First US Bancshares (FUSB) 10-Q 2009 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2009

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 Regulations S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  x

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

Class	Outstanding at August 7, 2009
Common Stock, $0.01 par value	6,017,649 shares

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

		PAGE
PART I. FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS
Condensed Consolidated Statements of Financial Condition at June 30, 2009 (Unaudited) and December 31, 2008		4
Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2009 and 2008 (Unaudited)		5
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2009 and 2008 (Unaudited)		6
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008 (Unaudited)		7
Notes to Condensed Consolidated Financial Statements (Unaudited)		8
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	20
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	23
ITEM 4.	CONTROLS AND PROCEDURES	24
PART II. OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	25
ITEM 1A.	RISK FACTORS	25
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	25
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	26
ITEM 6.	EXHIBITS	26
Signature Page		26

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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. (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. Such forward-looking statements are necessarily estimates reflecting the Company’s best judgment based upon current information and involve a number of risks and uncertainties, and various factors could cause results to differ materially from those contemplated by such forward-looking statements. Such factors could include those identified from time to time in the Company’s Securities and Exchange Commission filings and other public announcements, including the factors described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. With respect to the adequacy of the allowance for loan losses for the Company, these factors include, but are not limited to, the rate of growth (or lack thereof) in the economy, the relative strength and weakness in the consumer and commercial credit sectors and in the real estate markets and collateral values. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to revise forward-looking statements to reflect circumstances or events that occur after the dates on which the forward-looking statements are made, except as required by law.

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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 Per Share Data)

	June 30, 2009			December 31, 2008
	(Unaudited)
ASSETS
Cash and Due from Banks	$	12,561		$	13,246
Interest Bearing Deposits in Banks		126			126
Total Cash and Cash Equivalents		12,687			13,372
Federal Funds Sold		20,005			1,105
Investment Securities Available-for-Sale, at fair market value		179,886			184,213
Federal Home Loan Bank Stock, at cost		5,251			5,236
Loans, net of allowance for loan losses of $8,376 and $8,532, respectively		399,928			399,483
Premises and Equipment, net		17,599			17,495
Cash Surrender Value of Bank-Owned Life Insurance		11,937			11,724
Accrued Interest Receivable		4,432			4,843
Goodwill		4,098			4,098
Investment in Limited Partnerships		1,912			1,993
Other Assets		27,634			24,440
Total Assets	$	685,369		$	668,002
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	500,782		$	485,117
Accrued Interest Expense		3,102			3,402
Short-Term Borrowings		648			2,294
Long-Term Debt		90,000			90,000
Other Liabilities		10,025			8,525
Total Liabilities		604,557			589,338
Commitments and Contingencies (Note 8)
Shareholders’ Equity:
Common Stock, par value $0.01 per share, 10,000,000 shares authorized; 7,317,560 shares issued; 6,017,714 and 6,018,154 shares outstanding, respectively		73			73
Surplus		9,233			9,233
Accumulated Other Comprehensive Income, net of tax		2,783			2,476
Retained Earnings		89,847			87,999
Less Treasury Stock: 1,299,846 and 1,299,406 shares at cost, respectively		(21,124	)		(21,117	)
Total Shareholders’ Equity		80,812			78,664
Total Liabilities and Shareholders’ Equity	$	685,369		$	668,002

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

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UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Thousands, Except Per Share Data)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2009		2008		2009		2008
	(Unaudited)				(Unaudited)
INTEREST INCOME:
Interest and Fees on Loans	$	9,754	$	10,832	$	19,489	$	22,325
Interest on Investment Securities Available-for-Sale		2,191		2,208		4,425		4,242
Total Interest Income		11,945		13,040		23,914		26,567
INTEREST EXPENSE:
Interest on Deposits		2,523		3,366		5,177		7,127
Interest on Borrowings		925		937		1,841		1,926
Total Interest Expense		3,448		4,303		7,018		9,053
NET INTEREST INCOME		8,497		8,737		16,896		17,514
PROVISION FOR LOAN LOSSES		1,459		2,180		3,368		3,540
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		7,038		6,557		13,528		13,974
NON-INTEREST INCOME:
Service and Other Charges on Deposit Accounts		731		815		1,392		1,606
Credit Life Insurance Income		257		171		415		259
Other Income		2,979		696		3,397		1,168
Total Non-Interest Income		3,967		1,682		5,204		3,033
NON-INTEREST EXPENSE:
Salaries and Employee Benefits		3,486		3,145		6,637		6,365
Occupancy Expense		460		452		914		900
Furniture and Equipment Expense		305		374		610		703
Other Expense		2,442		2,152		4,519		4,151
Total Non-Interest Expense		6,693		6,123		12,680		12,119
INCOME BEFORE INCOME TAXES		4,312		2,116		6,052		4,888
PROVISION FOR INCOME TAXES		1,440		635		1,911		1,504
NET INCOME	$	2,872	$	1,481	$	4,141	$	3,384
BASIC AND DILUTED NET INCOME PER SHARE	$	0.48	$	0.25	$	0.69	$	0.56
DIVIDENDS PER SHARE	$	0.11	$	0.27	$	0.38	$	0.54

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

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UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in Thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
	(Unaudited)						(Unaudited)
Net income	$	2,872		$	1,481		$	4,141		$	3,384
Other comprehensive income (loss):
Reclassification adjustment for net gains realized on derivatives in net income, net of tax of $5		0			0			0			(8	)
Change in unrealized holding gains (losses) on available-for-sale securities arising during period, net of tax (benefits) of ($296), ($1,272), $186, and ($675), respectively		(493	)		(2,120	)		309			(1,124	)
Reclassification adjustment for net gains realized on available-for-sale securities realized in net income, net of tax of $2, $0, $2 and $0, respectively		(3	)		0			(3	)		0
Other comprehensive (loss) income		(496	)		(2,120	)		306			(1,132	)
Comprehensive income (loss)	$	2,376		$	(639	)	$	4,447		$	2,252

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

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UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

