UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2016

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    ☒  No    ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§ 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	☐
Non-accelerated filer	☐  (Do not check if a smaller reporting company)	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    ☒

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

Class	Outstanding at August 10, 2016
Common Stock, $0.01 par value	6,043,292 shares

1

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

		PAGE
	PART I. FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS
Interim Condensed Consolidated Balance Sheets at June 30, 2016 (Unaudited) and December 31, 2015		4
Interim Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)		5
Interim Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)		6
Interim Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (Unaudited)		7
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)		8
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	36
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	49
ITEM 4.	CONTROLS AND PROCEDURES	50
	PART II. OTHER INFORMATION	51
ITEM 1.	LEGAL PROCEEDINGS	51
ITEM 1A.	RISK FACTORS	51
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	51
ITEM 6.	EXHIBITS	51
Signature Page		52

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. (“USBI” and, together with its subsidiaries, the “Company”), through its senior management, from time to time makes forward-looking statements concerning its expected future operations and performance and other developments. The words “estimate,” “project,” “intend,” “anticipate,” “expect,” “believe,” “continues” and similar expressions are indicative of forward-looking statements. Such forward-looking statements are necessarily estimates reflecting the Company’s best judgment based on current information and involve a number of risks and uncertainties, and various factors could cause results to differ materially from those contemplated by such forward-looking statements. Such factors could include those identified from time to time in USBI’s Securities and Exchange Commission (“SEC”) filings and other public announcements, including the risk factors described in Part I, Item 1A of USBI’s Annual Report on Form 10-K as of and for the year ended December 31, 2015. Specifically, with respect to statements relating to loan demand, growth and earnings potential, geographic expansion and the adequacy of the allowance for loan losses for the Company, these factors include, but are not limited to, the rate of growth (or lack thereof) in the economy generally and in the Company’s service areas, the availability of quality loans in the Company’s service areas, 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

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Share and Per Share Data)

	June 30,			December 31,
	2016			2015
	(Unaudited)
ASSETS
Cash and due from banks	$	9,372		$	7,088
Interest-bearing deposits in banks		33,353			36,984
Total cash and cash equivalents		42,725			44,072
Investment securities available-for-sale, at fair value		179,613			198,843
Investment securities held-to-maturity, at amortized cost		33,552			32,359
Federal Home Loan Bank stock, at cost		1,368			1,025
Loans, net of allowance for loan losses of $3,591 and $3,781, respectively		298,901			255,432
Premises and equipment, net		14,960			12,084
Cash surrender value of bank-owned life insurance		14,448			14,292
Accrued interest receivable		1,804			1,833
Other real estate owned		5,405			6,038
Other assets		8,978			9,804
Total assets	$	601,754		$	575,782
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	495,618		$	479,258
Accrued interest expense		233			180
Other liabilities		7,026			6,960
Short-term borrowings		5,352			7,354
Long-term debt		15,000			5,000
Total liabilities		523,229			498,752
Commitments and contingencies
Shareholders’ equity:
Common stock, par value $0.01 per share, 10,000,000 shares authorized; 7,329,060 shares issued; 6,038,554 shares outstanding		73			73
Surplus		10,713			10,558
Accumulated other comprehensive income, net of tax		1,338			536
Retained earnings		87,231			86,693
Less treasury stock: 1,290,506 shares at cost		(20,817	)		(20,817	)
Noncontrolling interest		(13	)		(13	)
Total shareholders’ equity		78,525			77,030
Total liabilities and shareholders’ equity	$	601,754		$	575,782

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

4

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except Per Share Data)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2016		2015		2016		2015
	(Unaudited)				(Unaudited)
Interest income:
Interest and fees on loans	$	6,366	$	6,520	$	12,419	$	12,655
Interest on investment securities		1,112		1,215		2,255		2,401
Total interest income		7,478		7,735		14,674		15,056
Interest expense:
Interest on deposits		513		557		1,036		1,164
Interest on borrowings		48		8		60		15
Total interest expense		561		565		1,096		1,179
Net interest income		6,917		7,170		13,578		13,877
Provision (reduction in reserve) for loan losses		536		45		703		(121	)
Net interest income after provision (reduction in reserve) for loan losses		6,381		7,125		12,875		13,998
Non-interest income:
Service and other charges on deposit accounts		426		472		843		926
Credit insurance income		162		114		314		189
Other income, net		496		398		914		883
Net gain on sales and prepayments of investment securities		396		84		398		361
Total non-interest income		1,480		1,068		2,469		2,359
Non-interest expense:
Salaries and employee benefits		4,236		4,215		8,400		8,407
Net occupancy and equipment		782		780		1,551		1,603
Other real estate/foreclosure expense, net		129		347		246		567
Other expense		2,108		1,765		4,124		3,507
Total non-interest expense		7,255		7,107		14,321		14,084
Income before income taxes		606		1,086		1,023		2,273
Provision for income taxes		144		312		244		663
Net income	$	462	$	774	$	779	$	1,610
Basic net income per share	$	0.08	$	0.13	$	0.13	$	0.26
Diluted net income per share	$	0.07	$	0.12	$	0.12	$	0.25
Dividends per share	$	0.02	$	0.02	$	0.04	$	0.04

