First US Bancshares (FUSB) 10-Q 2010 Q3 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 September 30, 2010

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  ¨    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 November 8, 2010
Common Stock, $0.01 par value	6,011,012 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, 2010 (Unaudited) and December 31, 2009			4
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009 (Unaudited)			5
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2010 and 2009 (Unaudited)			6
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009 (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		25
ITEM 4.	CONTROLS AND PROCEDURES		26
PART II. OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS		27
ITEM 1A.	RISK FACTORS		27
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		27
ITEM 6.	EXHIBITS		28
Signature Page			28

2

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” or “USBI”), 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,” “believe” and similar expressions are indicative of forward-looking statements. Such forward-looking statements are necessarily estimates reflecting the Company’s best judgment based upon current information and involve a number of risks and uncertainties, and various factors could cause results to differ materially from those contemplated by such forward-looking statements. Such factors could include those identified from time to time in the Company’s Securities and Exchange Commission (“SEC”) filings and other public announcements, including the risk factors described in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. 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.

3

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in Thousands, Except Per Share Data)

	September 30, 2010			December 31, 2009
	(Unaudited)
ASSETS
Cash and Due from Banks	$	11,912		$	12,323
Interest-Bearing Deposits in Banks		9,678			126
Total Cash and Cash Equivalents		21,590			12,449
Federal Funds Sold		0			4,545
Investment Securities Available-for-Sale, at fair market value		153,259			194,754
Investment Securities Held-to-Maturity, at cost		1,210			1,250
Federal Home Loan Bank Stock, at cost		5,292			5,700
Loans, net of allowance for loan losses of $9,786 and $10,004, respectively		396,737			402,504
Premises and Equipment, net		16,677			17,253
Cash Surrender Value of Bank-Owned Life Insurance		12,388			12,037
Accrued Interest Receivable		4,771			5,095
Goodwill		4,098			4,098
Investment in Limited Partnerships		1,815			1,925
Other Real Estate Owned		27,992			21,439
Other Assets		7,953			8,705
Total Assets	$	653,782		$	691,754
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	513,626		$	513,053
Accrued Interest Payable		2,384			2,477
Short-Term Borrowings		817			620
Long-Term Debt		43,000			85,000
Other Liabilities		10,925			9,140
Total Liabilities		570,752			610,290
Commitments and Contingencies (Note 12)
Shareholders’ Equity:
Common Stock, par value $0.01 per share, 10,000,000 shares authorized; 7,317,560 shares issued; 6,011,264 and 6,017,582 shares outstanding, respectively		73			73
Surplus		9,233			9,233
Accumulated Other Comprehensive Income, net of tax		4,785			4,316
Retained Earnings		91,540			90,242
Less Treasury Stock: 1,306,296 and 1,299,978 shares at cost, respectively		(21,203	)		(21,127	)
Noncontrolling Interest		(1,398	)		(1,273	)
Total Shareholders’ Equity		83,030			81,464
Total Liabilities and Shareholders’ Equity	$	653,782		$	691,754

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

4

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except Per Share Data)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2010			2009		2010			2009
	(Unaudited)					(Unaudited)
INTEREST INCOME:
Interest and Fees on Loans	$	9,754		$	9,661	$	28,600		$	29,150
Interest on Investment Securities		1,663			2,143		5,256			6,568
Total Interest Income		11,417			11,804		33,856			35,718
INTEREST EXPENSE:
Interest on Deposits		1,913			2,338		5,871			7,515
Interest on Borrowings		539			952		2,035			2,793
Total Interest Expense		2,452			3,290		7,906			10,308
NET INTEREST INCOME		8,965			8,514		25,950			25,410
PROVISION FOR LOAN LOSSES		1,386			1,489		6,811			4,857
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		7,579			7,025		19,139			20,553
NON-INTEREST INCOME:
Service and Other Charges on Deposit Accounts		814			758		2,263			2,150
Credit Life Insurance Income		250			231		592			646
Other Income		337			218		5,073			3,615
Total Non-Interest Income		1,401			1,207		7,928			6,411
NON-INTEREST EXPENSE:
Salaries and Employee Benefits		3,476			3,538		10,562			10,175
Impairment Loss on Other Real Estate Owned		1,643			0		1,643			0
Occupancy Expense		493			498		1,421			1,412
Furniture and Equipment Expense		311			316		937			926
Other Expense		2,806			2,598		8,120			7,117
Total Non-Interest Expense		8,729			6,950		22,683			19,630
INCOME BEFORE INCOME TAXES		251			1,282		4,384			7,334
PROVISION FOR (BENEFIT FROM) INCOME TAXES		(100	)		255		1,221			2,166
NET INCOME	$	351		$	1,027	$	3,163		$	5,168
Less: Net Loss Attributable to Noncontrolling Interest		0			0		(125	)		0
NET INCOME ATTRIBUTABLE TO USBI	$	351		$	1,027	$	3,288		$	5,168
BASIC AND DILUTED NET INCOME ATTRIBUTABLE TO USBI PER SHARE	$	0.06		$	0.17	$	0.55		$	0.86
DIVIDENDS PER SHARE	$	0.11		$	0.11	$	0.33		$	0.49

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

5

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in Thousands)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010			2009
	(Unaudited)				(Unaudited)
Net income attributable to USBI	$	351	$	1,027	$	3,288		$	5,168
Other comprehensive income:
Change in unrealized holding gains on available-for-sale securities arising during period, net of tax of $86, $928, $375 and $1,114, respectively		144		1,547		627			1,857
Reclassification adjustment for net (gains) losses realized on available-for-sale securities realized in net income, net of tax of $0, $16, $95 and $14, respectively		0		27		(158	)		23
Other comprehensive income		144		1,574		469			1,880
Comprehensive income attributable to USBI	$	495	$	2,601	$	3,757		$	7,048
Net loss attributable to noncontrolling interest		0		0		(125	)		0
Total comprehensive income	$	495	$	2,601	$	3,632		$	7,048

