total adjustments		8,259			10,079
Net cash provided by operating activities		11,231			11,391
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and prepayments of investment securities, available-for-sale		27,299			35,745
Proceeds from maturities and prepayments of investment securities, held-to-maturity		9,224			1,170
Proceeds from redemption of Federal Home Loan Bank stock		256			1,925
Proceeds from the sale of other real estate		2,780			4,912
Purchase of premises and equipment		(82	)		(420	)
Purchase of investment securities, available-for-sale		(60,825	)		(16,296	)
Purchase of investment securities, held-to-maturity		(23,191	)		(12,189	)
Purchase of FHLB stock		(225	)		—
Net increase in federal funds sold		—			(5,000	)
Net change in loan portfolio		29,629			27,158
Net cash (used in) provided by investing activities		(15,135	)		37,005
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in customer deposits		(13,014	)		(20,446	)
Exercise of stock options		—			26
Increase (decrease) in borrowings		6,139			(19,023	)
Reissuance of treasury stock		131			85
Net cash used in financing activities		(6,744	)		(39,358	)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(10,648	)		9,038
CASH AND CASH EQUIVALENTS, beginning of period		54,126			52,797
CASH AND CASH EQUIVALENTS, end of period	$	43,478		$	61,835
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest	$	2,377		$	3,935
Income taxes		85			90
NON-CASH TRANSACTIONS:
Other real estate acquired in settlement of loans	$	2,196		$	6,019

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

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UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. GENERAL

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

The unaudited interim condensed consolidated financial statements, in the opinion of management, reflect all adjustments necessary for a fair presentation of consolidated financial position, results of operations and cash flows for the periods presented. Such adjustments are of a normal, recurring nature. The results of operations for any interim period are not necessarily indicative of results expected for the fiscal year ending December 31, 2013. While certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), management believes that the disclosures herein are adequate to make the information presented not misleading. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in USBI’s Annual Report on Form 10-K for the year ended December 31, 2012. The accounting policies followed by the Company are set forth in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in USBI’s Annual Report on Form 10-K for the year ended December 31, 2012. In preparing the unaudited interim condensed consolidated financial statements, management evaluated subsequent events through the date on which the unaudited interim condensed consolidated financial statements were issued.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The amendments in this ASU affect all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either Accounting Standards Codification (“ASC”) Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement. The requirements amend the disclosure requirements on offsetting in ASC Section 210-20-50. This information will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this ASU. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The adoption of this guidance, which involves disclosure only, did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In February 2013, the FASB issued ASU No. 2013-02, which updated ASC Topic 220, Comprehensive Income, which requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not reclassified in their entirety to net income, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. ASU No. 2013-02 is effective for annual reporting periods beginning on or after December 15, 2012 and interim periods within those annual periods. The adoption of ASU No. 2013-02 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

3. NET INCOME PER SHARE

Basic net income per share is computed by dividing net income by the weighted average shares during the three- and nine-month periods ended September 30, 2013 and 2012. Diluted net income per share for each of the three- and nine-month periods ended September 30, 2013 and 2012 is computed based on the weighted average shares outstanding during the period plus the dilutive effect of all potentially dilutive instruments outstanding. There were no outstanding potentially dilutive instruments during the three-and nine-month periods ended September 30, 2013 or 2012, and, therefore, basic and diluted weighted average shares outstanding were the same.

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The following table represents the basic and diluted net income per share calculations for the three- and nine-month periods ended September 30, 2013 and 2012 (in thousands of dollars, except per share data):

			Weighted		Basic and
			Average		Diluted Net
	Net		Shares		Income
	Income		Outstanding		Per Share
For the Three Months Ended:
September 30, 2013	$	904		6,027,562	$	0.15
September 30, 2012	$	1,179		6,023,124	$	0.20
For the Nine Months Ended:
September 30, 2013	$	2,972		6,024,935	$	0.49
September 30, 2012	$	1,312		6,022,648	$	0.22

4. COMPREHENSIVE INCOME

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

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company follows the provisions of ASC Topic 820, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.

Fair Value Hierarchy

The assumptions used in the estimation of the fair value of the Company’s financial instruments are detailed below. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather represent a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance.

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

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

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

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

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The Company rarely transfers assets and liabilities measured at fair value between Level 1 and Level 2 measurements. Trading account assets and securities available-for-sale may be periodically transferred to or from Level 3 valuation based on management’s conclusion regarding the best method of pricing for an individual security. Such transfers are accounted for as if they occurred at the beginning of a reporting period. There were no such transfers during the quarter ended September 30, 2013 or the year ended December 31, 2012.

Fair Value Measurements on a Recurring Basis

Available-for-Sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include exchange traded equities. Level 2 securities include U.S. treasury and agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. Level 2 fair values are obtained from quoted prices of securities with similar characteristics. In certain cases, where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

The following table presents the balances of available-for-sale securities measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012.

	Fair Value Measurements at September 30, 2013 Using
	Totals At September 30, 2013		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In Thousands of Dollars)
Mortgage-backed securities	$	102,020	$	—	$	102,020	$	—
Obligations of states, counties and political subdivisions		14,877		—		14,877		—
U.S. treasury securities		3,846		—		3,846		—
U.S. agencies		1,001		—		1,001		—

	Fair Value Measurements at December 31, 2012 Using
	Totals At December 31, 2012		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In Thousands of Dollars)
Mortgage-backed securities	$	77,553	$	—	$	77,553	$	—
Obligations of states, counties and political subdivisions		14,981		—		14,981		—
U.S. treasury securities		80		—		80		—

Fair Value Measurements on a Non-recurring Basis

Impaired Loans

Estimates of fair value are determined based on a variety of information, including the use of available appraisals, estimates of market value by licensed appraisers or local real estate brokers and the knowledge and experience of the Company’s management related to

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values of properties in the Company’s market areas. Management takes into consideration the type, location and occupancy of the property, as well as current economic conditions in the area in which the property is located, in assessing estimates of fair value. Accordingly, fair value estimates for impaired loans are classified as Level 3.

Loan impairment is reported when full payment under the loan terms is not expected. Impaired loans are carried at the present value of estimated future cash flows using the loan’s existing rate or the fair value of collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to increase, such increase is reported as a component of the provision for loan losses. When an impaired loan is determined to be collateral dependent, the fair value is determined through the utilization of a third-party appraisal. It is the policy of the Company to update appraisals every 18-24 months. The types of collateral influence the frequency of obtaining updated appraisals. Management knows the market trends of collateral values well and monitors trends in sales and valuations in all of the various categories of collateral. These trends influence how often new appraisals are obtained within the 18-24 month timeframe. An example would be loans collateralized by residential subdivision lots. The values of this type of collateral have been volatile in recent years, and, therefore, appraisals are generally updated at the lower end of the timeframe (i.e., closer to 18 months), while timberland appraisals which have been less volatile in recent years would be updated closer to the upper end of the timeframe (i.e., closer to 24 months). Any observed trend indicating significant changes in valuations would require updated appraisals. Based on experience, current appraisals are discounted 9% for estimated costs associated with foreclosures and costs to sell. If a loan is evaluated for impairment under ASC Topic 310-10-35, Accounting by Creditors for Impairment of a Loan, and the appraisal is outdated, a new appraisal is ordered. If the new appraisal is not received in sufficient time to assess any required impairment to meet financial reporting obligations, the old appraisal may be adjusted to reflect values observed in similar properties. In recent years, discounts have ranged from 20% to 30% and have been based on the most recent valuation/appraisal information available related to that particular type of loan/collateral. After a new appraisal is obtained, the analysis is updated to reflect the new valuation. Loan losses are charged against the allowance when management believes that the uncollectibility of a loan is confirmed. Loans, net of specific allowances, subject to this evaluation amounted to $9,848,600 and $14,956,079 as of September 30, 2013 and December 31, 2012, respectively. This valuation would be considered Level 3, consisting of appraisals of underlying collateral and discounted cash flow analysis.

Foreclosed Assets

Estimates of fair values are determined based on a variety of information, including the use of available appraisals, estimates of market value by licensed appraisers or local real estate brokers and the knowledge and experience of the Company’s management related to values of properties in the Company’s market areas. Management takes into consideration the type, location and occupancy of the property, as well as current economic conditions in the area in which the property is located, in assessing estimates of fair value. Accordingly, the fair value estimates for foreclosed real estate are classified as Level 3.

During 2013, certain foreclosed assets, upon initial recognition, were measured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed asset. The fair value of a foreclosed asset, upon initial recognition, is estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. Foreclosed assets measured at fair value upon initial recognition totaled $2,093,755 and $2,097,440 (utilizing Level 3 valuation inputs) as of September 30, 2013 and December 31, 2012, respectively. In connection with the measurement and initial recognition of the foregoing foreclosed assets, the Company recognized charge-offs of the allowance for loan losses totaling approximately $515,399 and $407,043 during the periods ended September 30, 2013 and December 31, 2012, respectively. Foreclosed assets totaling $2,640,103 and $9,270,443 (utilizing Level 3 valuation inputs) were remeasured at fair value at September 30, 2013 and December 31, 2012, respectively, resulting in impairment loss of $577,000 and $3,582,596 on other real estate owned during the periods ended September 30, 2013 and December 31, 2012, respectively.

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The following table presents the balances of impaired loans and foreclosed assets measured at fair value on a non-recurring basis as of September 30, 2013 and December 31, 2012.