	Six Months Ended June 30,
	2009			2008
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	4,141		$	3,384
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		424			467
Accretion of premiums and discounts, net		(62	)		(120	)
Provision for loan losses		3,368			3,540
(Gain) loss on sale of securities, net		(8	)		0
(Gain) loss on sale of fixed assets, net		(121	)		0
Net other operating activities		(1,964	)		2,203
Total adjustments		1,637			6,090
Net cash provided by operating activities		5,778			9,474
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and prepayments of investment securities available-for-sale		37,944			24,293
Proceeds from sales of investment securities available-for-sale		1,519			0
Proceeds from redemption of Federal Home Loan Bank stock		0			338
Purchase of premises and equipment, net		(342	)		(221	)
Purchase of investment securities available-for-sale		(34,575	)		(53,868	)
Purchase of Federal Home Loan Bank stock		(15	)		(478	)
Net increase in federal funds sold		(18,900	)		0
Net change in loan portfolio		(3,814	)		18,309
Net cash used in investing activities		(18,183	)		(11,627	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in customer deposits		15,665			8,987
Dividends paid		(2,292	)		(3,274	)
(Decrease) increase in borrowings		(1,646	)		3,805
Purchase of treasury stock		(7	)		(824	)
Net cash provided by financing activities		11,720			8,694
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(685	)		6,541
CASH AND CASH EQUIVALENTS, beginning of period		13,372			20,674
CASH AND CASH EQUIVALENTS, end of period	$	12,687		$	27,215
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest	$	7,319		$	9,758
Income Taxes		75			99
NON-CASH TRANSACTIONS:
Other real estate acquired in settlement of loans	$	4,863		$	7,035

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

7

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. GENERAL

The accompanying unaudited condensed consolidated financial statements include the accounts of United Security Bancshares, Inc. and its subsidiaries (the “Company”). All significant intercompany transactions and accounts have been eliminated.

The interim financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair presentation of financial position and results of operations for such 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, 2009. While certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), management believes that the disclosures herein are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. The accounting policies followed by the Company are set forth in Note 2, “Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. In preparing the financial statements, management evaluated subsequent events through the date on which the financial statements were issued.

2. NET INCOME PER SHARE

Basic net income per share is computed by dividing net income by the weighted average shares during the three- and six-month periods ended June 30, 2009 and 2008. Diluted net income per share for the three- and six-month periods ended June 30, 2009 and 2008 are computed based on the weighted average shares outstanding during the period plus the dilutive effect of outstanding stock options. There were no outstanding options during the periods ended June 30, 2009 or 2008.

The following table represents the net income per share calculations for the three- and six-month periods ended June 30, 2009 and 2008 (dollars in thousands, except per share data):

	Net Income		Weighted Average Shares Outstanding	Net Income Per Share
For the Three Months Ended:
June 30, 2009	$	2,872	6,017,727	$	0.48
June 30, 2008	$	1,481	6,042,209	$	0.25
For the Six Months Ended:
June 30, 2009	$	4,141	6,017,864	$	0.69
June 30, 2008	$	3,384	6,052,473	$	0.56

3. COMPREHENSIVE INCOME

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

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4. RECENT ACCOUNTING PRONOUNCEMENTS

Fair Value Measurements

On January 1, 2008, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157,Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances. On February 12, 2008, the Financial Accounting Standards Board (the “FASB”) issued Staff Position 157-2, which defers the effective date of SFAS No. 157 for certain nonfinancial assets and liabilities to fiscal years beginning after November 15, 2008. All other provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.

As defined in SFAS No. 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about 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. Financial 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 U.S. Treasury and federal agency securities and federal agency mortgage-backed securities, which are traded by dealers or brokers in active markets. 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.

Assets Measured at Fair Value on a Recurring Basis

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

Available-for-Sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Currently, all of the Company’s available-for-sale securities are considered to be Level 2 securities, except for $173,000 in equity securities that are considered to be Level 1 securities.

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Assets Measured at Fair Value on a Nonrecurring Basis

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

Impaired Loans

Loan impairment is reported when full payment under the loan terms is not expected. Impaired loans are carried at the present value of estimated future cash flows using the loan’s existing rate or the fair value of collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to require increase, such increase is reported as a component of the provision for loan losses. Loan losses are charged against the allowance when management believes that the uncollectibility of a loan is confirmed. Loans, net of specific allowances, subject to this evaluation amounted to $17,481,678 as of June 30, 2009. This valuation would be considered Level 3, consisting of appraisals of underlying collateral and discounted cash flow analysis.

SFAS No. 107,Disclosures About Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized on the face of the statement of condition, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Company’s financial instruments are detailed below. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather represent a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance.

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:The carrying amount of Federal Home Loan Bank stock approximates fair value.

Securities:Fair values of securities are based on available quoted market prices. The carrying amount of equity securities with no readily determined fair value approximates fair value.

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

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

Derivative instruments:Fair values of the Company’s derivative instruments are based on values obtained from counterparties or other quotations received from third parties. The Company’s loan commitments are negotiated at current market rates and are relatively short-term in nature. As a matter of policy, the Company generally makes commitments for fixed-rate loans for relatively short periods of time. Because of this policy and the absence of any known credit exposure, the estimated value of the Company’s loan commitments is nominal.

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

Time deposits:The fair value of relatively short-term time deposits is equal to their carrying values. Discounted cash flows have been 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.

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

Long-term debt: The fair value of this debt is estimated using discounted cash flows based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements as of June 30, 2009 and December 31, 2008.

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.

	June 30, 2009				December 31, 2008
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(Dollars in Thousands)
Assets:
Cash and cash equivalents	$	12,687	$	12,687	$	13,372	$	13,372
Investment securities available-for-sale		179,886		179,886		184,213		184,213
Federal funds sold		20,005		20,005		1,105		1,105
Federal Home Loan Bank stock		5,251		5,251		5,236		5,236
Accrued interest receivable		4,432		4,432		4,844		4,844
Loans, net of unearned		399,928		399,858		399,483		428,267
Liabilities:
Deposits		500,782		504,245		485,117		489,588
Short-term borrowings		648		648		2,294		2,294
Long-term debt		90,000		87,652		90,000		85,851
Accrued interest payable		3,102		3,102		3,402		3,402

Other Accounting Standards Recently Adopted

The following is a list of other accounting standards recently adopted that did not have a material impact on the Company’s financial statements.