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

6

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

	Nine Months Ended September 30,
	2010			2009
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	3,163		$	5,168
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		569			641
Amortization of premiums and discounts, net		579			9
Provision for loan losses		6,811			4,857
Gain on sale of securities, net		(253	)		(40	)
Impairment loss on other real estate owned		1,643			0
Loss on sale of fixed assets, net		124			15
Changes in operating assets and liabilities		2,401			(5,144	)
Net loss attributable to noncontrolling interest		125			0
Total adjustments		11,999			338
Net cash provided by operating activities		15,162			5,506
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and prepayments of investment securities		49,561			56,360
Proceeds from sales of investment securities		12,683			4,616
Proceeds from redemption of Federal Home Loan Bank stock		408			0
Proceeds from sale of other real estate		3,439			2,265
Purchase of premises and equipment, net		(194	)		(525	)
Purchase of investment securities available-for-sale		(20,284	)		(66,576	)
Purchase of investment securities held-to-maturity		0			(1,250	)
Purchase of Federal Home Loan Bank stock		0			(465	)
Net decrease (increase) in federal funds sold		4,545			(18,770	)
Net change in loan portfolio		(12,883	)		(3,120	)
Net cash provided by (used in) investing activities		37,275			(27,465	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in customer deposits		572			14,897
Dividends paid		(1,990	)		(2,956	)
(Decrease) increase in borrowings		(41,803	)		8,424
Purchase of treasury stock		(75	)		(9	)
Net cash (used in) provided by financing activities		(43,296	)		20,356
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		9,141			(1,603	)
CASH AND CASH EQUIVALENTS, beginning of period		12,449			13,372
CASH AND CASH EQUIVALENTS, end of period	$	21,590		$	11,769
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest	$	7,999		$	10,674
Income Taxes		660			2,016
NON-CASH TRANSACTIONS:
Other real estate acquired in settlement of loans	$	11,838		$	6,012

The accompanying notes are an integral part of these Condensed 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” or “USBI”). The Company is the parent holding company of First United Security Bank (the “Bank” or “FUSB”). The Bank operates a finance company, Acceptance Loan Company, Inc. (“ALC”). All significant intercompany transactions and accounts have been eliminated.

The interim condensed consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented. Such adjustments are of a normal, recurring nature. The results of operations for any interim period are not necessarily indicative of results expected for the fiscal year ending December 31, 2010. 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 (“SEC”), management believes that the disclosures herein are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The accounting policies followed by the Company are set forth in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. In preparing the condensed consolidated financial statements, management evaluated subsequent events through the date on which the financial statements were issued.

2. RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 860 Transfers and Servicingamended previous guidance on accounting for transfers of financial assets. The amended guidance eliminates the concept of qualifying special-purpose entities and requires that these entities be evaluated for consolidation under applicable accounting guidance, and it also removes the exception that permitted sale accounting for certain mortgage securitizations when control over the transferred assets had not been surrendered. Based on this new standard, many types of transferred financial assets that would previously have been derecognized will now remain on the transferor’s financial statements. The guidance also requires enhanced disclosures about transfers of financial assets and the transferor’s continuing involvement with those assets and related risk exposure. The new standard became effective for the Company on January 1, 2010 and did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

ASC Topic 810 Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entitieswas issued in June 2009 and amended then-existing guidance on accounting for variable interest entities (“VIEs”). This guidance replaces the quantitative-based risks and rewards calculation for determining which enterprise might have a controlling financial interest in a VIE. The new, more qualitative evaluation focuses on who has the power to direct the significant economic activities of the VIE and also has the obligation to absorb losses or rights to receive benefits from the VIE. It also requires an ongoing reassessment of whether an enterprise is the primary beneficiary of a VIE and calls for certain expanded disclosures about an enterprise’s involvement with variable interest entities. The new guidance became effective for the Company on January 1, 2010 and did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

ASC Topic 820-10 Fair Value Measurements and Disclosures –In January��2010, the FASB issued an update (ASU No. 2010-06,Improving Disclosures about Fair Value Measurements) impactingASC 820-10, Fair Value Measurements and Disclosures. The amendments in this update require new disclosures about significant transfers in and out of Level 1 and Level 2 fair value measurements. The amendments also require a reporting entity to provide information about activity for purchases, sales, issuances and settlements in Level 3 fair value measurements and to clarify disclosures about the level of disaggregation and disclosures about inputs and valuation techniques. This update became effective for the Company on January 1, 2010 and did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

8

In April 2010, the FASB issuedASU No. 2010-18,Receivables (Topic 310): Effect of a Loan Modification When the Loan Is Part of a Pool That is Accounted for as a Single Asset, which clarifies the accounting for acquired loans that have evidence of a deterioration in credit quality since origination (referred to as “Subtopic 310-30 Loans”). Under this ASU, an entity may not apply troubled debt restructuring (“TDR”) accounting guidance to individual Subtopic 310-30 Loans that are part of a pool, even if the modification of those loans would otherwise be considered a troubled debt restructuring. Once a pool is established, individual loans should not be removed from the pool unless the entity sells, forecloses or writes off the loan. Entities would continue to consider whether the pool of loans is impaired if expected cash flows for the pool change. Subtopic 310-30 Loans that are accounted for individually would continue to be subject to TDR accounting guidance. A one-time election to terminate accounting for loans as a pool, which may be made on a pool-by-pool basis, is provided upon adoption of the ASU. This ASU became effective for the Company for interim and annual reporting periods beginning September 30, 2010 and did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

On July 21, 2010, the FASB issuedASU No. 2010-20,Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which requires significant new disclosures about the allowance for credit losses and the credit quality of financing receivables. The requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and lease receivables. Under this statement, allowance for credit losses and fair value are to be disclosed by portfolio segment, while credit quality information, impaired financing receivables and nonaccrual status are to be presented by class of financing receivable. Disclosure of the nature and extent, financial impact and segment information of troubled debt restructurings will also be required. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance. This ASU is effective for interim and annual reporting periods after December 15, 2010. We are still assessing the impact of adoption in the Company’s consolidated financial statements but intend to include these disclosures in the notes to the consolidated financial statements beginning in the fourth quarter of 2010.

3. NET INCOME ATTRIBUTABLE TO USBI PER SHARE

Basic net income attributable to USBI per share is computed by dividing net income attributable to USBI by the weighted average shares during the three- and nine-month periods ended September 30, 2010 and 2009. Diluted net income attributable to USBI per share for each of the three- and nine-month periods ended September 30, 2010 and 2009 is computed based on the weighted average shares outstanding during the period plus the dilutive effect of all potentially dilutive instruments outstanding during the period. There were no outstanding potentially dilutive instruments during the periods ended September 30, 2010 or 2009, and, therefore, basic and diluted weighted average shares outstanding were the same.