	Fair Value Measurements at September 30, 2013 Using
	Totals At September 30, 2013		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In Thousands of Dollars)
Impaired loans	$	9,849	$	—	$	—	$	9,849
Foreclosed property and other real estate		4,734		—		—		4,734

	Fair Value Measurements at December 31, 2012 Using
	Totals At December 31, 2012		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In Thousands of Dollars)
Impaired loans	$	14,956	$	—	$	—	$	14,956
Foreclosed property and other real estate		11,368		—		—		11,368

Non-Recurring Fair Value Measurements Using Significant Unobservable Inputs:

The following table presents information regarding assets and liabilities measured at fair value using significant unobservable inputs (Level 3) as of September 30, 2013. The table includes the valuation techniques and the significant unobservable inputs utilized. The range of each unobservable input, as well as the weighted-average within the range utilized at September 30, 2013, are both included. Following the table is a description of the valuation technique and the sensitivity of the technique to changes in the significant unobservable input.

	Level 3 Significant Unobservable Input Assumptions
	Fair Value September 30, 2013		Valuation Technique	Unobservable Input	Quantitative Range of Unobservable Inputs (Weighted- Average)
	(In Thousands of Dollars)
Non-recurring fair value measurements:
Impaired loans	$	9,849	Multiple data points, including discount to appraised value of collateral based on recent market activity	Appraisal compatibility adjustment (discount)	9% - 10% (9.5%)
Foreclosed property and other real estate	$	4,734	Discount to appraised value of property based on recent market activity for sales of similar properties	Appraisal compatibility adjustment (discount)	9% - 10% (9.5%)

Impaired loans

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

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Foreclosed property and other real estate

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

Fair Value of Financial Instruments

ASC 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

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

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

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

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

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

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

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

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

Long-term borrowings: The fair value of this debt is estimated using discounted cash flows based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements as of September 30, 2013 and December 31, 2012.

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

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The estimated fair value and related carrying or notional amounts, as well as the level within the fair value hierarchy, of the Company’s financial instruments at September 30, 2013 and December 31, 2012 were as follows:

	September 30, 2013
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(In Thousands of Dollars)
Assets:
Cash and cash equivalents	$	43,478	$	43,478	$	43,478	$	—	$	—
Investment securities available-for-sale		121,744		121,744		—		121,744		—
Investment securities held-to-maturity		35,108		33,508		—		33,508		—
Federal funds sold		5,000		5,000		5,000		—		—
Federal Home Loan Bank stock		906		906		—		906		—
Loans, net of allowance for loan losses		304,778		305,032		—		—		305,032
Liabilities:
Deposits		476,020		476,534		—		476,534		—
Short-term borrowings		1,777		1,777		—		1,777		—
Long-term borrowings		5,000		5,009		—		5,009		—

	December 31, 2012
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(In Thousands of Dollars)
Assets:
Cash and cash equivalents	$	54,126	$	54,126	$	54,126	$	—	$	—
Investment securities available-for-sale		92,614		92,614		—		92,614		—
Investment securities held-to-maturity		21,136		21,185		—		21,185		—
Federal funds sold		5,000		5,000		5,000		—		—
Federal Home Loan Bank stock		936		936		—		936		—
Loans, net of allowance for loan losses		337,400		339,230		—		—		339,230
Liabilities:
Deposits		489,034		490,596		—		490,596		—
Short-term borrowings		638		638		—		638		—

6. INVESTMENT SECURITIES

Details of investment securities available-for-sale and held-to-maturity at September 30, 2013 and December 31, 2012 are as follows:

	Available-for-Sale
	September 30, 2013
	Amortized		Gross Unrealized		Gross Unrealized			Estimated Fair
	Cost		Gains		Losses			Value
	(In Thousands of Dollars)
Mortgage-backed securities	$	101,147	$	1,888	$	(1,015	)	$	102,020
Obligations of states, counties and political subdivisions		14,160		742		(25	)		14,877
U.S. treasury securities		4,164		—		(318	)		3,846
Obligations of U.S. government sponsored agencies		1,000		1		—			1,001
Total	$	120,471	$	2,631	$	(1,358	)	$	121,744

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	Held-to-Maturity
	September 30, 2013
	Amortized		Gross Unrealized		Gross Unrealized			Estimated Fair
	Cost		Gains		Losses			Value
	(In Thousands of Dollars)
U.S. agencies	$	35,108	$	—	$	(1,600	)	$	33,508

	Available-for-Sale
	December 31, 2012
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In Thousands of Dollars)
Mortgage-backed securities	$	74,117	$	3,468	$	(32	)	$	77,553
Obligations of states, counties and political subdivisions		13,395		1,586		—			14,981
U.S. treasury securities		80		—		—			80
Total	$	87,592	$	5,054	$	(32	)	$	92,614

	Held-to-Maturity
	December 31, 2012
	Amortized		Gross Unrealized		Gross Unrealized			Estimated Fair
	Cost		Gains		Losses			Value
	(In Thousands of Dollars)
U.S. agencies	$	21,136	$	56	$	(7	)	$	21,185

The scheduled maturities of investment securities available-for-sale and held-to-maturity at September 30, 2013 are presented in the following table:

	Available-for-Sale				Held-to-Maturity
	Amortized		Estimated Fair		Amortized		Estimated Fair
	Cost		Value		Cost		Value
	(In Thousands of Dollars)
Maturing within one year	$	281	$	284	$	—	$	—
Maturing after one to five years		10,641		11,127		—		—
Maturing after five to ten years		56,585		56,593		15,196		14,853
Maturing after ten years		52,964		53,740		19,912		18,655
Total	$	120,471	$	121,744	$	35,108	$	33,508

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

The following table reflects the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2013 and December 31, 2012. Management evaluates securities for other-than-temporary impairment no less frequently than quarterly and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) whether the Company does not intend to sell these securities, and it is not more likely than not that the Company will be required to sell the securities before recovery of their amortized cost bases. At September 30, 2013 and December 31, 2012, based on the aforementioned considerations, management did not record an other-than-temporary impairment on any security that was in an unrealized loss position.

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	Available-for-Sale
	September 30, 2013
	Less than 12 Months					12 Months or More
			Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses
	(In Thousands of Dollars)
Mortgage-backed securities	$	50,328	$	(996	)	$	296	$	(19	)
U.S. treasury securities		3,766		(318	)		—		—
Obligations of states, counties and political subdivisions		1,944		(25	)		—		—
	$	56,038	$	(1,339	)	$	296	$	(19	)

	Held-to-Maturity
	September 30, 2013
	Less than 12 Months					12 Months or More
			Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses
	(In Thousands of Dollars)
U.S. agencies	$	33,508	$	(1,600	)	$	—	$	—

	Available-for-Sale
	December 31, 2012
	Less than 12 Months					12 Months or More
			Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses
	(In Thousands of Dollars)
U.S. treasury securities	$	80	$	—		$	—	$	—
Mortgage-backed securities		1,173		(3	)		5,617		(29	)
	$	1,253	$	(3	)	$	5,617	$	(29	)

	Held-to-Maturity
	December 31, 2012
	Less than 12 Months					12 Months or More
			Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses
	(In Thousands of Dollars)
U.S. agencies	$	7,491	$	(7	)	$	—	$	—

As of September 30, 2013, two debt securities had been in a loss position for more than twelve months, and forty-three debt securities had been in a loss position for less than twelve months. The losses for all securities are considered to be a direct result of the effect that the current interest rate environment has on the value of debt securities and not related to the creditworthiness of the issuers. Further, the Company has the current intent and ability to retain its investments in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Therefore, the Company has not recognized any other-than-temporary impairments.

Investment securities available-for-sale with a carrying value of $69.7 million and $61.6 million at September 30, 2013 and December 31, 2012, respectively, were pledged to secure public deposits and for other purposes.

There were no gross gains or losses realized on sales of securities available-for-sale during the periods ended September 30, 2013 or December 31, 2012, respectively.

7. INVESTMENTS IN LIMITED PARTNERSHIPS

The Company has limited partnership investments in affordable housing projects for which it provides funding as a limited partner and receives tax credits related to its investments in the projects based on its partnership share. The Company has invested in limited partnerships of affordable housing projects, both as direct investments and investments in funds that invest solely in affordable housing projects. The Company has determined that these structures require evaluation as a variable interest entity (“VIE”) under ASC Topic 810, Consolidation. The Company consolidates one of the funds in which it has a 99.9% limited partnership interest. The

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resulting financial impact to the Company of the consolidation was a net increase to total assets of approximately $53,388 as of September 30, 2013. The remaining limited partnership investments are unconsolidated and are accounted for under the cost method as allowed under ASC Topic 325, Accounting for Tax Benefits Resulting from Investments in Affordable Housing Projects. The Company amortizes the excess of carrying value of the investment over its estimated residual value during the period in which tax credits are allocated to the investors. The Company’s maximum exposure to future loss related to these limited partnerships is limited to the $818,999 recorded investment.

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

The Company had no remaining cash commitments to these partnerships at September 30, 2013.