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

5

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in Thousands)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
	(Unaudited)						(Unaudited)
Net income	$	462		$	774		$	779		$	1,610
Other comprehensive income:
Unrealized holding gains (losses) on securities available-for-sale arising during period, net of tax expense (benefit) of $456, $(386), $695 and $(382), respectively		782			(641	)		1,192			(638	)
Reclassification adjustment for net gains on available-for-sale securities realized in net income, net of tax of $145, $31, $145 and $136, respectively		(250	)		(50	)		(250	)		(223	)
Unrealized holding losses arising during the period on effective cash flow hedge derivatives, net of tax of $(81), $0, $(81) and $0, respectively		(140	)		—			(140	)		—
Other comprehensive income (loss)		392			(691	)		802			(861	)
Total comprehensive income	$	854		$	83		$	1,581		$	749

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

6

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

	Six Months Ended
	June 30,
	2016			2015
	(Unaudited)
Cash flows from operating activities:
Net income	$	779		$	1,610
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		479			428
Provision (reduction in reserve) for loan losses		703			(121	)
Deferred income tax provision		235			648
Net gain on sale and prepayment of investment securities		(398	)		(359	)
Stock-based compensation expense		155			189
Net amortization of securities		805			837
Net loss on premises and equipment, repossessed assets and other real estate		371			494
Changes in assets and liabilities:
Decrease in accrued interest receivable		29			304
Decrease in other assets		50			859
Increase (decrease) in accrued interest expense		53			(23	)
Decrease in other liabilities		(155	)		(662	)
Net cash provided by operating activities		3,106			4,204
Cash flows from investing activities:
Purchase of investment securities, available-for-sale		(17,520	)		(40,185	)
Purchase of investment securities, held-to-maturity		(13,850	)		(17,538	)
Proceeds from sales of investment securities, available-for-sale		12,341			15,754
Proceeds from maturities and prepayments of investment securities, available-for-sale		25,572			25,399
Proceeds from maturities and prepayments of investment securities, held-to-maturity		12,579			2,625
Net increase in Federal Home Loan Bank stock		(343	)		(3	)
Proceeds from the sale of premises and equipment and other real estate		1,071			1,520
Net change in loan portfolio		(44,842	)		13,181
Purchases of premises and equipment		(3,578	)		(1,859	)
Net cash used in investing activities		(28,570	)		(1,106	)
Cash flows from financing activities:
Net increase (decrease) in customer deposits		16,360			(12,518	)
Net increase (decrease) in short-term borrowings		(2,002	)		549
Proceeds from long-term Federal Home Loan Bank advances		10,000			—
Dividends paid		(241	)		(242	)
Net cash provided by (used in) financial activities		24,117			(12,211	)
Net decrease in cash and cash equivalents		(1,347	)		(9,113	)
Cash and cash equivalents, beginning of period		44,072			34,166
Cash and cash equivalents, end of period	$	42,725		$	25,053
Supplemental disclosures:
Cash paid for:
Interest	$	1,043		$	1,202
Income taxes		65			28
Non-cash transactions:
Assets acquired in settlement of loans	$	560		$	1,463