In December 2007, the FASB issued SFAS No. 141(R),Business Combinations, which is a revision of SFAS No. 141,Business Combinations. SFAS No. 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and discloses information to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) became effective for fiscal years beginning after December 15, 2008, to be applied prospectively. The adoption of SFAS No. 141(R) did not impact the Company’s financial statements.

In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements. SFAS No. 160 amends Accounting Research Bulletin 51,Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be clearly reported as equity in the consolidated financial statements. Additionally, SFAS No. 160 requires that the amount of consolidated net income attributable to the parent and to the controlling interests be clearly identified and presented on the face of the consolidated statement of income. The provisions of SFAS No. 160 became effective for fiscal years beginning on or after December 15, 2008, with earlier application prohibited. Prospective application of SFAS No. 160 is required, except for the presentation and disclosure requirements, which must be applied retrospectively. The adoption of SFAS No. 160 did not impact the Company’s financial statements.

In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities. SFAS No. 161 amends SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, by requiring expanded disclosures about an entity’s derivative instruments and hedging activities, but does not change SFAS No. 133’s scope or accounting. SFAS No. 161 requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133

11

and its related interpretations and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. To meet those objectives, SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures in a tabular format about fair value amounts of and gains and losses on derivative instruments, including specific disclosures regarding the location and amounts of derivative instruments in the financial statements, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 also amends SFAS No. 107,Disclosures about Fair Value of Financial Instruments, to clarify that derivative instruments are subject to the SFAS No. 107 concentration of credit-risk disclosures. The provisions of SFAS No. 161 became effective for fiscal years beginning after November 15, 2008, with earlier application permitted. The adoption of SFAS No. 161 did not impact the Company’s financial statements.

In May 2008, the FASB issued SFAS No. 163,Accounting for Financial Guarantee Insurance Contract — an interpretation of FASB Statement No. 60. Diversity exists in practice in accounting for financial guarantee insurance contracts by insurance enterprises under SFAS No. 60,Accounting and Reporting by Insurance Enterprises. This results in inconsistencies in the recognition and measurement of claim liabilities. SFAS No. 163 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation and requires expanded disclosures about financial guarantee insurance contracts. The accounting and disclosure requirements of SFAS No. 163 became effective as of the beginning of the Company’s 2009 fiscal year. The adoption of SFAS No. 163 did not impact the Company’s financial statements.

In April 2009, the FASB issued three final staff positions (“FSPs”) intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities. FSP FAS 157-4,Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, provides guidelines for making fair value measurements more consistent with the principles presented in FASB Statement No. 157,Fair Value Measurements. FSP FAS 107-1 and Auditing Practices Board (“APB”) 28-1,Interim Disclosures about Fair Value of Financial Instruments, enhances consistency in financial reporting by increasing the frequency of fair value disclosures. FSP FAS 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairments, provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities.

FSP FAS 157-4 relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms what SFAS No. 157 states is the objective of fair value measurement — to reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements under current market conditions. Specifically, it reaffirms the need to use judgment to ascertain whether a formerly active market has become inactive and in determining fair values when markets have become inactive.

FSP FAS 107-1 and APB 28-1 relates to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet of companies at fair value. Prior to FSP FAS 107-1 and APB 28-1, fair values for these assets and liabilities were only disclosed once a year. FSP FAS 107-1 and APB 28-1 requires these disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value.

FSP FAS 115-2 and FAS 124-2 relating to other-than-temporary impairments is intended to bring greater consistency to the timing of impairment recognition and provide greater clarity to investors about the credit and noncredit components of impaired debt securities that are not expected to be sold. The measure of impairment in comprehensive income remains fair value. FSP FAS 115-2 and FAS 124-2 also requires increased and more timely disclosures regarding expected cash flows, credit losses and an aging of securities with unrealized losses.

The FSPs became effective for interim and annual periods ending after June 15, 2009. Adoption of these FSPs did not have a material effect on the financial statements of the Company.

In May 2009, the FASB issued SFAS No. 165,Subsequent Events,which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 became effective for interim and annual periods ending after June 15, 2009. The Company has complied with the requirements of SFAS No. 165.

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Accounting Standards Not Yet Adopted

In June 2009, the FASB issued SFAS No. 166,Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140, to improve the reporting for the transfer of financial assets resulting from (1) practices that have developed since the issuance of SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, that are not consistent with the original intent and key requirements of that statement and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. SFAS No. 166 must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company will review the requirements of SFAS No. 166 and comply with its requirements. The Company does not expect that the adoption of SFAS No. 166 will have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167,Amendments to FASB Interpretation No. 46(R),to amend certain requirements of FASB Interpretation No. 46 (revised December 2003),Consolidation of Variable Interest Entities, to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. SFAS No. 167 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company will review the requirements of SFAS No. 167 and comply with its requirements. The Company does not expect that the adoption of SFAS No. 167 will have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168,The FASB Accounting Standards Codification^TM and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162.Under SFAS No. 168,The FASB Accounting Standards Codification (the “Codification”) will become the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of SFAS No. 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. In the FASB’s view, the issuance of SFAS No. 168 and the Codification will not change GAAP, except for those nonpublic nongovernmental entities that must now apply the American Institute of Certified Public Accountants Technical Inquiry Service Section 5100,Revenue Recognition, paragraphs 38-76. The Company does not expect that the adoption of SFAS No. 168 will have a material impact on the Company’s consolidated financial statements.