8. LOANS AND ALLOWANCE FOR LOAN LOSSES

At September 30, 2013 and December 31, 2012, the composition of the loan portfolio by reporting segment and portfolio segment was as follows:

	September 30, 2013
	FUSB		ALC		Total
	(In Thousands of Dollars)
Real estate loans:
Construction, land development and other land loans	$	13,650	$	—	$	13,650
Secured by 1-4 family residential properties		35,532		27,807		63,339
Secured by multi-family residential properties		22,085		—		22,085
Secured by non-farm, non-residential properties		121,586		—		121,586
Other		771		—		771
Commercial and industrial loans		38,665		—		38,665
Consumer loans		11,045		47,426		58,471
Other loans		746		—		746
Total loans	$	244,080	$	75,233	$	319,313
Less: Unearned interest and fees		160		5,093		5,253
Allowance for loan losses		6,349		2,933		9,282
Net loans	$	237,571	$	67,207	$	304,778

	December 31, 2012
	FUSB		ALC		Total
	(In Thousands of Dollars)
Real estate loans:
Construction, land development and other land loans	$	30,635	$	—	$	30,635
Secured by 1-4 family residential properties		38,450		33,047		71,497
Secured by multi-family residential properties		24,187		—		24,187
Secured by non-farm, non-residential properties		129,235		—		129,235
Other		801		—		801
Commercial and industrial loans		42,903		—		42,903
Consumer loans		14,483		47,001		61,484
Other loans		1,037		—		1,037
Total loans	$	281,731	$	80,048	$	361,779
Less: Unearned interest and fees		175		4,926		5,101
Allowance for loan losses		15,765		3,513		19,278
Net loans	$	265,791	$	71,609	$	337,400

The Company grants commercial, real estate and installment loans to its customers. Although the Company has a diversified loan portfolio, 69.3% and 70.9% of the portfolio was concentrated in loans secured by real estate located primarily within a single geographic region of the United States as of September 30, 2013 and December 31, 2012, respectively.

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Portfolio Segments

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

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

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

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

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

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

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

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

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

Related Party Loans

In the ordinary course of business, the Bank makes loans to certain officers and directors of USBI, the Bank and ALC, including companies with which they are associated. These loans are made on the same terms as those prevailing for comparable transactions with others. Such loans do not represent more than normal risk of collectibility, nor do they present other unfavorable features. The aggregate balances of such related party loans and commitments at September 30, 2013 and December 31, 2012 were $3,689,631 and $2,468,563, respectively. During the quarter ended September 30, 2013, no new loans were extended to these parties, and repayments by active related parties were $53,446. During the year ended December 31, 2012, new loans to these parties totaled $310,265, and repayments by active related parties were $747,536.

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Allowance for Loan Losses

The following tables present changes in the allowance for loan losses by reporting segment and loan type as of September 30, 2013 and December 31, 2012:

	FUSB
	September 30, 2013
	Commercial		Commercial Real Estate			Consumer		Residential Real Estate		Other			Unallocated		Total
	(In Thousands of Dollars)
Allowance for loan losses:
Beginning balance	$	977	$	14,216		$	168	$	338	$	66		$	—	$	15,765
Charge-offs		462		7,950			248		493		2			—		9,155
Recoveries		87		43			65		4		2			—		201
Provision		168		(1,381	)		195		599		(43	)		—		(462	)
Ending balance		770		4,928			180		448		23			—		6,349
Ending balance individually evaluated for impairment		224		2,561			—		—		—			—		2,785
Ending balance collectively evaluated for impairment	$	546	$	2,367		$	180	$	448	$	23		$	—	$	3,564
Loan receivables:
Ending balance		38,665		158,092			11,045		35,532		746			—		244,080
Ending balance individually evaluated for impairment		788		34,532			—		295		—			—		35,615
Ending balance collectively evaluated for impairment	$	37,877	$	123,560		$	11,045	$	35,237	$	746		$	—	$	208,465

	ALC
	September 30, 2013
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other		Unallocated		Total
	(In Thousands of Dollars)
Allowance for loan losses:
Beginning balance	$	—	$	—	$	2,733	$	780	$	—	$	—	$	3,513
Charge-offs		—		—		2,129		407		—		—		2,536
Recoveries		—		—		680		15		—		—		695
Provision		—		—		1,075		186		—		—		1,261
Ending balance		—		—		2,359		574		—		—		2,933
Ending balance individually evaluated for impairment		—		—		—		—		—		—		—
Ending balance collectively evaluated for impairment	$	—	$	—	$	2,359	$	574	$	—	$	—	$	2,933
Loan receivables:
Ending balance		—		—		47,426		27,807		—		—		75,233
Ending balance individually evaluated for impairment		—		—		—		—		—		—		—
Ending balance collectively evaluated for impairment	$	—	$	—	$	47,426	$	27,807	$	—	$	—	$	75,233

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	FUSB & ALC
	September 30, 2013
	Commercial		Commercial Real Estate			Consumer		Residential Real Estate		Other			Unallocated		Total
	(In Thousands of Dollars)
Allowance for loan losses:
Beginning balance	$	977	$	14,216		$	2,901	$	1,118	$	66		$	—	$	19,278
Charge-offs		462		7,950			2,377		900		2			—		11,691
Recoveries		87		43			745		19		2			—		896
Provision		168		(1,381	)		1,270		785		(43	)		—		799
Ending balance		770		4,928			2,539		1,022		23			—		9,282
Ending balance individually evaluated for impairment		224		2,561			—		—		—			—		2,785
Ending balance collectively evaluated for impairment	$	546	$	2,367		$	2,539	$	1,022	$	23		$	—	$	6,497
Loan receivables:
Ending balance		38,665		158,092			58,471		63,339		746			—		319,313
Ending balance individually evaluated for impairment		788		34,532			—		295		—			—		35,615
Ending balance collectively evaluated for impairment	$	37,877	$	123,560		$	58,471	$	63,044	$	746		$	—	$	283,698

	FUSB
	December 31, 2012
	Commercial		Commercial Real Estate		Consumer			Residential Real Estate			Other		Unallocated			Total
	(In Thousands of Dollars)
Allowance for loan losses:
Beginning balance	$	889	$	16,533	$	306		$	684		$	78	$	201		$	18,691
Charge-offs		1,278		3,395		199			199			16		—			5,087
Recoveries		156		606		79			24			2		—			867
Provision		1,210		472		(18	)		(171	)		2		(201	)		1,294
Ending balance		977		14,216		168			338			66		—			15,765
Ending balance individually evaluated for impairment		406		10,818		—			—			—		—			11,224
Ending balance collectively evaluated for impairment	$	571	$	3,398	$	168		$	338		$	66	$	—		$	4,541
Loan receivables:
Ending balance		42,903		184,858		14,483			38,450			1,037		—			281,731
Ending balance individually evaluated for impairment		1,085		52,893		—			325			—		—			54,303
Ending balance collectively evaluated for impairment	$	41,818	$	131,965	$	14,483		$	38,125		$	1,037	$	—		$	227,428

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	ALC
	December 31, 2012
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other		Unallocated		Total
	(In Thousands of Dollars)
Allowance for loan losses:
Beginning balance	$	—	$	—	$	2,542	$	1,034	$	—	$	—	$	3,576
Charge-offs		—		—		3,249		713		—		—		3,962
Recoveries		—		—		815		40		—		—		855
Provision		—		—		2,625		419		—		—		3,044
Ending balance		—		—		2,733		780		—		—		3,513
Ending balance individually evaluated for impairment		—		—		—		—		—		—		—
Ending balance collectively evaluated for impairment	$	—	$	—	$	2,733	$	780	$	—	$	—	$	3,513
Loan receivables:
Ending balance		—		—		47,001		33,047		—		—		80,048
Ending balance individually evaluated for impairment		—		—		—		—		—		—		—
Ending balance collectively evaluated for impairment	$	—	$	—	$	47,001	$	33,047	$	—	$	—	$	80,048

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	FUSB & ALC
	December 31, 2012
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other		Unallocated			Total
	(In Thousands of Dollars)
Allowance for loan losses:
Beginning balance	$	889	$	16,533	$	2,848	$	1,718	$	78	$	201		$	22,267
Charge-offs		1,278		3,395		3,448		912		16		—			9,049
Recoveries		156		606		894		64		2		—			1,722
Provision		1,210		472		2,607		248		2		(201	)		4,338
Ending balance		977		14,216		2,901		1,118		66		—			19,278
Ending balance individually evaluated for impairment		406		10,818		—		—		—		—			11,224
Ending balance collectively evaluated for impairment	$	571	$	3,398	$	2,901	$	1,118	$	66	$	—		$	8,054
												—
Loan receivables:
Ending balance		42,903		184,858		61,484		71,497		1,037		—			361,779
Ending balance individually evaluated for impairment		1,085		52,893		—		325		—		—			54,303
Ending balance collectively evaluated for impairment	$	41,818	$	131,965	$	61,484	$	71,172	$	1,037	$	—		$	307,476

Credit Quality Indicators

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

The following is a guide for an 8-grade system of credit risk:

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

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

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

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

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

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

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

22

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

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

The table below illustrates the carrying amount of loans by credit quality indicator at September 30, 2013:

	FUSB
	Pass 1-4		Special Mention 5		Substandard 6		Doubtful 7		Total
	(In Thousands of Dollars)
Loans secured by real estate:
Construction, land development and other land loans	$	4,299	$	947	$	8,404	$	—	$	13,650
Secured by 1-4 family residential properties		29,666		1,841		4,025		—		35,532
Secured by multi-family residential properties		14,532		—		7,553		—		22,085
Secured by non-farm, non-residential properties		97,425		7,178		16,983		—		121,586
Other		771		—		—		—		771
Commercial and industrial loans		31,729		1,269		5,667		—		38,665
Consumer loans		10,173		123		749		—		11,045
Other loans		742		—		4		—		746
Total	$	189,337	$	11,358	$	43,385	$	—	$	244,080