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

7

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. GENERAL

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

The unaudited interim condensed consolidated financial statements, in the opinion of management, reflect all adjustments necessary for a fair presentation of consolidated financial position, results of operations and cash flows for the periods presented. Such adjustments are of a normal, recurring nature. The results of operations for any interim period are not necessarily indicative of results expected for the fiscal year ending December 31, 2016. While certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), management believes that the disclosures herein are adequate to make the information presented not misleading. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in USBI’s Annual Report on Form 10-K as of and for the year ended December 31, 2015. The accounting policies followed by the Company are set forth in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in USBI’s Annual Report on Form 10-K as of and for the year ended December 31, 2015. Certain amounts in the 2015 condensed consolidated financial statements have been reclassified to conform to the 2016 method of presentation. Included in these reclassifications was approximately $0.7 million that was reclassified from other liabilities to surplus on the Interim Condensed Consolidated Balance Sheet as of December 31, 2015 related to shares of stock that had been accrued as of the balance sheet date as deferred compensation for members of USBI's Board of Directors.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Update (“ASU”) 2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments.” Issued in June 2016, ASU 2016-13 removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all current recognition thresholds and will require companies to recognize an allowance for lifetime expected credit losses. Credit losses will be immediately recognized through net income; the amount recognized will be based on the current estimate of contractual cash flows not expected to be collected over the financial asset’s contractual term. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities. For public business entities, ASU 2016-13 is effective for financial statements issued for fiscal years and for interim periods within those fiscal years beginning after December 15, 2019. Institutions will be required to apply the changes through a cumulative-effect adjustment to their retained earnings as of the beginning of the first reporting period in which the guidance is effective. Management is currently evaluating the impact that this ASU will have on the Company’s consolidated financial statements.

ASU 2016-10, “Revenue from Contracts with Customers (Topic 606)-Identifying Performance Obligations and Licensing.”  Issued in April 2016, ASU 2016-10 clarifies ASC Topic 606, “Revenue from Contracts with Customers" with respect to (i) identifying performance obligations; and (ii) the licensing implementation guidance.  Since the amendments in ASU 2016-10 affect the guidance in ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which is not yet effective, this ASU will become effective when ASU 2014-09 becomes effective.  The amendments of ASU 2016-10 are effective for interim and annual periods beginning after December 15, 2017.  Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.  Management is currently evaluating the impact that this ASU will have on the Company’s consolidated financial statements.

ASU 2016-09, “Compensation-Stock Compensation (Topic 718)-Improvements to Employee Share-Based Payment Accounting.”  Issued in March 2016, ASU 2016-09 seeks to reduce complexity in accounting standards by simplifying several aspects of the accounting for share-based payment transactions, including (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes; (6) the practical expedient for estimating the expected term; and (7) intrinsic value.  The amendments of ASU 2016-09 are effective for interim and annual periods beginning after December 15, 2016.  Management is currently evaluating the impact that this ASU will have on the Company’s consolidated financial statements.

ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net).” Issued in March 2016, ASU 2016-08 clarifies certain principal versus agent considerations within the implementation guidance of ASC Topic 606, “Revenue from Contracts with Customers.” Since the amendments in ASU 2016-08 affect the guidance in ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which is not yet effective, this ASU will become effective when ASU 2014-09 becomes effective.  The amendments of ASU 2016-08 are effective for interim and annual periods beginning after December 15, 2017.  Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.  Management is currently evaluating the impact that this ASU will have on the Company’s consolidated financial statements.

ASU 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” Issued in March 2016, ASU 2016-05 clarifies that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under ASC Topic 815 does not, in and of itself, require de-designation of that hedging relationship, provided that all other hedge accounting criteria continue to be met.  The amendments of ASU 2016-05 are effective for interim and annual periods beginning after December 15, 2016.  Management is currently evaluating the impact that this ASU will have on the Company’s consolidated financial statements.

ASU 2016-02, “Leases (Topic 842).” Issued in February 2016, ASU 2016-02 will require organizations that lease assets (lessees) to recognize on the balance sheet the assets and liabilities for the rights and obligations created by the lease for all leases with a term of more than 12 months. The recognition, measurement and presentation of expenses and cash flows arising from a lease are not significantly changed under ASU 2016-02. There will continue to be differentiation between finance leases and operating leases. For finance leases, a lessee will be required to (i) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position; (ii) recognize interest on the lease liability separately from amortization of the right-of-use asset in the statement of income; and (iii) classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability within operating activities on the statement of cash flows. For operating leases, a lessee will be required to (i) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position; (ii) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis; and (iii) classify all cash payments within operating activities in the statement of cash flows. The accounting applied by the lessor in a lease transaction remains largely unchanged from previous U.S. GAAP. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018. Management is currently evaluating the impact that this ASU will have on the Company’s consolidated financial statements.

8

ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (An Amendment of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification).”  Issued in January 2016, ASU 2016-01 is intended to enhance the reporting model for financial instruments to provide users of financial statements with improved decision-making information.  The amendments to ASU 2016-01 include: (i) requiring equity investments, except those accounted for under the equity method of accounting or those that result in the consolidation of an investee, to be measured at fair value, with changes in fair value recognized in net income; (ii) requiring a qualitative assessment to identify impairment of equity investments without readily determinable fair values; and (iii) clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments of ASU 2016-01 are effective for interim and annual periods beginning after December 15, 2017.  Management is currently evaluating the impact that this ASU will have on the Company’s consolidated financial statements.

ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” Issued in April 2015, ASU 2015-05 provides guidance on how customers should evaluate whether cloud computing arrangements contain a software license that should be accounted for separately. A customer that determines that such an arrangement contains a software license must account for the license consistently with the acquisition of other software licenses. If an arrangement does not contain a software license, then the customer is required to account for it as a service contract. As a result, all software licenses within the scope of this guidance will be accounted for consistently with other licenses of intangible assets. The guidance is effective for annual and interim periods beginning after December 15, 2015. Entities can elect to apply the guidance either retrospectively or prospectively to all cloud computing arrangements entered into or materially modified after the effective date. ASU 2015-05 became effective for the Company on January 1, 2016 and was applied using the prospective transition method.  The adoption of ASU 2015-05 did not have a material impact on the Company’s consolidated financial statements.

ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” Issued in February 2015, ASU 2015-02 is intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability companies and certain entities involved in securitization transactions. ASU 2015-02 focuses on the consolidation criteria for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. The new standard simplifies and improves current U.S. GAAP by: (i) placing more emphasis on risk of loss when determining a controlling financial interest; (ii) reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (“VIE”); and (iii) changing consolidation conclusions for companies in several industries that typically make use of limited partnerships or VIEs. ASU 2015-02 became effective for the Company on January 1, 2016. The adoption of ASU 2015-02 did not have a material impact on the Company’s consolidated financial statements.

ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).”  Issued in May 2014, ASU 2014-09 will add FASB ASC Topic 606, Revenue from Contracts with Customers, and will supersede revenue recognition requirements in FASB ASC Topic 605, Revenue Recognition and certain cost guidance in FASB ASC Topic 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts.  ASU 2014-09 provides a framework for revenue recognition that replaces the existing industry and transaction-specific requirements under the existing standards.  ASU 2014-09 requires an entity to apply a five-step model to determine when to recognize revenue and at what amount.  The model specifies that revenue should be recognized when (or as) an entity transfers control of goods or services to a customer at the amount to which the entity expects to be entitled.  Depending on whether certain criteria are met, revenue should be recognized either over time, in a manner that depicts the entity’s performance, or at a point in time, when control of the goods or services is transferred to the customer.  ASU 2014-09 provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in each contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in each contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation.  In addition, the existing requirements for the recognition of a gain or loss on the transfer of non-financial assets that are not in a contract with a customer are amended to be consistent with the guidance on recognition and measurement in ASU 2014-09.  The amendments of ASU 2014-09 may be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application.  If the transition method of application is elected, the entity should also provide the additional disclosures in reporting periods that include the date of initial application regarding (1) the amount by which each financial statement line item is affected in the current reporting period and (2) an explanation of the reasons for significant changes.  ASU 2015-14, “Revenue from Contracts with Customers (Topic 606)-Deferral of the Effective Date,” issued in August 2015, defers the effective date of ASU 2014-09 by one year.  ASU 2015-14 provides that the amendments of ASU 2014-09 become effective for interim and annual periods beginning after December 15, 2017.  Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.  Management is currently evaluating the impact that this ASU will have on the Company’s consolidated financial statements, as well as the most appropriate method of application; however, regardless of the method of application selected, the adoption of ASU 2014-09 is not expected to have a material impact on the Company’s consolidated financial statements.

9

3. NET INCOME PER SHARE

Basic net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding. Included in basic shares are certain shares that have been accrued as of the balance sheet date as deferred compensation for members of USBI’s Board of Directors. Diluted net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding, adjusted for the effect of potentially dilutive stock awards outstanding during the period. The dilutive shares consist of nonqualified stock option grants issued to employees and members of USBI’s Board of Directors pursuant to the United Security Bancshares, Inc. 2013 Incentive Plan (the “2013 Incentive Plan”) previously approved by USBI’s shareholders. The following table reflects weighted average shares used to calculate basic and diluted net income per share for the periods presented.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2016		2015		2016		2015
Basic shares		6,147,727		6,139,268		6,145,326		6,136,882
Dilutive shares		272,550		177,050		272,550		177,050
Diluted shares		6,420,277		6,316,318		6,417,876		6,313,932

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2016		2015		2016		2015
	(Dollars in Thousands, Except Per Share Data)				(Dollars in Thousands, Except Per Share Data)
Net income	$	462	$	774	$	779	$	1,610
Basic net income per share	$	0.08	$	0.13	$	0.13	$	0.26
Diluted net income per share	$	0.07	$	0.12	$	0.12	$	0.25

4. COMPREHENSIVE INCOME

Comprehensive income consists of net income, as well as unrealized holding gains and losses that arise during the period associated with the Company’s available-for-sale securities portfolio and the effective portion of cash flow hedge derivatives. In the calculation of comprehensive income, reclassification adjustments are made for gains or losses realized in the statement of operations associated with the sale of available-for-sale securities or changes in the fair value of cash flow derivatives.