The following table represents the basic and diluted net income attributable to USBI per share calculations for the three- and nine-month periods ended September 30, 2010 and 2009 (dollars in thousands, except per share data):

	Net Income Attributable to USBI		Weighted Average Shares Outstanding		Basic and Diluted Net Income Attributable to USBI Per Share
For the Three Months Ended:
September 30, 2010	$	351		6,011,354	$	0.06
September 30, 2009	$	1,027		6,017,650	$	0.17
For the Nine Months Ended:
September 30, 2010	$	3,288		6,014,914	$	0.55
September 30, 2009	$	5,168		6,017,792	$	0.86

9

4. COMPREHENSIVE INCOME

Comprehensive income consists of net income attributable to USBI, 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.

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company follows the provisions ofASC Topic 820 Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC Topic 820 applies to reported balances that are required or permitted to be measured at fair value under existing GAAP; accordingly, ASC Topic 820 does not require any new fair value measurements of reported balances.

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 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.

Assets Measured at Fair Value on a Recurring Basis

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

Available-for-Sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. Level 2 securities include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. Level 2 fair values are obtained from quoted prices of securities with similar characteristics. In certain cases, where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Currently, all of the Company’s available-for-sale securities are considered to be Level 2 securities, except for equity securities that are considered to be Level 1 securities in the amount of $192,726 and $183,409 at September 30, 2010 and December 31, 2009, respectively.

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.

10

Impaired Loans

Loan impairment is reported when full payment under the loan terms is not expected. Impaired loans are carried at the present value of estimated future cash flows using the loan’s existing rate or the fair value of collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to increase, such increase is reported as a component of the provision for loan losses. Loan losses are charged against the allowance when management believes that the uncollectibility of a loan is confirmed. Loans, net of specific allowances, subject to this evaluation amounted to $5,831,710 and $12,882,218 as of September 30, 2010 and December 31, 2009, respectively. This valuation would be considered Level 3, consisting of appraisals of underlying collateral and discounted cash flow analysis.

Non-Financial Assets and Non-Financial Liabilities

Application of ASC Topic 820 to non-financial assets and non-financial liabilities became effective January 1, 2009. The Company has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Certain non-financial assets and non-financial liabilities measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment.

During 2010, certain foreclosed assets, upon initial recognition, have been remeasured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed asset. The fair value of a foreclosed asset, upon initial recognition, is estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. Foreclosed assets measured at fair value upon initial recognition have totaled $6,156,565 (utilizing Level 2 valuation inputs) during 2010. In connection with the measurement and initial recognition of the foregoing foreclosed assets, the Company has recognized charge-offs of the allowance for possible loan losses totaling approximately $3,537,661. Foreclosed assets totaling $1,327,500 were remeasured at fair value in the third quarter of 2010, resulting in impairment loss of $1.6 million on other real estate owned.

The following methods and assumptions are used by the Company in estimating the fair value of its financial instruments:

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

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

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

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

Loans, net:For variable-rate loans, fair values are based on carrying values. Fixed-rate commercial loans, other installment loans and certain real estate mortgage loans 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 values 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, floating rate borrowings from the FHLB and the U.S. Treasury Tax and Loan account. Due to the short-term nature of these borrowings, fair values approximate carrying values.

11

Long-term debt: The fair value of this debt is estimated using discounted cash flows based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements as of September 30, 2010 and December 31, 2009.

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.

Assets measured at fair value at September 30, 2010 and December 31, 2009 are summarized below.

	Fair Value Measurements at September 30, 2010 Using
	Totals at September  30, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Mortgage-backed securities	$	131,888,500	$	—	$	131,888,500	$	—
Obligations of states, counties and political subdivisions		21,098,076		—		21,098,076		—
Equity securities		192,726		192,726		—		—
U.S. treasury securities		80,107		—		80,107		—
Impaired loans		5,831,710		—		—		5,831,710
Foreclosed assets		27,991,695		—		27,991,695		—
	Fair Value Measurements at December 31, 2009 Using
	Totals at December  31, 2009		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs ( Level 2)		Significant Unobservable Inputs (Level 3)
Mortgage-backed securities	$	165,913,607	$	—	$	165,913,607	$	—
Obligations of states, counties and political subdivisions		21,635,113		—		21,635,113		—
Equity securities		183,409		183,409		—		—
U.S. treasury securities		80,325		—		80,325		—
Impaired loans		12,882,218		—		—		12,882,218
Foreclosed assets		21,438,827		—		21,438,827		—

12

The estimated fair value and related carrying or notional amounts of the Company’s financial instruments at September 30, 2010 and December 31, 2009 were as follows:

	September 30, 2010				December 31, 2009
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(Dollars in Thousands)
Assets:
Cash and cash equivalents	$	21,590	$	21,590	$	12,449	$	12,449
Investment securities available-for-sale		153,259		153,259		194,754		194,754
Investment securities held-to-maturity		1,210		1,210		1,250		1,248
Federal funds sold		0		0		4,545		4,545
FHLB stock		5,292		5,292		5,700		5,700
Accrued interest receivable		4,771		4,771		5,095		5,095
Loans, net of unearned		396,737		395,295		402,504		408,152
Liabilities:
Deposits		513,626		514,999		513,053		515,559
Short-term borrowings		817		817		620		620
Long-term debt		43,000		44,721		85,000		87,475
Accrued interest payable		2,384		2,384		2,477		2,477

6. INVESTMENT SECURITIES

Details of investment securities available-for-sale and held-to-maturity at September 30, 2010 and December 31, 2009 are as follows:

	Available-for-Sale
	September 30, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in Thousands)
Mortgage-backed securities	$	125,624	$	6,503	$	(238	)	$	131,889
Obligations of states, counties and political subdivisions		19,768		1,330		0			21,098
Equity securities		132		93		(33	)		192
U.S. treasury securities		80		0		0			80
Total	$	145,604	$	7,926	$	(271	)	$	153,259
	Held-to-Maturity
	September 30, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in Thousands)
Obligations of states, counties and political subdivisions	$	1,210	$	0	$	0		$	1,210
	Available-for-Sale
	December 31, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in Thousands)
Mortgage-backed securities	$	159,739	$	6,343	$	(167	)	$	165,915
Obligations of states, counties and political subdivisions		20,919		722		(6	)		21,635
Obligations of U.S. government sponsored agencies		6,978		0		(37	)		6,941
Equity securities		132		51		0			183
U.S. treasury securities		80		0		0			80
Total	$	187,848	$	7,116	$	(210	)	$	194,754

13

	Held-to-Maturity
	December 31, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in Thousands)
Obligations of states, counties and political subdivisions	$	1,250	$	0	$	(2	)	$	1,248

The scheduled maturities of investment securities available-for-sale and held-to-maturity at September 30, 2010 are presented in the following table:

	Available-for Sale				Held-to-Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(Dollars in Thousands)
Maturing within one year	$	835	$	841	$	40	$	40
Maturing after one to five years		9,510		9,950		185		185
Maturing after five to fifteen years		93,578		99,100		635		635
Maturing after fifteen years		41,549		43,176		350		350
Equity securities and Preferred Stock		132		192		0		0
Total	$	145,604	$	153,259	$	1,210	$	1,210

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

The following table reflects the Company’s investments’ gross unrealized losses and market value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2010 and December 31, 2009. 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, 2010 and December 31, 2009, based on the aforementioned considerations, management did not record an other-than-temporary impairment on any security that was in an unrealized loss position.