	ALC
	Performing		Nonperforming		Total
	(In Thousands of Dollars)
Loans secured by real estate:
Secured by 1-4 family residential properties	$	27,085	$	722	$	27,807
Consumer loans		46,088		1,338		47,426
Total	$	73,173	$	2,060	$	75,233

23

The table below illustrates the carrying amount of loans by credit quality indicator at December 31, 2012:

	FUSB
	Pass 1-4		Special Mention 5		Substandard 6		Doubtful 7		Total
	(In Thousands of Dollars)
Loans secured by real estate:
Construction, land development and other land loans	$	12,653	$	1,235	$	16,747	$	—	$	30,635
Secured by 1-4 family residential properties		31,772		1,546		5,132		—		38,450
Secured by multi-family residential properties		10,776		3,132		10,279		—		24,187
Secured by non-farm, non-residential properties		90,139		8,630		30,466		—		129,235
Other		801		—		—		—		801
Commercial and industrial loans		40,607		419		1,877		—		42,903
Consumer loans		13,394		188		901		—		14,483
Other loans		1,036		—		1		—		1,037
Total	$	201,178	$	15,150	$	65,403	$	—	$	281,731

	ALC
	Performing		Nonperforming		Total
	(In Thousands of Dollars)
Loans secured by real estate:
Secured by 1-4 family residential properties	$	32,036	$	1,011	$	33,047
Consumer loans		46,175		826		47,001
Total	$	78,211	$	1,837	$	80,048

The following table provides an aging analysis of past due loans by class at September 30, 2013:

	FUSB
	As of September 30, 2013
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
	(In Thousands of Dollars)
Loans secured by real estate:
Construction, land development and other land loans	$	233	$	—	$	3,132	$	3,365	$	10,285	$	13,650	$	—
Secured by 1-4 family residential properties		438		236		1,062		1,736		33,796		35,532		—
Secured by multi-family residential Properties		—		—		1,286		1,286		20,799		22,085		—
Secured by non-farm, non-residential properties		693		105		3,579		4,377		117,209		121,586		—
Other		—		—		—		—		771		771		—
Commercial and industrial loans		68		83		55		206		38,459		38,665		—
Consumer loans		128		19		25		172		10,873		11,045		—
Other loans		—		—		—		—		746		746		—
Total	$	1,560	$	443	$	9,139	$	11,142	$	232,938	$	244,080	$	—

24

	ALC
	As of September 30, 2013
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
	(In Thousands of Dollars)
Loans secured by real estate:
Construction, land development and other land loans	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Secured by 1-4 family residential properties		286		92		763		1,141		26,666		27,807		665
Secured by multi-family residential properties		—		—		—		—		—		—		—
Secured by non-farm, non-residential properties		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		—
Commercial and industrial loans		—		—		—		—		—		—		—
Consumer loans		745		543		1,200		2,488		44,938		47,426		1,188
Other loans		—		—		—		—		—		—		—
Total	$	1,031	$	635	$	1,963	$	3,629	$	71,604	$	75,233	$	1,853

The following table provides an aging analysis of past due loans by class at December 31, 2012:

	FUSB
	As of December 31, 2012
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
	(In Thousands of Dollars)
Loans secured by real estate:
Construction, land development and other land loans	$	456	$	1,126	$	10,329	$	11,911	$	18,724	$	30,635	$	—
Secured by 1-4 family residential properties		1,027		572		1,106		2,705		35,745		38,450		—
Secured by multi-family residential properties		—		—		2,884		2,884		21,303		24,187		—
Secured by non-farm, non-residential properties		210		32		4,930		5,172		124,063		129,235		—
Other		—		—		—		—		801		801		—
Commercial and industrial loans		430		59		480		969		41,934		42,903		—
Consumer loans		407		89		66		562		13,921		14,483		—
Other loans		—		—		—		—		1,037		1,037		—
Total	$	2,530	$	1,878	$	19,795	$	24,203	$	257,528	$	281,731	$	—

25

	ALC
	As of December 31, 2012
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
	(In Thousands of Dollars)
Loans secured by real estate:
Construction, land development and other land loans	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Secured by 1-4 family residential properties		348		173		1,075		1,596		31,451		33,047		851
Secured by multi-family residential properties		—		—		—		—		—		—		—
Secured by non-farm, non-residential properties		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		—
Commercial and industrial loans		—		—		—		—		—		—		—
Consumer loans		989		609		1,159		2,757		44,244		47,001		720
Other loans		—		—		—		—		—		—		—
Total	$	1,337	$	782	$	2,234	$	4,353	$	75,695	$	80,048	$	1,571

The following table provides an analysis of non-accruing loans by class at September 30, 2013 and December 31, 2012:

	Loans on Non-Accrual Status
	September 30, 2013		December 31, 2012
	(In Thousands of Dollars)
Loans secured by real estate:
Construction, land development and other land loans	$	4,330	$	11,456
Secured by 1-4 family residential properties		1,978		2,441
Secured by multi-family residential properties		1,286		2,884
Secured by non-farm, non-residential properties		4,594		5,809
Commercial and industrial loans		425		822
Consumer loans		137		206
Total loans	$	12,750	$	23,618

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Impaired Loans

At September 30, 2013, the carrying amount of impaired loans consisted of the following:

	September 30, 2013
	Carrying Amount		Unpaid Principal Balance		Related Allowances
	(In Thousands of Dollars)
Impaired loans with no related allowance recorded
Loans secured by real estate:
Construction, land development and other land loans	$	6,570	$	6,570	$	—
Secured by 1-4 family residential properties		295		295		—
Secured by multi-family residential properties		1,054		1,054		—
Secured by non-farm, non-residential properties		14,498		14,498		—
Commercial and industrial		564		564		—
Total loans with no related allowance recorded	$	22,981	$	22,981	$	—
Impaired loans with an allowance recorded
Loans secured by real estate:
Construction, land development and other land loans	$	1,461	$	1,461	$	263
Secured by multi-family residential properties		6,499		6,499		1,699
Secured by non-farm, non-residential properties		4,450		4,450		599
Commercial and industrial		224		224		224
Total loans with an allowance recorded	$	12,634	$	12,634	$	2,785
Total impaired loans
Loans secured by real estate:
Construction, land development and other land loans	$	8,031	$	8,031	$	263
Secured by 1-4 family residential properties		295		295		—
Secured by multi-family residential properties		7,553		7,553		1,699
Secured by non-farm, non-residential properties		18,948		18,948		599
Commercial and industrial		788		788		224
Total impaired loans	$	35,615	$	35,615	$	2,785

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At December 31, 2012, the carrying amount of impaired loans consisted of the following:

	December 31, 2012
	Carrying Amount		Unpaid Principal Balance		Related Allowances
	(In Thousands of Dollars)
Impaired loans with no related allowance recorded
Loans secured by real estate:
Construction, land development and other land loans	$	2,645	$	2,645	$	—
Secured by 1-4 family residential properties		325		325		—
Secured by multi-family residential properties		3,027		3,027		—
Secured by non-farm, non-residential properties		21,471		21,471		—
Commercial and industrial		655		655		—
Total loans with no related allowance recorded	$	28,123	$	28,123	$	—
Impaired loans with an allowance recorded
Loans secured by real estate:
Construction, land development and other land loans	$	12,658	$	12,658	$	7,453
Secured by multi-family residential properties		7,252		7,252		1,865
Secured by non-farm, non-residential properties		5,840		5,840		1,500
Commercial and industrial		430		430		406
Total loans with an allowance recorded	$	26,180	$	26,180	$	11,224
Total impaired loans
Loans secured by real estate:
Construction, land development and other land loans	$	15,303	$	15,303	$	7,453
Secured by 1-4 family residential properties		325		325		—
Secured by multi-family residential properties		10,279		10,279		1,865
Secured by non-farm, non-residential properties		27,311		27,311		1,500
Commercial and industrial		1,085		1,085		406
Total impaired loans	$	54,303	$	54,303	$	11,224

The average net investment in impaired loans and interest income recognized and received on impaired loans at September 30, 2013 and December 31, 2012 were as follows:

	September 30, 2013
	Average Recorded Investment		Interest Income Recognized		Interest Income Received
	(In Thousands of Dollars)
Loans secured by real estate:
Construction, land development and other land loans	$	11,656	$	134	$	135
Secured by 1-4 family residential properties		308		5		6
Secured by multi-family residential properties		9,075		298		304
Secured by non-farm, non-residential properties		23,527		741		726
Commercial and industrial		1,061		28		28
Total impaired loans	$	45,627	$	1,206	$	1,199

	December 31, 2012
	Average Recorded Investment		Interest Income Recognized		Interest Income Received
	(In Thousands of Dollars)
Loans secured by real estate:
Construction, land development and other land loans	$	18,283	$	546	$	598
Secured by 1-4 family residential properties		146		10		10
Secured by multi-family residential properties		4,942		483		455
Secured by non-farm, non-residential properties		29,627		1,452		1,477
Commercial and industrial		1,222		38		42
Total impaired loans	$	54,220	$	2,529	$	2,582

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Loans on which the accrual of interest has been discontinued amounted to $12,750,648 and $23,618,330 at September 30, 2013 and December 31, 2012, respectively. If interest on those loans had been accrued, such income would have approximated $333,637 and $1,058,377 for the quarter ended September 30, 2013 and the year ended December 31, 2012, respectively. Interest income actually recorded on those loans amounted to $30,880 and $157,601 for the quarter ended September 30, 2013 and the year ended December 31, 2012, respectively. Accruing loans past due 90 days or more amounted to $1,853,276 and $1,570,548 at September 30, 2013 and December 31, 2012, respectively.