5. INVESTMENT SECURITIES

Details of investment securities available-for-sale are as follows:

	June 30, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in Thousands)
Mortgage-backed securities	$	156,613	$	4,459	$	(202	)	$	160,870
Obligations of states, counties and political subdivisions		18,569		226		(74	)		18,721
U.S. treasury securities		121		1		0			122
Equity securities		132		41		0			173
Total	$	175,435	$	4,727	$	(276	)	$	179,886

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	December 31, 2008
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in Thousands)
Mortgage-backed securities	$	166,712	$	4,111	$	(340	)	$	170,483
Obligations of states, counties and political subdivisions		11,281		153		(63	)		11,372
U.S. treasury securities		122		1		0			123
Obligations of U.S. government sponsored agencies		2,005		11		0			2,016
Equity securities		132		88		0			220
Total	$	180,252	$	4,364	$	(403	)	$	184,213

The scheduled maturities of investment securities available-for-sale at June 30, 2009 are presented in the following table:

	Amortized Cost		Estimated Fair Value
	(Dollars in Thousands)
Maturing within one year	$	3,498	$	3,498
Maturing after one to five years		13,595		13,920
Maturing after five to fifteen years		110,367		113,505
Maturing after fifteen years		47,843		48,790
Equity securities and Preferred Stock		132		173
Total	$	175,435	$	179,886

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

The following table reflects the Company’s investments’ gross unrealized losses and market value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2009 and December 31, 2008. The Company does not believe that any individual unrealized loss represents an other-than-temporary impairment. The Company does not intend to sell these securities, has assessed the likelihood that it will be required to sell these securities before recovery of its amortized cost basis as not likely, and does expect to recover the entire amortized cost basis of these securities based on comparison of the present value of cash flows expected to be collected from the securities with the amortized cost basis of the securities. Therefore, the Company has not recognized any other-than-temporary impairments.

	June 30, 2009
	Less than 12 Months					12 Months or More
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in Thousands)
Obligations of states, counties and political subdivisions	$	6,567	$	(74	)	$	0	$	0
Mortgage-backed securities		10,481		(71	)		1,315		(131	)
Total	$	17,048	$	(145	)	$	1,315	$	(131	)
	December 31, 2008
	Less than 12 Months					12 Months or More
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in Thousands)
Obligations of states, counties and political subdivisions	$	1,438	$	(63	)	$	0	$	0
Mortgage-backed securities		10,303		(101	)		6,830		(239	)
Total	$	11,741	$	(164	)	$	6,830	$	(239	)

Management evaluates securities for other-than-temporary impairment no less frequently than quarterly and more frequently when economic or market concerns warrant such evaluation.

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The following chart represents the gross gains and losses realized on securities available-for-sale:

	Gross Gains		Gross Losses		Net Gains (Losses)
	(Dollars in Thousands)
Three Months Ended:
June 30, 2009	$	8	$	0	$	8
June 30, 2008		0		0		0
Six Months Ended:
June 30, 2009	$	8	$	0	$	8
June 30, 2008		0		0		0

6. SEGMENT REPORTING

Under SFAS No. 131,Disclosures About Segments of an Enterprise and Related Information, certain information is disclosed for the two reportable operating segments of the Company. The reportable segments were determined using the internal management reporting system. They are composed of the Company’s and First United Security Bank’s (the “Bank”) significant subsidiaries. The accounting policies for each segment are the same as those described in Note 2, “Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10-K for the period ended December 31, 2008. 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:

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	First United Security Bank		Acceptance Loan Company		All Other		Eliminations			Consolidated
	(Dollars in Thousands)
As of or for the three months ended June 30, 2009:
Net interest income	$	5,437	$	3,043	$	17	$	0		$	8,497
Provision for loan losses		223		1,236		0		0			1,459
Total non-interest income		1,261		2,603		3,225		(3,122	)		3,967
Total non-interest expense		4,482		2,092		273		(154	)		6,693
Income before income taxes		1,993		2,318		2,969		(2,968	)		4,312
Provision for income taxes		562		873		5		0			1,440
Net income	$	1,431	$	1,445	$	2,964	$	(2,968	)	$	2,872
Other significant items:
Total assets	$	683,739	$	100,819	$	95,558	$	(194,747	)	$	685,369
Total investment securities		179,601		0		285		0			179,886
Total loans, net		412,265		89,843		0		(102,180	)		399,928
Goodwill		3,112		0		986		0			4,098
Investment in subsidiaries		11,231		63		81,247		(92,464	)		77
Fixed asset addition		279		21		0		0			300
Depreciation and amortization expense		167		47		0		0			214
Total interest income from external customers		7,172		4,770		3		0			11,945
Total interest income from affiliates		1,727		0		14		(1,741	)		0
As of or for the six months ended June 30, 2009:
Net interest income	$	10,738	$	6,128	$	30	$	0		$	16,896
Provision for loan losses		1,057		2,311		0		0			3,368
Total non-interest income		2,322		2,764		4,747		(4,629	)		5,204
Total non-interest expense		8,651		3,871		456		(298	)		12,680
Income before income taxes		3,352		2,710		4,321		(4,331	)		6,052
Provision for income taxes		884		1,019		8		0			1,911
Net income	$	2,468	$	1,691	$	4,313	$	(4,331	)	$	4,141
Other significant items:
Fixed asset addition	$	314	$	28	$	0	$	0		$	342
Depreciation and amortization expense		338		86		0		0			424
Total interest income from external customers		14,294		9,611		9		0			23,914
Total interest income from affiliates		3,483		0		22		(3,505	)		0