	Available-for-Sale
	September 30, 2010
	Less than 12 Months					12 Months or More
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in Thousands)
Mortgage-backed securities	$	6,753	$	(208	)	$	766	$	(30	)
Equity Securities		42		(33	)		0		0
Total	$	6,795	$	(241	)	$	766	$	(30	)
	Available-for-Sale
	December 31, 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	$	1,616	$	(3	)	$	282	$	(2	)
U.S. treasury securities and obligations of U.S. government sponsored agencies		6,941		(37	)		0		0
Mortgage-backed securities		10,965		(109	)		861		(59	)
Total	$	19,522	$	(149	)	$	1,143	$	(61	)

14

	Held-to-Maturity
	December 31, 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	$	303	$	(2	)	$	0	$	0

Investment securities available-for-sale with a carrying amount of $89.2 million and $116.9 million at September 30, 2010 and December 31, 2009, respectively, were pledged to secure public deposits and for other purposes.

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

	Gross Gains		Gross Losses		Net Gains (Losses)
	(Dollars in Thousands)
Three Months Ended:
September 30, 2010	$	0	$	0	$	0
September 30, 2009	$	32	$	0	$	32
Nine Months Ended:
September 30, 2010	$	253	$	0	$	253
September 30, 2009	$	40	$	0	$	40

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 meet the definition of a variable interest entity underASC Topic 810 Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. The Company consolidates one of the funds in which it is the sole limited partner and one of the affordable housing projects in which the fund invests. The resulting financial impact to the Company of the consolidation of these two entities was a net increase to total assets of approximately $3.1 million as of December 31, 2009 and September 30, 2010. This included $7.4 million in premises and equipment, less a loan totaling $5.0 million, at September 30, 2010 and $7.6 million in premises and equipment, less a loan totaling $5.2 million, at December 31, 2009. This loan, payable by the partnership to the Company, was eliminated as a result of this consolidation. Unconsolidated investments in these partnerships are accounted for under the cost method as allowed underASC Topic 325 Accounting for Tax Benefits Resulting from Investments in Affordable Housing Projects. The Company amortizes the excess of carrying value of the investment over its estimated residual value during the period in which tax credits are allocated to the investors. The Company’s maximum exposure to future loss related to these limited partnerships is limited to the $1.8 million recorded investment.

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

The Bank had no remaining cash commitments to these partnerships at September 30, 2010.

8. SHORT-TERM BORROWINGS

Short-term borrowings consist of federal funds purchased, thirty-day FHLB advances, treasury tax and loan deposits and securities sold under repurchase agreements. Federal funds purchased generally mature within one to four days. None were outstanding at September 30, 2010 or December 31, 2009. Treasury tax and loan deposits totaled $467,027 and $506,170 at September 30, 2010 and December 31, 2009, respectively. These deposits are withdrawable on demand.

15

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, 2010 and December 31, 2009 were $349,717 and $113,527, respectively.

At September 30, 2010, the Bank had $7.8 million in available federal fund lines from correspondent banks.

9. 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, 2010 and December 31, 2009, investment securities and mortgage loans amounting to $48,343,724 and $89,327,110, respectively, were pledged to secure these borrowings.

At September 30, 2010, the Bank had $152.8 million in available credit from the FHLB.

10. INCOME TAXES

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

	September  30, 2010			September  30, 2009
	(Dollars in Thousands)
Income tax expense at federal statutory rate	$	1,491		$	2,494
Increase (decrease) resulting from:
Tax-exempt interest		(302	)		(275	)
State income tax expense, net of federal income tax benefit		191			174
Low income housing tax credits		(54	)		(124	)
Other		(105	)		(103	)
Total	$	1,221		$	2,166

11. SEGMENT REPORTING

UnderASC Topic 280 Segment Reporting, certain information is disclosed for the two reportable operating segments of the Company. The reportable segments were determined using the internal management reporting system. They are composed of the Company’s and the Bank’s significant subsidiaries. The accounting policies for each segment are the same as those described in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. 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:

16

	FUSB			ALC		All Other			Eliminations			Consolidated
	(Dollars in Thousands)
For the three months ended September 30, 2010:
Net interest income	$	5,742		$	3,206	$	17		$	0		$	8,965
Provision for loan losses		908			478		0			0			1,386
Total non-interest income		1,191			119		1,681			(1,590	)		1,401
Total non-interest expense		6,251			2,336		302			(160	)		8,729
Income (loss) before income taxes		(226	)		511		1,396			(1,430	)		251
Provision for (benefit from) income taxes		(285	)		180		5			0			(100	)
Net income	$	59		$	331	$	1,391		$	(1,430	)	$	351
Less: Net loss attributable to noncontrolling interest		0			0		0			0			0
Net income attributable to USBI	$	59		$	331	$	1,391		$	(1,430	)	$	351
Other significant items:
Total assets	$	646,074		$	91,777	$	99,116		$	(183,185	)	$	653,782
Total investment securities		154,207			0		262			0			154,469
Total loans, net		399,311			81,084		0			(83,658	)		396,737
Goodwill		3,111			0		987			0			4,098
Investment in subsidiaries		14,954			63		84,888			(99,829	)		76
Fixed asset addition		110			24		0			0			134
Depreciation and amortization expense		147			38		0			0			185
Total interest income from external customers		6,810			4,604		3			0			11,417
Total interest income from affiliates		1,397			0		14			(1,411	)		0
For the nine months ended September 30, 2010:
Net interest income	$	16,634		$	9,270	$	46		$	0		$	25,950
Provision for loan losses		5,369			1,442		0			0			6,811
Total non-interest income		3,735			4,082		5,195			(5,084	)		7,928
Total non-interest expense		15,638			6,621		905			(481	)		22,683
Income (loss) before income taxes		(638	)		5,289		4,336			(4,603	)		4,384
Provision for (benefit from) income taxes		(803	)		2,011		13			0			1,221
Net income	$	165		$	3,278	$	4,323		$	(4,603	)	$	3,163
Less: Net loss attributable to noncontrolling interest		0			0		(125	)		0			(125	)
Net income attributable to USBI	$	165		$	3,278	$	4,448		$	(4,603	)	$	3,288
Other significant items:
Fixed asset addition	$	169		$	25	$	0		$	0		$	194
Depreciation and amortization expense		453			116		0			0			569
Total interest income from external customers		20,306			13,543		7			0			33,856
Total interest income from affiliates		4,273			0		39			(4,312	)		0