Troubled Debt Restructurings

Loans are considered restructured loans if concessions have been granted to borrowers that are experiencing financial difficulty. The concessions granted generally involve the modification of terms of the loan, such as changes in payment schedule or interest rate, which generally would not otherwise be considered. Restructured loans can involve loans remaining on 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 reported as troubled debt restructurings. Generally, restructured loans remain on non-accrual until the customer has attained a sustained period of repayment performance under the modified loan terms (generally a minimum of six months). However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms and whether the loan should be returned to or maintained on non-accrual status. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan remains on non-accrual status. Based on the above, the Company had $6,116,647 and $12,397,049 of non-accruing loans that were restructured and remained on non-accrual status at September 30, 2013 and December 31, 2012, respectively.

The following table provides the number of loans modified in a troubled debt restructuring by loan portfolio as of September 30, 2013 and December 31, 2012, as well as the pre- and post-modification principal balance as of September 30, 2013 and December 31, 2012:

	September 30, 2013						December 31, 2012
	Number of Loans		Pre- Modification Outstanding Principal Balance		Post- Modification Principal Balance		Number of Loans		Pre- Modification Outstanding Principal Balance		Post- Modification Principal Balance
	(In Thousands of Dollars)
Loans secured by real estate:
Construction, land development and other land loans		8	$	12,580	$	5,279		10	$	11,267	$	9,988
Secured by 1-4 family residential properties		13		870		591		4		596		586
Secured by non-farm, non-residential properties		8		1,892		1,633		6		1,811		1,586
Commercial loans		3		371		331		4		380		356
Total		32	$	15,713	$	7,834		24	$	14,054	$	12,516

The following table provides the number of loans modified in a troubled debt restructuring that have subsequently defaulted, by loan portfolio, as of September 30, 2013 and December 31, 2012:

	September 30, 2013				December 31, 2012
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
	(In Thousands of Dollars)
Troubled debt restructurings that have subsequently defaulted:
Construction, land development and other land loans		2	$	2,083		6	$	7,062
Secured by non-farm, non-residential properties		4		1,073		2		433
Commercial loans		—		—		2		68
Total		6	$	3,156		10	$	7,563

Restructured loan modifications may include payment schedule modifications, interest rate concessions, maturity date extensions, modification of note structure, principal reduction or some combination of these concessions.

29

During the quarter ended September 30, 2013 and the year ended December 31, 2012, restructured loan modifications of loans secured by real estate and commercial and industrial loans primarily included maturity date extensions and payment schedule modifications.

The change in troubled debt restructuring from December 31, 2012 to September 30, 2013 was as follows:

	September 30, 2013		December 31, 2012		Change
	(In Thousands of Dollars)
Loans secured by real estate:
Construction, land development and other land loans	$	5,279	$	9,988	$	(4,709	)
Secured by 1-4 family residential properties		591		586		5
Secured by non-farm, non-residential properties		1,633		1,586		47
Commercial and industrial loans		331		356		(25	)
Total	$	7,834	$	12,516		(4,682	)

All loans $500,000 and over, modified in a troubled debt restructuring and rated substandard or lower, are evaluated for impairment. The nature and extent of impairment of restructured loans, including those that have experienced a subsequent payment default, is considered in the determination of an appropriate level of allowance for loan losses. This evaluation resulted in an allowance for loan losses on these restructured loans of $486,349 and $6,322,593 at September 30, 2013 and December 31, 2012, respectively.

9. OTHER REAL ESTATE OWNED

Other real estate and certain other assets acquired in foreclosure are reported at the lower of the investment in the loan or fair value of the property less estimated costs to sell. The following table summarizes foreclosed property activity for the nine months ended September 30, 2013 and 2012.

	Nine Months Ended September 30, 2013
	FUSB			ALC			TOTAL
	(Dollars in Thousands)
Balance December 31, 2012	$	11,089		$	2,197		$	13,286
Transfers from loans		1,770			426			2,196
Sales proceeds		(1,876	)		(905	)		(2,781	)
Gross gains		62			28			90
Gross losses		(155	)		(687	)		(842	)
Net losses		(93	)		(659	)		(752	)
Impairment		(368	)		(209	)		(577	)
Balance September 30, 2013	$	10,522		$	850		$	11,372

	Nine Months Ended September 30, 2012
	FUSB			ALC			TOTAL
	(Dollars in Thousands)
Balance December 31, 2011	$	12,606		$	4,168		$	16,774
Transfers from loans		5,337			682			6,019
Sales proceeds		(3,670	)		(1,242	)		(4,912	)
Gross gains		11			63			74
Gross losses		(528	)		(578	)		(1,106	)
Net losses		(517	)		(515	)		(1,032	)
Impairment		(2,735	)		(506	)		(3,241	)
Balance September 30, 2012	$	11,021		$	2,587		$	13,608

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

30

10. SHORT-TERM BORROWINGS

Short-term borrowings consist of federal funds purchased and securities sold under repurchase agreements. Federal funds purchased generally mature within one to four days. There were no federal funds purchased outstanding at September 30, 2013 or December 31, 2012.

Securities sold under repurchase agreements, which are secured borrowings, generally are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities. The Company monitors the fair value of the underlying securities on a daily basis. Securities sold under repurchase agreements at September 30, 2013 and December 31, 2012 were $1,777,000 and $638,000, respectively.

At September 30, 2013, the Bank had $17.8 million in available federal fund lines from correspondent banks.

11. LONG-TERM BORROWINGS

The Company uses FHLB advances as an alternative to funding sources with similar maturities, such as certificates of deposit or other deposit programs. These advances generally offer more attractive rates when compared to other mid-term financing options. They are also flexible, allowing the Company to quickly obtain the necessary maturities and rates that best suit its overall asset/liability strategy. At September 30, 2013, the Company had advances outstanding of $5.0 million and assets pledged of $5.3 million. At December 31, 2012, no advances were outstanding, and no assets were pledged.

At September 30, 2013, the Bank had $163.0 million in available credit from the FHLB.

12. INCOME TAXES

The Company files a consolidated income tax return with the federal government and the State of Alabama. ALC files a Mississippi state income tax return related to operations from its Mississippi branches. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and the states in which it files for the years ended December 31, 2009 through 2012.

As of September 30, 2013, the Company had no unrecognized tax benefits related to federal or state income tax matters and does not anticipate any material increase or decrease in unrecognized tax benefits relative to any tax positions taken prior to September 30, 2013. As of September 30, 2013, the Company had accrued no interest and no penalties related to uncertain tax positions.

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

	Nine Months Ended
	September 30, 2013			September 30, 2012
	(Dollars in Thousands)
Income tax expense at federal statutory rate	$	1,421		$	499
Increase (decrease) resulting from:
Tax-exempt interest		(292	)		(274	)
State income tax expense, net of federal income taxes		163			43
Other		(86	)		(111	)
Total	$	1,206		$	157

The Company’s determination of the realization of the net deferred tax asset is based on its assessment of all available positive and negative evidence. The Company is currently in a three-year cumulative loss position, which represents negative evidence. As of September 30, 2013, of the $7.1 million net deferred tax asset, $3.5 million related to the provision for loan losses, $1.8 million related to impairment of OREO and $1.6 million resulted from deferred compensation. As of December 31, 2012, of the $9.5 million net deferred tax asset, $7.3 million related to the provision for loan losses, $2.3 million related to impairment of OREO and $1.5 million resulted from deferred compensation.

At September 30, 2013, positive evidence supporting the realization of the deferred tax asset included a strong earnings history, exclusive of loan loss provisions and other real estate write-downs, which created the most significant portion of the deferred asset.

31

The majority of these provisions and write-downs resulted from one type of loan – real estate development. The Company believes that impaired loans of this type have been identified and adequately reserved. Management has projected taxable income over the next five years resulting from reduced provisions for loan losses and reduced write-downs of OREO. Except in unusual circumstances, the Company no longer invests in these types of loans.

Along with the taxable income in 2012 and the first, second and third quarters of 2013, the Company has projected future taxable income over the next five tax years, although there can be no assurance that such income will be realized due to unanticipated changes in economic, competitive and other factors. Further positive evidence includes the Company’s strong capital position and history of significant pre-tax earnings, which the Company believes outweighs the negative evidence of recent pre-tax losses. Accordingly, a valuation allowance has not been established as of September 30, 2013.

