Stock Based Compensation

12 Months Ended

Dec. 31, 2012

Stock Based Compensation [Abstract]

Stock Based Compensation

10. Stock Based Compensation

Options have been granted to officers and key employees at an exercise price equal to estimated fair value at the date of grant as determined by the Board of Directors. All options granted are service awards, and as such are based solely upon fulfilling a requisite service period (the vesting period). In May 2005, the Company's shareholders approved the adoption of the United Security Bancshares 2005 Stock Option Plan (2005 Plan). At the same time, all previous plans, including the 1995 Plan, were terminated. The 2005 Plan provides for the granting of up to 598,073 shares of authorized and unissued shares of common stock at option prices per share which must not be less than 100% of the fair market value per share at the time each option is granted.

The options granted (incentive stock options for employees and non-qualified stock options for Directors) have an exercise price at the prevailing market price on the date of grant. All options granted are exercisable 20% each year commencing one year after the date of grant and expire ten years after the date of grant.

Under the 2005 Plan, 186,781 granted shares are outstanding (158,080 incentive stock options and 28,701 nonqualified stock options) as of December 31, 2012, of which 140,694 are vested.

Options outstanding, exercisable, exercised and forfeited are as follows:

			Weighted
	2005		Average
	Plan		Exercise Price
Options outstanding December 31, 2011		161,024	$	12.01
Granted during the year		25,757		2.38
Exercised during the year		-		-
Forfeited during the year		-		-
Options outstanding December 31, 2012		186,781	$	10.68

Included in total outstanding options at December 31, 2012, are 140,694 exercisable shares at a weighted average price of $13.16, a weighted average remaining contract term of 3.32 years and no intrinsic value.

Included in salaries and employee benefits for the years ended December 31, 2012 and 2011 is $18,000 and $18,000 of share-based compensation, respectively. The related tax benefit on share-based compensation recorded in the provision for income taxes was not material to either year.

As of December 31, 2012, and 2011, there was $42,000 and $19,000, respectively, of total unrecognized compensation expense related to non­vested stock options. This cost is expected to be recognized over a weighted average period of approximately 3.0 years. No options were exercised during 2012 or 2011.

	Year Ended		Year Ended
	December 31, 2012		December 31,  2011
Weighted average grant-date fair value of stock options granted	$	1.33	$	2.06
Total fair value of stock options vested	$	26,246	$	129,864
Total intrinsic value of stock options exercised		n/a		n/a

The Bank determines fair value at grant date using the Black-Scholes-Merton pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock and the expected dividend yield and the risk-free interest rate over the expected life of the option.

The weighted average assumptions used in the pricing model are noted in the table below. The expected term of options granted is derived using the simplified method, which is based upon the average period between vesting term and expiration term of the options. The risk free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. Expected volatility is based on the historical volatility of the Bank's stock over a period commensurate with the expected term of the options. The Company believes that historical volatility is indicative of expectations about its future volatility over the expected term of the options.

The Bank expenses the fair value of the option on a straight-line basis over the vesting period for each separately vesting portion of the award. The Bank estimates forfeitures and only recognizes expense for those shares expected to vest. Based upon historical evidence, the Company has determined that because options are granted to a limited number of key employees rather than a broad segment of the employee base, expected forfeitures, if any, are not material. The Company granted 25,757 shares and 4,268 shares in incentive stock options during 2012 and 2011, respectively. The assumptions used for the 2012 and 2011 stock option grant are as follows.

	Year Ended			Year Ended
	December 31, 2012			December 31, 2011
Risk Free Interest Rate		1.02	%		2.11	%
Expected Dividend Yield		0.00	%		0.00	%
Expected Life in Years	5.50 Years			5.50 Years
Expected Price Volatility		79.43	%		76.18	%

The Black-Scholes-Merton option valuation model requires the input of highly subjective assumptions, including the expected life of the stock based award and stock price volatility. The assumptions listed above represent management's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if other assumptions had been used, the Bank's recorded stock-based compensation expense could have been materially different from that previously reported in proforma disclosures. In addition, the Bank is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If the Bank's actual forfeiture rate is materially different from the estimate, the share-based compensation expense could be materially different.