17

	FUSB		ALC		All Other		Eliminations			Consolidated
	(Dollars in Thousands)
For the three months ended September 30, 2009:
Net interest income	$	5,463	$	3,035	$	16	$	0		$	8,514
Provision for loan losses		639		850		0		0			1,489
Total non-interest income		1,039		126		1,323		(1,281	)		1,207
Total non-interest expense		4,757		2,144		237		(188	)		6,950
Income before income taxes		1,106		167		1,102		(1,093	)		1,282
Provision for income taxes		201		49		5		0			255
Net Income	$	905	$	118	$	1,097	$	(1,093	)	$	1,027
Less: Net loss attributable to noncontrolling interest		0		0		0		0			0
Net income attributable to USBI	$	905	$	118	$	1,097	$	(1,093	)	$	1,027
Other significant items:
Total assets	$	695,169	$	98,526	$	97,565	$	(196,034	)	$	695,226
Total investment securities		193,842		0		260		0			194,102
Total loans, net		409,887		88,038		0		(100,179	)		397,746
Goodwill		3,111		0		987		0			4,098
Investment in subsidiaries		11,418		63		83,149		(94,553	)		77
Fixed asset addition		96		86		0		0			182
Depreciation and amortization expense		156		61		0		0			217
Total interest income from external customers		7,074		4,728		2		0			11,804
Total interest income from affiliates		1,693		0		14		(1,707	)		0
For the nine months ended September 30, 2009:
Net interest income	$	16,200	$	9,163	$	47	$	0		$	25,410
Provision for loan losses		1,696		3,161		0		0			4,857
Total non-interest income		3,362		2,890		6,070		(5,911	)		6,411
Total non-interest expense		13,408		6,015		694		(487	)		19,630
Income before income taxes		4,458		2,877		5,423		(5,424	)		7,334
Provision for income taxes		1,085		1,068		13		0			2,166
Net Income	$	3,373	$	1,809	$	5,410	$	(5,424	)	$	5,168
Less: Net loss attributable to noncontrolling interest		0		0		0		0			0
Net income attributable to USBI	$	3,373	$	1,809	$	5,410	$	(5,424	)	$	5,168
Other significant items:
Fixed asset addition	$	411	$	114	$	0	$	0		$	525
Depreciation and amortization expense		495		146		0		0			641
Total interest income from external customers		21,368		14,339		11		0			35,718
Total interest income from affiliates		5,176		0		36		(5,212	)		0

18

12. GUARANTEES, COMMITMENTS AND CONTINGENCIES

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

	September 30, 2010		December 31, 2009
	(Dollars in Thousands)
Standby Letters of Credit	$	1,227	$	1,527
Commitments to Extend Credit	$	46,265	$	61,096

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, 2010 was $1.2 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 September 30, 2010, 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, 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 that Graves owed on certain loans and failing to credit Graves properly for 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 the lawsuit in its entirety. Mr. Graves was recently discharged from bankruptcy, and the appeal was returned to the Alabama Supreme Court’s active docket. The Alabama Supreme Court subsequently upheld the trial court’s initial denial of arbitration, and the case is being returned to the Circuit Court of Shelby County. 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, results of operations or cash flows.

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 their 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 includes allegations that the defendants committed fraud and various other breaches relating to loans made by ALC, resulting in damage to both the Shareholder Plaintiffs individually and to the Company. 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. Specifically, the court

19

dismissed the Shareholder Plaintiffs’ derivative and fraud claims and ordered that the Shareholder Plaintiffs re-plead their remaining claims with sufficient factual particularity. The court also granted a motion filed by the Company and ALC seeking to have the lawsuit transferred from the Circuit Court of Choctaw County, Alabama to the Circuit Court of Clarke County, Alabama. On January 19, 2009, the lawsuit was transferred to the Circuit County of Clarke County, where it is currently pending. Upon transfer, all circuit court judges of Clarke County recused themselves based on an existing practice that they not hear cases involving a party who is also an attorney practicing within Alabama’s First Judicial Circuit (one of the Shareholder Plaintiffs is an attorney practicing within the First Judicial Circuit). On February 10, 2010, the Chief Justice of the Alabama Supreme Court appointed Judge Braxton Kittrell to preside over the case. On October 18, 2010, all parties to the action, including the Shareholder Plaintiffs, agreed to a joint dismissal of the case with prejudice and subsequently filed papers with the court acknowledging the stipulation. The joint stipulation did not arise from the Company or ALC paying damages, costs or fees to the Shareholder Plaintiffs. The parties are currently waiting for the court to take action on the joint stipulation.

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 position, results of operations or cash flows.

13. SUBSEQUENT EVENTS

In accordance with the provisions of ASC 855, we have evaluated subsequent events through the filing date of the interim condensed consolidated financial statements and have included all accounting and disclosure requirements related to subsequent events in our financial statements.

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, changes in financial position, results of operations and liquidity of the Company. The Company is the parent holding company of First United Security Bank (the “Bank” or “FUSB”). The Bank operates a finance company, Acceptance Loan Company, Inc. (“ALC”). The Company has no operations of any consequence other than the ownership of its subsidiaries.

The accounting principles and reporting policies of the Company, and the methods of applying these principles, conform with accounting principles generally accepted in the United States of America (“GAAP”) and 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 estimates, which significantly affect the determination of financial position, results of operations and cash flows, is set forth in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

The emphasis of this discussion is a comparison of assets, liabilities and shareholders’ equity as of September 30, 2010 to year-end 2009, while comparing income and expense for the three- and nine-month periods ended September 30, 2010 and 2009.

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, 2009.