32

13. SEGMENT REPORTING

Under ASC Topic 280, Segment Reporting, certain information is disclosed for the two reportable operating segments of the Company. The reportable segments were determined using the internal management reporting system. They are composed of USBI’s significant subsidiaries. The accounting policies for each segment are the same as those described in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in USBI’s Annual Report on Form 10-K for the period ended December 31, 2012. The segment results include certain overhead allocations and intercompany transactions that were recorded at current market prices. All intercompany transactions have been eliminated to determine the consolidated balances. The results for the two reportable segments of the Company are included in the following table:

	FUSB			ALC		All Other		Eliminations			Consolidated
	(Dollars in Thousands)
For the three months ended September 30, 2013:
Net interest income	$	4,190		$	3,376	$	2	$	—		$	7,568
Provision for loan losses		(300	)		540		—		—			240
Total non-interest income		913			360		1,267		(1,249	)		1,291
Total non-interest expense		4,962			2,322		308		(227	)		7,365
Income before income taxes		441			874		961		(1,022	)		1,254
Provision for income taxes		12			337		1		—			350
Net income	$	429		$	537	$	960	$	(1,022	)	$	904
Other significant items:
Total assets	$	561,325		$	70,809	$	75,422	$	(147,554	)	$	560,002
Total investment securities		156,772			—		80		—			156,852
Total loans, net		292,180			67,207		—		(54,609	)		304,778
Investment in subsidiaries		784			—		70,386		(71,165	)		5
Fixed asset additions		(6	)		8		—		—			2
Depreciation expense		131			49		—		—			180
Total interest income from external customers		4,096			4,174		—		—			8,270
Total interest income from affiliates		798			—		3		(801	)		—
For the nine months ended September 30, 2013:
Net interest income	$	12,706		$	10,355	$	7	$	—		$	23,068
Provision for loan losses		(462	)		1,261		—		—			799
Total non-interest income		3,239			1,045		3,778		(3,920	)		4,142
Total non-interest expense		14,247			7,984		668		(666	)		22,233
Income before income taxes		2,160			2,155		3,117		(3,254	)		4,178
Provision for income taxes		371			833		2		—			1,206
Net income	$	1,789		$	1,322	$	3,115	$	(3,254	)	$	2,972
Other significant items:
Fixed asset additions	$	56		$	26	$	—	$	—		$	82
Depreciation expense		392			128		—		—			520
Total interest income from external customers		12,494			12,802		—		—			25,296
Total interest income from affiliates		2,447			—		7		(2,454	)		—

33

	FUSB			ALC		All Other		Eliminations			Consolidated
	(Dollars in Thousands)
For the three months ended September 30, 2012:
Net interest income	$	4,617		$	3,675	$	5	$	—		$	8,297
Provision for loan losses		—			492		—		—			492
Total non-interest income		1,017			361		1,610		(1,535	)		1,453
Total non-interest expense		4,803			2,562		394		(197	)		7,562
Income before income taxes		831			982		1,221		(1,338	)		1,696
Provision for income taxes		136			379		2		—			517
Net income	$	695		$	603	$	1,219	$	(1,338	)	$	1,179
Other significant items:
Total assets	$	584,884		$	79,629	$	74,280	$	(154,471	)	$	584,322
Total investment securities		114,688			—		75		—			114,763
Total loans, net		335,487			73,565		—		(64,319	)		344,733
Investment in subsidiaries		802			—		69,080		(69,877	)		5
Fixed asset additions		99			32		—		—			131
Depreciation expense		127			38		—		—			165
Total interest income from external customers		4,701			4,627		—		—			9,328
Total interest income from affiliates		952			—		5		(957	)		—
For the nine months ended September 30, 2012:
Net interest income	$	14,548		$	10,856	$	14	$	—		$	25,418
Provision for loan losses		1,523			1,652		—		—			3,175
Total non-interest income		2,987			1,020		2,254		(2,203	)		4,058
Total non-interest expense		16,506			8,124		763		(561	)		24,832
Income before income taxes		(494	)		2,100		1,505		(1,642	)		1,469
Provision for (benefit from) income taxes		(660	)		812		5		—			157
Net income	$	166		$	1,288	$	1,500	$	(1,642	)	$	1,312
Other significant items:
Fixed asset additions	$	211		$	209	$	—	$	—		$	420
Depreciation expense		408			116		—		—			524
Total interest income from external customers		15,296			13,790		—		—			29,086
Total interest income from affiliates		2,935			—		13		(2,948	)		—

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14. GUARANTEES, COMMITMENTS AND CONTINGENCIES

The Bank’s exposure to credit loss in the event of nonperformance by the other party for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making these commitments as it does for on-balance sheet instruments. For interest rate swap transactions and commitments to purchase or sell securities for forward delivery, the contract or notional amounts do not represent exposure to credit loss. The Bank controls the credit risk of these derivative instruments through credit approvals, limits and monitoring procedures. Certain derivative contracts have credit risk for the carrying value plus the amount to replace such contracts in the event of counterparty default. All of the Bank’s financial instruments are held for risk management and not for trading purposes. During the quarters ended September 30, 2013 and 2012, there were no credit losses associated with derivative contracts.

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

	September 30, 2013		December 31, 2012
	(Dollars in Thousands)
Standby Letters of Credit	$	946	$	1,092
Commitments to Extend Credit	$	31,363	$	32,123

Standby letters of credit are contingent commitments issued by the Bank generally to guarantee the performance of a customer to a third party. The Bank has recourse against the customer for any amount that it is required to pay to a third party under a standby letter of credit. Revenues are recognized over the lives of the standby letters of credit. The potential amount of future payments that the Bank could be required to make under its standby letters of credit at September 30, 2013 and December 31, 2012 was $946,000 and $1,092,000, respectively, representing the Bank’s total credit risk.

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

Commitments to purchase securities for delayed delivery require the Bank to purchase a specified security at a specified price for delivery on a specified date. Similarly, commitments to sell securities for delayed delivery require the Bank to sell a specified security at a specified price for delivery on a specified date. Market risk arises from potential movements in security values and interest rates between the commitment and delivery dates. At September 30, 2013 and December 31, 2012, there were no outstanding commitments to purchase and sell securities for delayed delivery.

Litigation

On September 27, 2007, Malcomb Graves Automotive, LLC (“Graves Automotive”), Malcomb Graves and Tina Graves filed a lawsuit in the Circuit Court of Shelby County, Alabama against 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

35

capacities. The Circuit Court also dismissed Graves Automotive’s claims for conversion and negligent supervision against ALC and ordered Graves Automotive to re-plead its fraud allegations against ALC with more particularity. On September 15, 2011, Graves Automotive filed a third amended complaint in response to the Circuit Court’s June 15, 2011 order. In its third amended complaint, Graves Automotive asserted claims against ALC for breach of contract, fraud, unjust enrichment and conversion. ALC moved to dismiss the third amended complaint on many of the same grounds as set forth in its previous motion to dismiss. On October 13, 2011, the Circuit Court dismissed Graves Automotive’s conversion claim and again ordered Graves Automotive to re-plead its fraud claims with more particularity, this time within 60 days. On December 12, 2011, Graves Automotive filed its fourth amended complaint, this time asserting only two counts, breach of contract and unjust enrichment. Despite removing the fraud claims, the fourth amended complaint still requests punitive damages. On January 11, 2012, ALC filed a motion to dismiss the fourth amended complaint and to strike Graves Automotive’s request for punitive damages. This motion 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. The Circuit Court conducted a status conference on September 24, 2013 and ordered on September 30, 2013, as a result of the conference, Graves Automotive to produce all documents supporting its contentions within 30 days. Graves Automotive has failed to do so. 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. Although the ultimate outcome of this matter remains unknown, ALC continues to deny the allegations against it in the underlying lawsuit with respect to the remaining claims and intends to vigorously defend itself in this matter.

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.

Contingencies Resolved Subsequent to Period End

On February 17, 2011, Wayne Allen Russell, Jr. (“Russell”) filed a lawsuit in the Circuit Court of Tuscaloosa County, Alabama against the Bank and Bill Morgan, who served as the Bank’s Business Development Officer. The allegations in the lawsuit relate to a mortgage on a parcel of real estate, executed by Russell in favor of the Bank as security for a loan, and certain related transactions, including foreclosure proceedings executed by the Bank. Additionally, on June 17, 2011, Mr. Russell’s wife, Rebecca Russell, in response to a lawsuit filed against Mrs. Russell by the Bank, filed a counterclaim against the Bank seeking compensatory and punitive damages, asserting that she was induced to mortgage a rental dwelling owned by her, the proceeds of which were paid upon certain obligations owed to the Bank by her husband, and that the Bank had orally agreed to refinance her loan as a part of an alleged refinancing promise by the Bank with respect to the obligations of Mr. Russell. On October 29, 2012, the Court granted summary judgment in favor of the Bank and Mr. Morgan with respect to all claims asserted in the consolidated lawsuits, and a subsequent motion to alter, amend or vacate filed by Mr. and Mrs. Russell was denied by operation of law. On March 25, 2013, Mr. and Mrs. Russell filed a Notice of Appeal to the Supreme Court of Alabama. On October 25, 2013, the Alabama Court of Civil Appeals affirmed the ruling of the lower court and the grant of summary judgment in favor of the Bank without an opinion. This concluded the appeal and the lawsuit.

On or about June 1, 2012, a former employee filed a complaint against the Bank with the Occupational Safety and Health Administration (“OSHA”) alleging violations of Section 806 of the Corporate and Criminal Fraud Accountability Act, 18 U.S.C. § 1514A (“Section 806”), and Section 1057 of the Consumer Financial Protection Act, 12 U.S.C. § 5567, in connection with his separation from the Bank in April 2012. Based on its investigation, OSHA concluded it had no reasonable cause to believe the statutes were violated. As was his right, however, the former employee timely requested a hearing before an Administrative Law Judge (“ALJ”) and filed an amended complaint in that forum. The Bank filed a motion to dismiss the amended complaint (in lieu of an answer), and the motion was granted as to all claims other than the claim alleging a violation of Section 806. On November 12, 2013, the Bank entered into a settlement agreement with the former employee to resolve the matter. In connection with the settlement agreement, any and all remaining claims alleged by the former employee against the Bank are due to be dismissed, with prejudice.