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	First United Security Bank		Acceptance Loan Company			All Other		Eliminations			Consolidated
	(Dollars in Thousands)
As of or for the three months ended June 30, 2008:
Net interest income	$	5,671	$	3,042		$	24	$	0		$	8,737
Provision for loan losses		772		1,408			0		0			2,180
Total non-interest income		1,394		153			1,755		(1,620	)		1,682
Total non-interest expense		3,953		1,933			306		(69	)		6,123
Income (loss) before income taxes		2,340		(146	)		1,473		(1,551	)		2,116
Provision for (benefit from) income taxes		690		(59	)		4		0			635
Net income (loss)	$	1,650	$	(87	)	$	1,469	$	(1,551	)	$	1,481
Other significant items:
Total assets	$	666,406	$	114,430		$	92,258	$	(203,697	)	$	669,397
Total investment securities		172,079		0			348		0			172,427
Total loans, net		411,708		98,513			0		(111,517	)		398,704
Goodwill		3,112		0			986		0			4,098
Investment in subsidiaries		9,700		63			78,016		(87,701	)		78
Fixed asset addition		80		23			0		0			103
Depreciation and amortization expense		374		93			1		0			468
Total interest income from external customers		8,121		4,911			8		0			13,040
Total interest income from affiliates		1,868		0			15		(1,883	)		0
As of or for the six months ended June 30, 2008:
Net interest income	$	11,242	$	6,232		$	40	$	0		$	17,514
Provision for loan losses		1,139		2,401			0		0			3,540
Total non-interest income		2,593		256			3,905		(3,721	)		3,033
Total non-interest expense		7,920		3,799			553		(153	)		12,119
Income before income taxes		4,776		288			3,392		(3,568	)		4,888
Provision for income taxes		1,414		82			8		0			1,504
Net income	$	3,362	$	206		$	3,384	$	(3,568	)	$	3,384
Other significant items:
Fixed asset addition	$	189	$	32		$	0	$	0		$	221
Depreciation and amortization expense		373		93			1		0			467
Total interest income from external customers		16,504		10,048			15		0			26,567
Total interest income from affiliates		3,816		0			26		(3,842	)		0

7. DERIVATIVE FINANCIAL INSTRUMENTS

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

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The Bank’s principal objective in holding derivative financial instruments is asset-liability management. The operations of the Bank are subject to a risk of interest rate fluctuations to the extent that there is a difference between the amount of the Bank’s interest earning assets and the amount of interest bearing liabilities that mature or reprice in specified periods. The principal objective of the Bank’s asset-liability management activities is to provide maximum levels of net interest income while maintaining acceptable levels of interest rate and liquidity risk and facilitating the funding needs of the Bank. To achieve that objective, the Bank uses a combination of derivative financial instruments, including interest rate swaps. During the period ended June 30, 2009, no interest rate swaps were used.

8. 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 period ended June 30, 2009, there were no credit losses associated with derivative contracts.

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

	June 30, 2009		December 31, 2008
	(Dollars in Thousands)
Standby Letters of Credit	$	1,671	$	1,952
Commitments to Extend Credit	$	55,029	$	54,330

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. At June 30, 2009, the potential amount of future payments that the Bank could be required to make under its standby letters of credit was $1.7 million, representing the Bank’s total credit risk.

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

Commitments to purchase securities for delayed delivery require the Bank to purchase a specified security at a specified price for delivery on a specified date. Similarly, commitments to sell securities for delayed delivery require the Bank to sell a specified security at a specified price for delivery on a specified date. Market risk arises from potential movements in security values and interest rates between the commitment and delivery dates. At June 30, 2009, there were no outstanding commitments to purchase and sell securities for delayed delivery.

Litigation

On September 27, 2007, Malcomb Graves Automotive, LLC, Malcomb Graves and Tina Graves (collectively, “Graves”) filed a lawsuit in the Circuit Court of Shelby County, Alabama against the Company, the Bank, Acceptance Loan Company, Inc., a subsidiary of 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, has been named as a co-defendant. The complaint alleges that the defendants committed fraud in allegedly misrepresenting to Graves the amounts Graves owed on certain loans and failing to credit Graves properly for

18

certain loans. The defendants deny the allegations and intend to vigorously defend themselves in this action. The trial court denied the defendants’ motion to compel arbitration, and the defendants elected to appeal the trial court’s ruling with the Alabama Supreme Court. During the appeal, Malcomb Graves filed for bankruptcy, staying this lawsuit in its entirety. The defendants have not yet responded to the complaint, and no discovery has been exchanged between the parties. For these reasons, it is too early to assess the likelihood of a resolution of this matter or whether this matter will have a material adverse effect on the Company’s financial position or results of operations.

On April 1, 2008, E. Mark Ezell, Mark Ezell Family, LLC, Nena M. Morris, Mark Ezell Investment & Property Management, LLC, Patricia W. Ezell, J.W. Ezell, Ranier W. Ezell and Bradley H. Ezell, all shareholders of the Company (collectively, the “Shareholder Plaintiffs”), filed a lawsuit in the Circuit Court of Choctaw County, Alabama against the Company, ALC, Robert Steen and Mauldin & Jenkins, LLC seeking an unspecified amount of compensatory and punitive damages. On October 31, 2008, the Shareholder Plaintiffs amended the complaint to add Terry Phillips, President and Chief Executive Officer of the Company, as a co-defendant. The complaint, as amended, seeks both direct and derivative relief and alleges that the defendants committed fraud and various other breaches relating to loans made by ALC, resulting in damage to both the Shareholder Plaintiffs and the Company. The Company and ALC deny the allegations focused on them and intend to vigorously defend themselves in this action. On January 16, 2009, the trial court granted in part a motion filed by the Company and ALC seeking to dismiss certain of the Shareholder Plaintiffs’ claims, including the derivative and fraud claims, and ordered the Shareholder Plaintiffs to re-plead their remaining claims. The trial court also granted a motion filed by the Company and ALC seeking to have the lawsuit transferred to the Circuit Court of Clarke County, which transfer occurred on January 19, 2009. The Shareholder Plaintiffs have not yet amended their complaint as ordered, and, as such, no discovery has been exchanged between the parties. For these reasons, it is too early to assess the likelihood of a resolution of this matter or whether this matter will have a material adverse effect on the Company’s financial position or results of operations.

The Bank was informed by letter dated September 30, 2008, that the U.S. Department of Justice (the “DOJ”) has authorized the filing of a complaint in the U.S. District Court for the Southern District of Alabama against the Bank alleging certain violations of the Fair Housing Act and the Equal Credit Opportunity Act. This matter arose in connection with the Federal Deposit Insurance Corporation’s evaluation of the Bank under the Community Reinvestment Act (“CRA”), which resulted in a “Needs to Improve” CRA rating for the Bank. The Company believes that the Bank’s lending practices have complied with all applicable laws, and the Bank has been in active discussions with the DOJ in an effort to resolve this matter. It is too early to assess whether the resolution of this matter will have a material adverse effect on the Company’s financial position or results of operations.