COMPARING THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2010 TO THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009

20

Net income attributable to USBI during the third quarter of 2010 was $351,000, compared to net income attributable to USBI of $1.0 million for the same period of 2009, resulting in a decrease of basic net income attributable to USBI per share from $0.17 to $0.06. Net income attributable to USBI decreased from $5.2 million for the nine months ended September 30, 2009 to $3.3 million for the nine months ended September 30, 2010, resulting in a decrease in basic net income attributable to USBI per share to $0.55 from $0.86. Annualized return on assets was 0.65% for the first nine months of 2010, compared to 1.01% for the same period during 2009. Average return on shareholders’ equity decreased to 5.28% for the first nine months of 2010 from 8.64% during the first nine months of 2009.

For the three-month period ended September 30, 2010, the Bank had net income of $59,000, compared to net income of $905,000 for the same quarter in 2009. For the nine-month period ended September 30, 2010, the Bank had net income of $165,000, compared to net income of $3.4 million for the same period in 2009. Decreases in net income for the Bank resulted from higher provisons for loan losses as a result of higher charge-offs in both periods. These charge-offs resulted mainly from the foreclosure of several commercial real estate loans as real estate values continue to decline and market conditions continue to be depressed. The impairment loss on other real estate owned of $1.6 million realized in the third quarter of 2010 also contributed to the decrease in net income.

Net income attributable to ALC for the three-month period ending September 30, 2010 was $331,000, compared to $118,000 for the same quarter of 2009. For the nine-month period ended September 30, 2010, net income attributable to ALC was $3.3 million, compared to $1.8 million in 2009. In the second quarter of 2009, net income at ALC benefited from net proceeds in the amount of $2.7 million related to the settlement of a lawsuit filed against three accounting firms. In the first quarter of 2010, ALC received a net settlement from the Cincinnati Insurance Company of $3.8 million.

Interest income for the 2010 third quarter decreased $387,000, or 3.3%, compared to the third quarter of 2009. The decrease in interest income was primarily due to a decrease in interest earned on investment securities. This decrease was due to an overall decrease in the average volume and yield on investment securities. For the nine months ending September 30, 2010, interest income decreased $1.9 million, or 5.2%, compared with 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 on loans and a decrease in the average yield and volume of investment securities. Interest income at the Bank for the 2010 third quarter decreased $262,000 compared to the third quarter of 2009. For the nine months ended September 30, 2010, interest income at the Bank decreased $1.1 million compared to the same period in 2009. These decreases were due to an overall decrease in volume and in the average yield on loans and investment securities. Loan demand continues to be weak as the duration of the current economic downturn continues in our markets. Loan originations continue to decline in all of our markets. Cash flows from loans and investment securities are reinvested at lower rates, resulting in lower interest income. Interest income at ALC decreased $125,000 for the third quarter of 2010 compared to the same quarter in 2009. Interest income at ALC decreased $797,000 for the nine-month period ended September 30, 2010 compared to the same period in 2009. These decreases resulted from a decline in average loans outstanding for both periods. Loans outstanding at ALC have declined due to an overall decline in loan demand and implementation of stricter underwriting standards due to the harsh economic conditions in the various markets served by ALC.

Interest expense for the Company for the 2010 third quarter decreased $838,000, or 25.5%, compared to the third quarter of 2009. Interest expense decreased $2.4 million, or 23.3%, to $7.9 million for the first nine months of 2010, compared to $10.3 million for the first nine months of 2009. These decreases were the result of lower interest rates paid on certificates of deposit and borrowed funds for these periods in 2010. As longer term certificates of deposit mature, they reprice at lower rates, as rates remain at record lows. Average long-term debt has been reduced by $32.0 million since September 30, 2009.

Net interest income increased $451,000, or 5.3%, for the third quarter of 2010 and increased $540,000, or 2.1%, for the first nine months of 2010 compared to the same periods in 2009, respectively. The net interest margin improved from 5.53% for the nine months ended September 30, 2009 to 5.74% for the nine months ended September 30, 2010 and from 5.46% for the third quarter of 2009 to 6.01% for the third quarter of 2010. Loan and investment yields declined for the three- and nine-month periods ended September 30, 2010 compared to the same periods in 2009. The cost of funds declined due to a decline in interest rates paid on interest bearing deposits and borrowed funds. Asset yields and funds costs have stabilized, and the net interest margin is expected to remain near current levels until the Federal Reserve adjusts rates.

The provision for loan losses was $1.4 million, or 1.4% annualized of average loans, in the third quarter of 2010, compared to $1.5 million, or 1.5% annualized of average loans, in the third quarter of 2009. The provision for loan losses increased to $6.8 million for the nine months ended September 30, 2010, compared to $4.9 million for the same period in 2009. The annualized provision as a percent of average loans was 2.2% and 1.6% for the first nine months of 2010 and 2009, respectively. Charge-offs exceeded recoveries by $7.0 million for the nine months ended September 30, 2010, an increase of approximately $1.6 million over the same period in the prior year. See

21

“CREDIT QUALITY.” The provision for loan losses at the Bank increased to $5.4 million for the nine months ended September 30, 2010, compared to $1.7 million for the same period in 2009. For the quarter ended September 30, 2010, the provision for loan losses at the Bank was $908,000, an increase from $639,000 for the same quarter of 2009. Continued weakness in residential and commercial real estate and high unemployment levels in our market areas had a significant impact on our net charge-off levels and resulted in a higher provision for loan losses at the Bank. The provision for loan losses at ALC decreased to $1.4 million for the nine months ended September 30, 2010, compared to $3.2 million for the same period in 2009. For the quarter ended September 30, 2010, the provision for loan losses at ALC was $478,000, compared to $850,000 for the same quarter of 2009. Non-performing loans at ALC have declined from previous levels, and charge-offs have declined, thus requiring a lower provision for loan losses.

Total non-interest income for the Company increased $194,000, or 16.1%, for the third quarter of 2010 and increased $1.5 million, or 23.7%, for the first nine months of 2010 compared to the same periods in 2009, respectively. Service charges and fees on deposit accounts increased $56,000 for the 2010 third quarter and $113,000 for the nine months ended September 30, 2010, compared to the same periods in 2009, respectively. Credit life insurance income increased $19,000 for the 2010 third quarter and declined $54,000 for the nine months ended September 30, 2010, compared to the same periods in 2009, respectively. All other income was negatively affected by an increase in loss on the sale of other real estate owned of $129,000 for the 2010 third quarter and $268,000 for the nine months ended September 30, 2010, compared to the same periods in 2009, respectively. All other fees increased $1.5 million for the nine months ended September 30, 2010 as a result of the $4.2 million insurance settlement received in the first quarter of 2010.