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

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

The accounting principles and reporting policies of USBI and its subsidiaries (collectively, “the Company”), and the methods of applying these principles, conform with accounting principles generally accepted in the United States of America (“GAAP”) and

36

general practices within the financial services industry. Critical accounting policies relate to securities, loans, allowance for loan losses, derivatives and hedging. A description of these estimates, which significantly affect the determination of consolidated financial position, results of operations and cash flows, is set forth in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in USBI’s Annual Report on Form 10-K for the year ended December 31, 2012.

The emphasis of this discussion is a comparison of assets, liabilities and shareholders’ equity as of September 30, 2013 to year-end 2012, while comparing income and expense for the three- and nine-month periods ended September 30, 2013 and 2012.

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

This information should be read in conjunction with the Company’s unaudited consolidated financial statements and related notes appearing elsewhere in this report and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in USBI’s Annual Report on Form 10-K for the year ended December 31, 2012.

COMPARING THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2013 TO THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2012

Net income for the Company in the third quarter of 2013 was $904,000, compared to net income for the Company of $1.2 million for the third quarter of 2012, resulting in a decrease of basic net income per share from $0.20 per share for the third quarter of 2012 to $0.15 per share for the same quarter of 2013. Net income for the Company for the nine-month period ended September 30, 2013 was $3.0 million, compared to net income for the Company of $1.3 million for the nine-month period of 2012. This resulted in an increase of basic net income per share from $0.22 per share to $0.49 per share for the nine-month periods ended September 30, 2012 and 2013, respectively.

For the three-month period ended September 30, 2013, the Bank had net income of $429,000, compared to net income of $695,000 for the same quarter of 2012. For the nine-month period ended September 30, 2013, the Bank had net income of $1.8 million, compared to net income of $166,000 for the same period in 2012. For the nine-month period, the increase in net income for the Bank resulted primarily from lower impairment charges on other real estate owned (“OREO”) and lower provisions for loan losses.

Net income for ALC for the three-month period ended September 30, 2013 was $537,000, compared to $603,000 for the same quarter of 2012. Net income for ALC for the nine-month periods ended both September 30, 2013 and 2012 was $1.3 million. The decline in net income for the third quarter of 2013 compared to the third quarter of 2012 resulted from an increase in the provision for loan losses and a decline in interest income, offset somewhat by a decline in non-interest expense. Net income for the nine-month period was impacted by a decline in interest income, offset by a decline in the provision for loan losses, an increase in non-interest income and a decline in non-interest expense, when compared to the nine-month period in 2012.

Interest income for the Company for the 2013 third quarter decreased $1.1 million, or 11.3%, compared to the third quarter of 2012. For the nine months ended September 30, 2013, interest income decreased $3.8 million, or 13.0%, compared with the same period in 2012. The decrease in interest income during these periods was primarily due to a decrease in interest earned on loans resulting from an overall decrease in the average volume and a decrease in the average yield on loans and investment securities. Interest income at the Bank for the 2013 third quarter decreased $758,000, or 13.4%, compared to the third quarter of 2012. For the nine months ended September 30, 2013, interest income at the Bank decreased $3.3 million, or 18.0%, compared with the same period of 2012. Interest income at ALC for the third quarter of 2013 decreased $452,000, or 9.8%, compared to the third quarter of 2012. For the nine months ended September 30, 2013, interest income at ALC decreased $988,000, or 7.2%, compared with the same period of 2012. The decreases in interest income at the Bank and ALC were due to an overall decrease in the average volume and yield on loans. Interest income on investment securities decreased due to the decrease in the average yield of investment securities. Loan demand continues to be weak due to continuing challenging economic conditions in the Company’s market area.

Interest expense for the Company in the 2013 third quarter decreased $329,000, or 31.9%, compared to the third quarter of 2012. Interest expense decreased $1.4 million, or 39.3%, to $2.2 million for the first nine months of 2013, compared to $3.7 million for the first nine months of 2012. These decreases resulted from decreased volume of certificates of deposit, as well as lower interest rates paid on certificates of deposit. As longer term certificates of deposit mature, they reprice at lower rates, as current rates on deposits remain at record historical lows.

37

Net interest income for the Company decreased $729,000, or 8.8%, for the third quarter of 2013, and decreased $2.4 million, or 9.2%, for the first nine months of 2013, compared to the same periods in 2012. The net interest margin declined from 6.07% for the nine months ended September 30, 2012 to 5.97% for the nine months ended September 30, 2013, and from 6.04% for the third quarter of 2012 to 5.89% for the third quarter of 2013. Loan and investment yields declined for the three- and nine-month periods ended September 30, 2013 compared to the same periods in 2012. The cost of funds declined due to a decline in interest rates paid on interest bearing deposits. Asset yields and funds costs have stabilized, and the net interest margin is expected to remain near current levels until the Federal Reserve adjusts rates, however, no assurance is given regarding prevailing market rates.

The provision for loan losses for the Company was $240,000, or 0.3% annualized of average loans, in the third quarter of 2013, compared to $492,000, or 0.5% annualized of average loans, in the third quarter of 2012. The provision for loan losses decreased to $799,000 for the nine months ended September 30, 2013, compared to $3.2 million for the same period in 2012. Net charge-offs for the Company were $2.6 million for the 2013 third quarter and $10.8 million for the first nine months of 2013, compared to $760,000 and $5.6 million for the same periods in 2012. The substantial increase in net charge-offs resulted from the actual charge-down of several large commercial real estate loans at the Bank that had been identified as non-performing, with the appropriate allowance allocated, and no additional provision was required.

The provision for loan losses at the Bank was a negative provision of $(300,000) for the 2013 third quarter and $(462,000) for the nine months ended September 30, 2013. Net charge-offs increased $1.8 million to $2.0 million for the third quarter of 2013 and increased $5.4 million to $9.0 million for the nine months ended September 30, 2013, when compared to the same periods in 2012.

The provision for loan losses at ALC increased to $540,000 for the third quarter of 2013, compared to $492,000 for the same period of 2012. For the nine-month period ending September 30, 2013, the provision for loan losses at ALC decreased $400,000 to $1.3 million, compared to $1.7 million for the same nine-month period in 2012. Net charge-offs for the third quarter of 2013 were $620,000, compared to $586,000 for the third quarter of 2012. For the nine-month period ended September 30, 2013, net charge-offs were $1.8 million, compared to $2.0 million for the first nine months of 2012.

Total non-interest income for the Company decreased $162,000, or 11.1% for the third quarter of 2013 and increased $84,000, or 2.1% for the first nine months of 2013. Service charges on deposit accounts decreased $53,000 for the third quarter of 2013, and decreased $136,000 for the nine-month period ended September 30, 2013, when compared to the same periods in 2012, primarily due to decreased fees generated from customer overdrafts and non-sufficient funds in the first three quarters of 2013. Other income increased $315,000 for the nine-month period ended September 30, 2013 compared to the same period in 2012. This increase is attributable to a non-recurring prepayment penalty of $484,000 from the early payoff of a mortgage-backed pool received in the first quarter of 2013.

Total non-interest expense for the Company decreased $197,000, or 2.6%, for the 2013 third quarter and decreased $2.6 million, or 10.5%, for the nine months ended September 30, 2013, compared to the same periods in 2012. Salary and employee benefits increased $596,000 when comparing third quarter 2013 to the same period in 2012, and increased $1.1 million for the nine months ended September 30, 2013 compared to the same period in 2012. The increase in salary and employee benefits was the result of salary related to additional staffing added during the period. For the 2013 third quarter, impairment on other real estate decreased $162,000, and realized loss on sale of OREO decreased $524,000. For the nine months ended September 30, 2013, impairment on OREO decreased $2.7 million, and realized loss on sale of OREO decreased $279,000. Management was able to reduce OREO in 2012 and in the first, second and third quarters of 2013, which resulted in lower impairment expense on OREO. If the economy remains weak and real estate values decline, however, further impairment and losses could occur.

Income tax expense for the third quarter of 2013 was $350,000, compared to income tax expense of $517,000 in the third quarter of 2012. For the nine-month period ended September 30, 2013, income tax expense was $1.2 million, compared to income tax expense of $157,000 for the same period of 2012. Management estimates the effective tax rate for the Company to be approximately 30.0% of pre-tax income for the period ended September 30, 2013.

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COMPARING THE SEPTEMBER 30, 2013 STATEMENTS OF FINANCIAL CONDITION TO DECEMBER 31, 2012

In comparing consolidated financial condition at September 30, 2013 to December 31, 2012, total assets decreased $7.1 million to $560.0 million and liabilities decreased $7.9 million to $490.6 million. Shareholders’ equity increased $0.8 million as a result of net income of $3.0 million, partially offset by a $2.3 million decrease in accumulated other comprehensive income.

Investment securities increased $43.1 million, or 37.9%, during the first nine months of 2013. Investments provide the Company with a stable form of liquidity while maximizing earnings yield. Loans, net of unearned income, decreased $42.6 million, from $356.7 million at December 31, 2012 to $314.1 million at September 30, 2013. Deposits decreased $13.0 million, or 2.7%, during the first nine months of 2013. Loans at ALC, net of unearned income, decreased $5.0 million, from $75.1 million at December 31, 2012 to $70.1 million at September 30, 2013. Loans at the Bank, after consolidation eliminations, decreased $37.7 million from $281.6 million at December 31, 2012 to $243.9 million at September 30, 2013.