On June 5, 2009, the Company, the Bank and ALC (the Company, the Bank and ALC collectively referred to herein as the “USB Companies”) finalized settlement agreements and releases (the “Settlement Agreements”) with defendants McKean & Associates, P.A., Ernst & Young LLP and Mauldin & Jenkins, LLC (collectively, the “Defendants”) to resolve a lawsuit initially filed in the Circuit Court of Clarke County, Alabama on April 29, 2008 (the “McKean Lawsuit”). As reported by the Company in prior filings, the McKean Lawsuit alleged that the Defendants breached their contractual obligations to the USB Companies, the Defendants breached their duty to exercise reasonable care in performing their audits on behalf of the USB Companies and the Defendants committed certain other torts in connection with their audits of the USB Companies, all relating to certain loan irregularities within ALC discovered during the second quarter of 2007. Pursuant to the Settlement Agreements, the USB Companies, with the consent and approval of the Company’s Board of Directors, agreed to dismiss, with prejudice, each of the Defendants from the McKean Lawsuit and to release the Defendants from all claims asserted or that may have been asserted against the Defendants in the Lawsuit. In exchange, the Defendants paid an aggregate sum of $4.5 million to the USB Companies, with the USB Companies maintaining responsibility for their own attorneys’ fees and costs arising from the McKean Lawsuit, which resulted in net proceeds to the USB Companies in the amount of $2.7 million. The Settlement Agreements concluded the McKean Lawsuit. The USB Companies entered into the Settlement Agreements to avoid the expense and uncertainty of further litigation of the claims alleged in the McKean Lawsuit.

The Company 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.

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

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

The accounting principles and reporting policies of the Company, and the methods of applying these principles, conform with accounting principles generally accepted in the United States (“GAAP”) and with general practices within the financial services industry. Critical accounting policies relate to securities, loans, allowance for loan losses, derivatives and hedging. A description of these policies, which significantly affect the determination of financial position, results of operations and cash flows, is set forth in Note 2, “Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

The emphasis of this discussion is a comparison of assets, liabilities and shareholders’ equity as of June 30, 2009 to year-end 2008, while comparing income and expense for the three- and six-month periods ended June 30, 2009 and 2008.

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

This information should be read in conjunction with the Company’s unaudited consolidated financial statements and related notes appearing elsewhere in this report and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

COMPARING THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2009 TO THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2008

Net income during the second quarter of 2009 was $2.9 million, compared to $1.5 million for the same period in 2008, resulting in an increase of basic net income per share from $0.25 to $0.48. For the six months, net income increased from $3.4 million in 2008 to $4.1 million in 2009, resulting in an increase of basic net income per share to $0.69 from $0.56. Annualized return on assets was 1.23% for the first six months of 2009, compared to 1.02% for the same period during 2008. Average return on shareholders’ equity increased to 10.53% for the first six months of 2009, from 8.49% during the first six months of 2008.

Interest income for the 2009 second quarter decreased $1.1 million, or 8.4%, compared to the second quarter of 2008. The decrease in interest income was primarily due to a decrease in interest earned on loans. This decrease is due to an overall decrease in the average yield and volume of loans outstanding. For the 2009 six-month period, interest income decreased $2.7 million, or 10.0%, over the same period last year. This decrease in interest income was primarily due to a decrease in interest earned on loans resulting from an overall decrease in the average yield and a decrease in the volume of loans outstanding.

Interest expense for the 2009 second quarter decreased $1.0 million, or 19.9%, compared to the second quarter of 2008. Interest expense decreased $2.1 million, or 22.5%, to $7.0 million for the first six months of 2009, compared to $9.1 million for the first six months of 2008. These decreases were the result of lower interest rates paid on certificates of deposit and borrowed funds for these periods in 2009.

Net interest income decreased $240,000, or 2.7%, for the second quarter of 2009 and decreased $618,000, or 3.5%, for the first six months of 2009, compared to the same periods in 2008, respectively. Asset yields have fallen faster than funding rates, as prime adjustable loans have priced down much faster than certificates of deposit. As loan yields have somewhat stabilized, the yield on interest-earning assets continues to decline due to the shift from loans to investment securities as loan growth continues to be depressed. The Company’s cost of funds continues to decline as longer-term certificates of deposit reprice. However, even though net interest margin improved in the second quarter of 2009 from the first quarter of 2009, it declined during the three- and six-month periods of 2009, compared to the same periods in 2008.

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The provision for loan losses was $1.5 million, or 1.4% annualized of average loans, in the second quarter of 2009, compared to $2.2 million, or 2.1% annualized of average loans, in the second quarter of 2008. The provision for loan losses decreased to $3.4 million year-to-date 2009, compared to $3.5 million in 2008. The annualized provision as a percent of average loans was 1.7% for each of the first six months of 2008 and 2009. Charge-offs exceeded recoveries by $3.5 million for the 2009 six-month period, a decrease of approximately $700,000 over the same period in the prior year. See “CREDIT QUALITY.”

Total non-interest income increased $2.3 million, or 135.9%, for the second quarter of 2009, and $2.2 million, or 71.6%, for the first six months of 2009. Service charges and fees on deposit accounts decreased $84,000 quarter-to-date and $214,000 year-to-date 2009, compared to the same periods in 2008. Income on bank-owned life insurance increased $3,000 quarter-to-date and $6,000 year-to-date 2009, compared to the same periods in 2008. Commissions on credit insurance increased $86,000 quarter-to-date 2009 and $156,000 year-to-date, compared to the same periods in 2008. Letters of credit and commitment fees decreased $5,000 quarter-to-date and $16,000 year-to-date. Net gains on the sale of other real estate owned amounted to $268,000 in 2008 and have decreased to a net loss of $121,000 year-to-date 2009. All other fees increased as a result of a settlement received in the second quarter of 2009 related to a lawsuit filed against three accounting firms, which resulted in net settlement proceeds to the Company in the amount of $2.7 million. This non-recurring income represents earnings of $0.30 per share for the three- and six-month periods ended June 30, 2009.