Total non-interest expense increased $1.8 million, or 25.6%, for the 2010 third quarter and increased $3.1 million, or 15.6%, for the nine months ended September 30, 2010 compared to the same periods in 2009. Impairment write-down on other real estate owned amounted to $1.6 million for the 2010 third quarter. This impairment resulted from the continued decline in real estate values as the downturn continues in our markets. Salary and employee benefits decreased $62,000, when comparing the third quarter of 2010 to the same period in 2009, and increased $387,000 for the nine months ended September 30, 2010 compared to the same period in 2009. For the 2010 third quarter, legal and professional fees increased $59,000 and telephone and data circuit expense decreased $17,000, each compared to the same quarter in 2009. For the nine months ended September 30, 2010, legal and professional fees decreased $81,000 and telephone and data circuit expense decreased $7,000, each compared to the same period in 2009. Insurance assessments imposed by the Federal Deposit Insurance Corporation (the “FDIC”) decreased $98,000 for the 2010 third quarter and increased $104,000 for the nine months ended September 30, 2010 compared to the same periods in 2009.

Income tax benefit for the third quarter of 2010 was $100,000, compared to income tax expense of $255,000 in the third quarter of 2009. Income tax expense for the first nine months of 2010 decreased $945,000 compared to the first nine months of 2009. The decrease during the first nine months of 2010 compared to 2009 resulted from lower levels of taxable income. Management estimates the effective tax rate for the Company to be approximately 30.0% of pre-tax income for the period ending December 31, 2010.

COMPARING THE SEPTEMBER 30, 2010 STATEMENTS OF FINANCIAL CONDITION TO DECEMBER 31, 2009

In comparing financial condition at September 30, 2010 to December 31, 2009, total assets decreased $38.0 million to $653.8 million, while liabilities decreased $40.0 million to $570.8 million. Shareholders’ equity increased $1.6 million as a result of an increase in other comprehensive income of $469,000 and earnings in excess of dividends of $1.2 million.

Investment securities decreased $41.5 million, or 21.2%, during the first nine months of 2010. Investments provide the Company with a stable form of liquidity while maximizing earnings yield. Loans, net of unearned income, decreased $6.0 million, from $412.5 million at December 31, 2009, to $406.5 million at September 30, 2010. While net loans at September 30, 2010 decreased from December 31, 2009, average loans increased $5.7 million from December 31, 2009 and $6.8 million from September 30, 2009. Loan growth at the Bank has been flat due to the slowdown in construction and real estate development in the trade areas served by the Company. Deposits increased $573,000, or 0.1%, during the first nine months of 2010. Loans, net of unearned income at ALC decreased $5.8 million, from $90.8 million at December 31, 2009 to $85.0 million at September 30, 2010. Loans at the Bank, after consolidation eliminations, decreased $194,000 from $321.7 million at December 31, 2009 to $321.5 million at September 30, 2010.

22

CREDIT QUALITY

At September 30, 2010, the allowance for loan losses was $9.8 million, or 2.4% of loans net of unearned income, compared to $8.0 million, or 2.0% of loans net of unearned income, at September 30, 2009, and $10.0 million, or 2.4% of loans net of unearned income, at December 31, 2009. The coverage ratio of the allowance for loan losses to non-performing assets decreased to 22.3% at September 30, 2010, compared to 23.6% at December 31, 2009. At September 30, 2010, loans on non-accrual decreased $4.9 million, accruing loans past due 90 days or more declined $1.7 million and real estate acquired in settlement of loans increased $8.2 million, each as compared to December 31, 2009. Non-performing assets increased slightly from December 31, 2009, primarily due to increased real estate acquired in settlement of loans. Management believes that the allowance for loan losses is sufficient to cover estimated credit losses associated with the loan portfolio as of September 30, 2010.

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

	FUSB Nine Months Ended						ALC Nine Months Ended						Consolidated Nine Months Ended
	September 30, 2010			September 30, 2009			September 30, 2010			September 30, 2009			September 30, 2010			September 30, 2009
Balance at Beginning of Period	$	5,587		$	4,157		$	4,417		$	4,375		$	10,004		$	8,532
Charge-Offs		(5,341	)		(2,341	)		(2,534	)		(3,931	)		(7,875	)		(6,272	)
Recoveries		205			162			641			713			846			875
Net Loans Charged-Off		(5,136	)		(2,179	)		(1,893	)		(3,218	)		(7,029	)		(5,397	)
Provision for Loan Losses		5,369			1,696			1,442			3,161			6,811			4,857
Balance at End of Period	$	5,820		$	3,674		$	3,966		$	4,318		$	9,786		$	7,992

Net charge-offs for the nine months ended September 30, 2010 were $7.0 million, or 2.3% of average loans on an annualized basis, an increase of 30.2%, or $1.6 million, from net charge-offs of $5.4 million, or 1.8% of average loans on an annualized basis, reported for the nine months ended September 30, 2009. The provision for loan losses for the first nine months of 2010 was $6.8 million, compared to $4.9 million in the first nine months of 2009. Charge-offs at the Bank increased due to losses on commercial real estate foreclosures resulting from adverse market conditions and decreasing real estate values. If market conditions continue to deteriorate and real estate values continue to decline, this could cause further deterioration in the loan portfolio, resulting in higher levels of charge-offs.

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):

	Consolidated
	September 30, 2010			December 31, 2009			September 30, 2009
Loans Accounted for on a Non-Accrual Basis	$	9,286		$	14,197		$	12,551
Accruing Loans Past Due 90 Days or More		5,020			6,693			7,154
Real Estate Acquired in Settlement of Loans		27,992			21,439			21,126
Total	$	42,298		$	42,329		$	40,831
Non-Performing Assets as a Percentage of Net Loans and Other Real Estate		9.73	%		9.75	%		9.57	%

23

	FUSB
	September 30, 2010			December 31, 2009			September 30, 2009
Loans Accounted for on a Non-Accrual Basis	$	7,613		$	10,903		$	9,791
Accruing Loans Past Due 90 Days or More		2,450			2,548			3,802
Real Estate Acquired in Settlement of Loans		21,378			14,715			14,167
Total	$	31,441		$	28,166		$	27,760
Non-Performing Assets as a Percentage of Net Loans and Other Real Estate		9.17	%		6.54	%		8.48	%