Other assets declined $4.5 million from December 31, 2012 to September 30, 2013. This reduction resulted primarily from a $2.9 million income tax refund receivable and a $465,000 refund receivable from prepaid FDIC assessments as of December 31, 2012. All other components of other assets remained fairly consistent for the nine-month period.

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

At September 30, 2013, the allowance for loan losses was $9.3 million, or 3.0% of loans net of unearned income, compared to $19.3 million, or 5.4% of loans net of unearned income, at December 31, 2012. The coverage ratio of the allowance for loan losses to non-performing assets decreased to 35.7% at September 30, 2013, compared to 50.1% at December 31, 2012. The level of non-performing and impaired loans has decreased since December 31, 2012 through collections, charge-offs and upgrades. The impairment and reserve required by loans evaluated individually for impairment has decreased. In addition, the historical loss ratio utilized in calculating the allowance for loan losses for the remaining portion of the loan portfolio, which is evaluated collectively for impairment, has also decreased. These factors have contributed to the decreased allowance for loan losses.

Net charge-offs for the nine-month period ended September 30, 2013 were $10.8 million, or 4.3% of average loans on an annualized basis, an increase of 96.4%, or $5.4 million, from charge-offs of $5.6 million, or 1.9% of average loans on an annualized basis, reported for the nine-month period ended September 30, 2012. The provision for loan losses for the nine months ended September 30, 2013 was $799,020, compared to $3.2 million for the same period of 2012.

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

	Consolidated
	September 30, 2013			December 31, 2012			September 30, 2012
Loans Accounted for on a Non-Accrual Basis	$	12,750		$	23,618		$	31,575
Accruing Loans Past Due 90 Days or More		1,853			1,571			2,088
Real Estate Acquired in Settlement of Loans		11,372			13,286			13,608
Total	$	25,975		$	38,475		$	47,271
Non-Performing Assets as a Percentage of Net
Loans and Other Real Estate		8.00	%		10.40	%		12.50	%

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	FUSB
	September 30, 2013			December 31, 2012			September 30, 2012
Loans Accounted for on a Non-Accrual Basis	$	12,544		$	23,351		$	30,067
Accruing Loans Past Due 90 Days or More		—			—			56
Real Estate Acquired in Settlement of Loans		10,522			11,089			11,021
Total	$	23,066		$	34,440		$	41,144
Non-Performing Assets as a Percentage of Net
Loans and Other Real Estate		9.07	%		11.77	%		13.77	%

	ALC
	September 30, 2013			December 31, 2012			September 30, 2012
Loans Accounted for on a Non-Accrual Basis	$	206		$	267		$	1,507
Accruing Loans Past Due 90 Days or More		1,853			1,571			2,032
Real Estate Acquired in Settlement of Loans		850			2,197			2,587
Total	$	2,909		$	4,035		$	6,126
Non-Performing Assets as a Percentage of Net
Loans and Other Real Estate		4.10	%		5.22	%		7.72	%

Non-performing assets as a percentage of net loans and other real estate was 8.0% at September 30, 2013 and 10.4% at December 31, 2012. Loans on non-accrual status decreased $10.9 million, accruing loans past due 90 days or more increased $282,000 and real estate acquired in settlement of loans decreased $1.9 million from December 31, 2012. The Company forecasts that challenging economic conditions and the weakened real estate market in the Company’s market area will continue to put downward pressure on real estate collateral values and will impact the Company’s ability to reduce non-performing assets. OREO as of September 30, 2013 consisted of six residential properties totaling $473,911 and thirty commercial properties totaling $10.0 million at the Bank, and thirty residential properties totaling $592,993 and thirteen commercial properties totaling $256,641 at ALC. Every effort is made to dispose of these properties in a timely manner, but these efforts continue to be hampered by current economic conditions. Real estate values are depressed, and the real estate market remains weakened in all of the Company’s market area. Management reviews these non-performing assets and reports to the Board of Directors of the Bank monthly. Loans past due 90 days or more and still accruing interest are reviewed by management and are allowed to continue accruing only when management believes that underlying collateral values and the financial strength of the borrowers are sufficient to protect the Bank from loss. If at any time management determines that there may be a loss of interest or principal, these loans will be changed to non-accrual status and their asset values downgraded.

LIQUIDITY AND CAPITAL RESOURCES

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

The Bank currently has up to $163.0 million in borrowing capacity from the FHLB and $17.8 million in established federal funds lines.

USBI and the Bank are required to maintain certain levels of regulatory capital. At September 30, 2013 and December 31, 2012, USBI and the Bank were in compliance with all regulatory capital requirements.

Management is not aware of any condition that currently exists that would have an adverse effect on the liquidity, capital resources or operation of the Company. However, USBI and its subsidiaries are defendants in certain claims and legal actions arising in the ordinary course of business. See Note 14 to Item 1, “Guarantees, Commitments and Contingencies,” for a discussion of such claims and legal actions.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The asset portion of the balance sheet provides liquidity primarily from two sources. These are principal payments and maturities of loans and maturities and principal payments from the investment portfolio. Other short-term investments, such as federal funds sold, are additional sources of liquidity. Loans maturing or repricing in one year or less amounted to $120.1 million at September 30, 2013 and $155.5 million at December 31, 2012.

Investment securities forecasted to mature or reprice over the next twelve months ending September 30, 2014 are estimated to be $14.8 million, or approximately 9.4%, of the investment portfolio as of September 30, 2013. For comparison, principal payments on investment securities totaled $26.2 million, or 16.7 %, of the investment portfolio as of September 30, 2013.

Although the majority of the securities portfolio has legal final maturities longer than 10 years, a substantial percentage of the portfolio provides monthly principal and interest payments and consists of securities that are readily marketable and easily convertible into cash on short notice. As of September 30, 2013, the bond portfolio had an expected average maturity of 3.7 years, and approximately 70.9% of the $155.3 million in bonds was expected to be repaid within 5 years. However, management does not rely solely upon the investment portfolio to generate cash flows to fund loans, capital expenditures, dividends, debt repayment and other cash requirements. Instead, these activities are funded by cash flows from loan payments, as well as increases in deposits and short-term and long-term borrowings.

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

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

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

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

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

Simple gap analysis is no longer considered to be as accurate a tool for measuring interest rate risk as pro forma income simulation because it does not make an allowance for how much an item reprices as interest rates change, only that it is possible that the item could reprice. Accordingly, the Bank does not rely on gap analysis but instead measures changes in net interest income and net interest margin through income simulation over +/- 1%, 2%, 3% and 4% interest rate shocks. Our estimates have consistently shown that the Bank has very limited, if any, net interest margin and net interest income risk to rising interest rates.

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

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

ITEM 4. CONTROLS AND PROCEDURES

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

The management of the Company carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of September 30, 2013, pursuant to the evaluation of these controls and procedures required by Rule 13a-15 of the Exchange Act. Based upon that evaluation, the Company’s management concluded that, as of September 30, 2013, USBI’s disclosure controls and procedures are effective to ensure that the information required to be disclosed in the Company’s periodic filings with the SEC is recorded, processed, summarized and reported within the time periods specified.

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 14 to Item 1, “Guarantees, Commitments and Contingencies,” for information regarding certain other litigation matters relating to the Company.

USBI and its subsidiaries also are parties to litigation other than as described in Note 14 to Item 1, and the Company intends to vigorously defend itself in all such litigation. In the opinion of the Company, based on review and consultation with legal counsel, the outcome of such litigation should not have a material adverse effect on the Company’s consolidated financial statements or results of operations.

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ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors,” in USBI’s Annual Report on Form 10-K for the year ended December 31, 2012 that could materially affect the Company’s business, financial condition or future results. The risks described in USBI’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

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

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

Issuer Purchases of Equity Securities

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

(1) On December 17, 2012, the Board of Directors extended the share repurchase program previously approved by the Board on January 19, 2006. Under the repurchase program, USBI is authorized to repurchase up to 642,785 shares of common stock. The expiration date of the extended repurchase program is December 31, 2013. As of September 30, 2013 there were 242,303 shares that may still be purchased under the program.

ITEM 6. EXHIBITS

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

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SIGNATURES

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

UNITED SECURITY BANCSHARES, INC.
DATE: November 13, 2013
BY:	/s/ Thomas S. Elley
	Thomas S. Elley
	Its Vice President, Treasurer and Assistant Secretary, Chief Financial Officer and Principal Accounting Officer (Duly Authorized Officer and Principal Financial Officer)

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INDEX TO EXHIBITS

Exhibit No.	Description
3.1	Certificate of Incorporation of United Security Bancshares, Inc., incorporated herein by reference to the Exhibits to Form 10-Q for the quarter ended September 30, 1999.
3.2	Amended and Restated Bylaws of United Security Bancshares, Inc., incorporated by reference to Exhibit 3(ii) to the Current Report on Form 8-K filed August 29, 2007.
3.2A	First Amendment to the Bylaws of United Security Bancshares, Inc., incorporated by reference to Exhibit 3(ii) to the Current Report on Form 8-K filed February 24, 2012.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
32	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Interactive Data Files for the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013.

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