Total non-interest expense increased $570,000, or 9.3%, quarter-to-date and increased $561,000, or 4.6%, year-to-date 2009, compared to the same periods in 2008. Salary and employee benefits increased $341,000, when comparing second quarter 2009 to 2008, and $272,000 year-to-date 2009, compared to the same period in 2008. For the three months ended June 30, 2009, advertising expense decreased $27,000, legal and professional fees decreased $80,000 and telephone and data circuit expense increased $7,000, each compared to the same quarter in 2008. On a year-to-date basis, advertising expense decreased $24,000, legal and professional fees increased $153,000 and telephone and data circuit expense increased $16,000, each compared to the same period in 2008. FDIC insurance assessments have increased $210,000 quarter-to-date and $296,000 year-to-date 2009, compared to the same periods in 2008.

Income tax expense for the second quarter of 2009 was $1.4 million, compared to $635,000 in 2008. Income tax expense for the first six months of 2009 increased $407,000 over the first six months of 2008. The increase during the first six months of 2009 compared to 2008 resulted from higher levels of taxable income. Management estimates the effective tax rate for the Company to be approximately 31.5% of pre-tax income for the period ending December 31, 2009.

COMPARING THE JUNE 30, 2009 STATEMENT OF FINANCIAL CONDITION TO DECEMBER 31, 2008

In comparing financial condition at December 31, 2008 to June 30, 2009, total assets increased $17.4 million to $685.4 million, while liabilities increased $15.2 million to $604.6 million. Shareholders’ equity increased $2.1 million as a result of an increase in other comprehensive income of $307,000 and earnings in excess of dividends of $1.8 million.

Investment securities decreased $4.3 million, or 2.3%, during the first six months of 2009. Investments provide the Company with a stable form of liquidity while maximizing earnings yield. Loans, net of unearned income, increased $289,000, from $408.0 million at December 31, 2008, to $408.3 million at June 30, 2009. While quarter-end net loans have increased slightly over December 31, 2008, average loans have declined $7.2 million from December 31, 2008 and $17.6 million from June 30, 2008. Loan growth has been flat due to the slowdown in construction and real estate development in the trade areas served by the Company. Deposits increased $15.7 million, or 3.2%, during the first six months of 2009.

CREDIT QUALITY

At June 30, 2009, the allowance for loan losses was $8.4 million, or 2.0% of loans net of unearned income, compared to $7.8 million, or 1.9% of loans net of unearned income, at June 30, 2008, and $8.5 million, or 2.1% of loans net of unearned income, at December 31, 2008. The coverage ratio of the allowance for loan losses to non-performing assets decreased to 21.6% at June 30, 2009, compared to 22.6% at December 31, 2008. Loans on non-accrual increased $1.1 million, accruing loans past due 90 days or more declined $3.3 million and real estate acquired in settlement of loans increased $3.3 million, as compared to December 31, 2008.

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Activity in the allowance for loan losses is summarized as follows (dollars in thousands):

	Six Months Ended June 30,
	2009			2008
Balance at Beginning of Period	$	8,532		$	8,535
Charge-Offs		(4,205	)		(5,294	)
Recoveries		681			1,065
Net Loans Charged-Off		(3,524	)		(4,229	)
Additions Charged to Operations		3,368			3,540
Balance at End of Period	$	8,376		$	7,846

Net charge-offs for the six months ended June 30, 2009 were $3.5 million, or 1.73% of average loans on an annualized basis, a decrease of $705,000 from the charge-offs of $4.2 million, or 2.0% of average loans on an annualized basis, reported a year earlier. The provision for loan losses for the first six months of 2009 was $3.4 million, compared to $3.5 million in the first six months of 2008.

The Company maintains the allowance for loan losses at a level deemed adequate by management to absorb probable 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.

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

	June 30, 2009			December 31, 2008			June 30, 2008
Loans Accounted for on a Non-Accrual Basis	$	11,337		$	10,258		$	9,887
Accruing Loans Past Due 90 Days or More		6,029			9,323			7,550
Real Estate Acquired in Settlement of Loans		21,421			18,131			16,545
Total	$	38,787		$	37,712		$	33,982
Non-Performing Assets as a Percentage of Net Loans and Other Real Estate		9.03	%		8.85	%		8.03	%

Non-performing assets as a percentage of net loans and other real estate was 9.0% at June 30, 2009, compared to 8.9% at December 31, 2008. This increase is due to a $1.1 million increase in loans on non-accrual and a $3.3 million increase in real estate acquired in settlement of loans, offset by a $3.3 million decrease in accruing loans past due 90 days or more. Other real estate acquired in settlement of loans as of June 30, 2009 consisted of twenty residential properties and twenty-six commercial properties totaling $14.4 million at the Bank and one hundred forty-eight residential properties totaling $7.0 million at ALC. Management is making every effort to dispose of these properties in a timely manner, but the national recession and the severely depressed real estate market continue to have a negative impact on this process. In spite of the bad economic conditions, management believes that, by closely monitoring these non-performing assets, through aggressive collection and sales efforts, they can be reduced to a more manageable level. Management reviews these loans and reports to the Board of Directors monthly. Loans past due 90 days or more and still accruing are reviewed closely by management and are allowed to continue accruing interest 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 and their asset value downgraded.

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Impaired loans totaled $18.6 million, $24.4 million and $11.2 million as of June 30, 2009, December 31, 2008 and June 30, 2008, respectively. Impaired loans at June 30, 2009 consisted mainly of six commercial real estate loans and three residential development loans. Based on management’s analysis, these loans are considered impaired based on current collateral values. There was approximately $1.1 million at June 30, 2009 and 2008 and $1.6 million at December 31, 2008 in the allowance for loan losses specifically allocated to these impaired loans.