	ALC
	September 30, 2010			December 31, 2009			September 30, 2009
Loans Accounted for on a Non-Accrual Basis	$	1,673		$	3,294		$	2,760
Accruing Loans Past Due 90 Days or More		2,570			4,145			3,352
Real Estate Acquired in Settlement of Loans		6,614			6,724			6,959
Total	$	10,857		$	14,163		$	13,071
Non-Performing Assets as a Percentage of Net Loans and Other Real Estate		11.84	%		14.52	%		13.16	%

Non-performing assets as a percentage of net loans and other real estate was 9.73% at September 30, 2010, compared to 9.75% at December 31, 2009. The decrease was due to a $4.9 million decrease in loans on non-accrual and a $6.6 million increase in real estate acquired in settlement of loans, offset by a $1.7 million decrease in accruing loans past due 90 days or more. Other real estate acquired in settlement of loans as of September 30, 2010 consisted of twenty-eight residential properties and thirty commercial properties totaling $21.4 million at the Bank and one hundred forty-seven residential properties and nineteen non-residential properties totaling $6.6 million at ALC. Every effort is made to dispose of these properties in a timely manner, but these efforts continue to be hampered by poor economic conditions. Real estate values continue to decline, and the real estate market remains severely depressed in all of our market areas. Management reviews these non-performing assets and reports to the Board of Directors of the Bank monthly. Loans past due 90 days or more and still accruing are reviewed by management and are allowed to continue accruing only when management believes that underlying collateral values and the financial strength of the borrowers are sufficient to protect the Bank from loss. If at any time management determines that there may be a loss of interest or principal, these loans will be changed to non-accrual and their asset values downgraded.

Impaired loans totaled $33.0 million, $35.4 million and $17.2 million as of September 30, 2010, December 31, 2009 and September 30, 2009, respectively. There was approximately $1.1 million, $2.6 million and $0.6 million in the allowance for loan losses specifically allocated to these impaired loans at September 30, 2010, December 31, 2009 and September 30, 2009, respectively.

	FUSB
	September 30, 2010		December 31, 2009		September 30, 2009
Impaired loans with a valuation allowance	$	6,887	$	15,058	$	7,570
Impaired loans without a valuation allowance		25,963		19,890		9,206
Total impaired loans	$	32,850	$	34,948	$	16,777
Valuation allowance related to impaired loans	$	1,055	$	2,525	$	502
	ALC
	September 30, 2010		December 31, 2009		September 30, 2009
Impaired loans with a valuation allowance	$	0	$	437	$	442
Impaired loans without a valuation allowance		0		0		0
Total impaired loans	$	0	$	437	$	442
Valuation allowance related to impaired loans	$	0	$	87	$	102

24

LIQUIDITY AND CAPITAL RESOURCES

The Bank’s primary sources of funds are customer deposits, Federal Home Loan Bank (“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 $152.8 million in borrowing capacity from the FHLB and $7.8 million in established federal funds lines.

The Bank is required to maintain certain levels of regulatory capital. At September 30, 2010 and December 31, 2009, 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 12 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 $190.4 million at December 31, 2009 and $180.4 million at September 30, 2010.

Investment securities forecasted to mature or reprice over the next twelve months totaled $10.3 million, or 6.7% of the investment portfolio, as of September 30, 2010. For comparison, principal payments on investment securities totaled $41.1 million, or 26.6% of the investment portfolio, at September 30, 2010.

Although the majority of the securities portfolio has legal final maturities in excess of 10 years, the entire portfolio consists of securities that are readily marketable and easily convertible into cash. As of September 30, 2010, the bond portfolio had an expected average maturity of 3.5 years, and approximately 75.9% of the $154.5 million in bonds were 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, FHLB advances, securities sold under agreements to repurchase and short-term and long-term borrowings are additional sources of liquidity. Liquidity management involves the continual monitoring of the sources and uses of funds to maintain an acceptable cash position. Long-term liquidity management focuses on considerations related to the total balance sheet structure.

The Bank, at September 30, 2010, had long-term debt and short-term borrowings that, on average, represented 8.9% of total liabilities and equity, compared to 10.5% at year-end 2009.

25

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.

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% and 3% 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 designed to provide reasonable assurance of achieving the objective that information in its reports filed with 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 Chief 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 September 30, 2010, 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 Chief 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 Chief 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.

26

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, 2010 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 12 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 12 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

The impact on us of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and its implementing regulations cannot be predicted at this time.

A wide range of regulatory initiatives directed at the financial services industry have been proposed in recent months. One of those initiatives, the Dodd-Frank Act, was signed into law by President Obama on July 21, 2010. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, establishes the new federal Bureau of Consumer Financial Protection (the “BCFP”) and will require the BCFP, the FDIC, the SEC and other federal agencies to implement numerous new rules, many of which may not be implemented for several months or years. The Dodd-Frank Act and the resulting regulations will significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions. At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the resulting regulations will impact the Company’s business. However, compliance with these new laws and regulations will result in additional costs and expenses, which may adversely impact the Company’s results of operations, financial condition or liquidity.

In addition to the risk factor above and other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2009 that could materially affect our business, financial condition or future results. The risks described herein and in our Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

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

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased			Average Price Paid per Share			Total Number of Shares Purchased as Part of Publicly Announced Programs(1)		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Programs(1)
July 1 – July 31		0		$	0.00			0		242,303
August 1 – August 31		4,290	(2)	$	9.25	(2)		0		242,303
September 1 – September 30		0		$	0.00			0		242,303
Total		4,290		$	9.25			0		242,303

(1) On December 17, 2009, the Board of Directors of the Company extended the share repurchase program previously approved by the Board on January 19, 2006. Under the repurchase program, the Company is authorized to repurchase up to 642,785 shares of common stock before December 31, 2010, the expiration date of the extended repurchase program.

27

(2) 4,050 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 6. EXHIBITS

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

SIGNATURES

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

UNITED SECURITY BANCSHARES, INC.

DATE: November 8, 2010

BY:	/s/ Robert Steen
	Robert Steen
	Its Vice President, Treasurer and Assistant Secretary, Chief Financial Officer and Principal Accounting Officer (Duly Authorized Officer and Principal Financial Officer)

INDEX TO EXHIBITS

Exhibit No.	Description
3.1	Certificate of Incorporation of United Security Bancshares, Inc., incorporated herein by reference to the Exhibits to Form 10-Q for the quarter ended September 30, 1999.
3.2	Amended and Restated Bylaws of United Security Bancshares, Inc., incorporated 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 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.

28