LIQUIDITY AND CAPITAL RESOURCES

The Bank’s primary sources of funds are customer deposits, Federal Home Loan Bank 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 $115.3 million in borrowing capacity from the Federal Home Loan Bank and $10.0 million in established federal funds lines.

The Bank is required to maintain certain levels of regulatory capital. At June 30, 2009 and December 31, 2008, the Company and the Bank were in compliance with all regulatory capital requirements.

Management is not aware of any condition that currently exists that would have an adverse effect on the liquidity, capital resources or operation of the Company. However, the Company is a defendant in certain claims and legal actions arising in the ordinary course of business. See Note 8 to Item 1, “Guarantees, Commitments and Contingencies,” for a discussion of such claims and legal actions.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary functions of asset and liability management are to (1) assure adequate liquidity, (2) maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities, (3) maximize the profit of the Bank and (4) reduce risks to the Bank’s capital. Liquidity management involves the ability to meet day-to-day cash flow requirements of the Bank’s customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs. Without proper liquidity management, the Bank would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the needs of the communities that it serves. Interest rate risk management focuses on the maturity structure of assets and liabilities and their repricing characteristics during changes 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 the net interest margin.

The asset portion of the balance sheet provides liquidity primarily from two sources. These are principal payments, maturities and sales relating to 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 $183.6 million at December 31, 2008 and $166.4 million at June 30, 2009.

Investment securities that are forecast to mature or reprice over the next twelve months total $12.1 million, or 6.8% of the investment portfolio, as of June 30, 2009. For comparison, principal payments on investment securities totaled $35.3 million, or 19.6% of the investment portfolio, at June 30, 2009.

Although the majority of the securities portfolio has legal final maturities longer than 10 years, the entire portfolio consists of securities that are readily marketable and easily convertible into cash. As of June 30, 2009, the bond portfolio had an expected average maturity of 3.3 years, and approximately 77.8% of the $179.9 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 operating activities and increases in deposits and short-term borrowings.

The liability portion of the balance sheet provides liquidity through interest bearing and non-interest bearing deposit accounts. Federal funds purchased, Federal Home Loan Bank 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.

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The Bank, at June 30, 2009, had long-term debt and short-term borrowings that, on average, represented 13.3% of total liabilities and equity, compared to 13.7% at year-end 2008.

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. Sensitivity is measured as the difference between the volume of assets and the volume of liabilities in the current portfolio 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. Interest rate derivatives used in interest rate sensitivity management also are included in the applicable gap intervals.

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

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

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 is measured over a five-year time period, which allows for a more comprehensive assessment of longer-term repricing and cash flow imbalances that may not be captured by short-term net interest margin simulation. The results of these calculations are representative of long-term interest rate risk, both in terms of changes in the present value of the Bank’s assets and liabilities, as well as long-term changes in core profitability.

ITEM 4. CONTROLS AND PROCEDURES

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

As of June 30, 2009, the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed in the Company’s periodic filings with the SEC is recorded, processed, summarized and reported within the time periods specified.

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 8 to Item 1, “Guarantees, Commitments and Contingencies,” for information regarding certain litigation matters relating to the Company and its subsidiaries.

The Company and its subsidiaries also are parties to litigation other than as described in Note 8 to Item 1, and the Company intends to vigorously defend itself in all such litigation. In the opinion of the Company, based on review and consultation with legal counsel, the outcome of such litigation should not have a material adverse effect on the Company’s consolidated financial statements or results of operations.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2008, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

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

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs(1)	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Programs(1)
April 1 – April 30	7,500	(2)	$	15.34	0	242,303
May 1 – May 31	0			0.00	0	242,303
June 1 – June 30	0			0.00	0	242,303
Total	7,500		$	15.34	0	242,303

(1) On December 18, 2008, the Board of Directors of the Company extended the share repurchase program previously approved by the Board of Directors on January 19, 2006. Under the repurchase program, the Company is authorized to repurchase up to 642,785 shares of common stock before December 31, 2009, the expiration date of the extended repurchase program.

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(2) 7,260 shares were purchased in open-market transactions by an independent trustee for the United Security Bancshares, Inc. Employee Stock Ownership Plan (With 401(k) Provisions), and 240 shares were purchased by a trust, which is part of the Company’s general assets, subject to the claims of its creditors, established in connection with the United Security Bancshares, Inc. Non-Employee Directors’ Deferred Compensation Plan.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company held its Annual Meeting of Shareholders on May 12, 2009. At the meeting, the shareholders of the Company were asked to vote on the election of 12 directors to serve until the next annual meeting of shareholders or until their successors are elected and qualified and to consider two shareholder proposals. The results of the shareholder voting on these matters are summarized as follows:

Proposal 1: Election of Directors

Director	For	Withheld
Dan R. Barlow	4,073,763	659,694
Linda H. Breedlove	4,037,090	696,367
Gerald P. Corgill	4,214,876	518,581
Wayne C. Curtis	4,049,477	683,980
John C. Gordon	4,084,720	648,737
William G. Harrison	4,081,420	652,037
Hardie B. Kimbrough	3,994,047	739,410
Jack W. Meigs	4,084,685	648,772
R. Terry Phillips	4,081,420	652,037
James C. Stanley	4,205,050	528,407
Howard M. Whitted	4,084,720	648,737
Bruce N. Wilson	4,037,806	695,651

Proposal 2: Shareholder Proposal Regarding the Company Seeking a Merger

For	Against/Abstain	Non-Votes
350,092	3,747,602	635,763

Proposal 3: Shareholder Proposal Regarding the Process for Nominating, Evaluating and Electing Directors

For	Against/Abstain	Non-Votes
911,243	3,186,451	635,763

ITEM 6. EXHIBITS

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

SIGNATURES

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

UNITED SECURITY BANCSHARES, INC. DATE: August 7, 2009
BY:	/s/ Robert Steen
	Robert Steen
	Its Vice President, Treasurer, Principal 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 herein by reference to Exhibit 3(ii) to the Current Report on Form 8-K filed August 29, 2007.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2	Certification of Principal 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.

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