5. INVESTMENT SECURITIES

Details of investment securities available-for-sale and held-to-maturity as of June 30, 2016 and December 31, 2015 were as follows:

	Available-for-Sale
	June 30, 2016
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in Thousands)
Mortgage-backed securities:
Residential	$	110,687	$	1,849	$	(20	)	$	112,516
Commercial		53,472		295		(456	)		53,311
Obligations of states and political subdivisions		10,267		662		—			10,929
Obligations of U.S. government-sponsored agencies		2,000		8		—			2,008
Corporate notes		767		2		—			769
U.S. Treasury securities		80		—		—			80
Total	$	177,273	$	2,816	$	(476	)	$	179,613

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	Held-to-Maturity
	June 30, 2016
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in Thousands)
Mortgage-backed securities:
Commercial	$	17,396	$	105	$	—		$	17,501
Obligations of U.S. government-sponsored agencies		13,972		77		(2	)		14,047
Obligations of states and political subdivisions		2,184		40		(3	)		2,221
Total	$	33,552	$	222	$	(5	)	$	33,769

	Available-for-Sale
	December 31, 2015
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in Thousands)
Mortgage-backed securities:
Residential	$	135,104	$	998	$	(608	)	$	135,494
Commercial		45,961		164		(616	)		45,509
Obligations of states and political subdivisions		14,071		931		(4	)		14,998
Obligations of U.S. government-sponsored agencies		1,999		—		(17	)		1,982
Corporate notes		780		—		—			780
U.S. Treasury securities		80		—		—			80
Total	$	197,995	$	2,093	$	(1,245	)	$	198,843

	Held-to-Maturity
	December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in Thousands)
Mortgage-backed securities:
Commercial	$	16,321	$	33	$	(170	)	$	16,184
Obligations of U.S. government-sponsored agencies		13,766		19		(71	)		13,714
Obligations of states and political subdivisions		2,272		18		(4	)		2,286
Total	$	32,359	$	70	$	(245	)	$	32,184

The scheduled maturities of investment securities available-for-sale and held-to-maturity as of June 30, 2016 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	$	1,930	$	1,947	$	—	$	—
Maturing after one to five years		6,124		6,256		1,463		1,509
Maturing after five to ten years		94,262		95,782		9,653		9,674
Maturing after ten years		74,957		75,628		22,436		22,586
Total	$	177,273	$	179,613	$	33,552	$	33,769

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.

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The following table reflects gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of June 30, 2016 and December 31, 2015.

	Available-for-Sale
	June 30, 2016
	Less than 12 Months					12 Months or More
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in Thousands)
Mortgage-backed securities:
Residential	$	1,646	$	(2	)	$	2,099	$	(18	)
Commercial		13,893		(15	)		13,612		(441	)
U.S. Treasury securities		80		—			—		—
Total	$	15,619	$	(17	)	$	15,711	$	(459	)

	Held-to-Maturity
	June 30, 2016
	Less than 12 Months					12 Months or More
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in Thousands)
Obligations of U.S. government-sponsored agencies	$	1,396	$	(2	)	$	—	$	—
Obligations of states and political subdivisions		568		(3	)		—		—
Total	$	1,964	$	(5	)	$	—	$	—

	Available-for-Sale
	December 31, 2015
	Less than 12 Months					12 Months or More
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in Thousands)
Mortgage-backed securities:
Residential	$	83,403	$	(458	)	$	9,061	$	(150	)
Commercial		24,337		(272	)		8,918		(344	)
Obligations of U.S. government-sponsored agencies		1,982		(17	)		—		—
Corporate notes		779		—			—		—
Obligations of states and political subdivisions		707		(4	)		—		—
Total	$	111,208	$	(751	)	$	17,979	$	(494	)

	Held-to-Maturity
	December 31, 2015
	Less than 12 Months					12 Months or More
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in Thousands)
Mortgage-backed securities:
Commercial	$	14,143	$	(170	)	$	—	$	—
Obligations of U.S. government-sponsored agencies		11,163		(44	)		1,560		(27	)
Obligations of states and political subdivisions		572		(4	)		—		—
Total	$	25,878	$	(218	)	$	1,560	$	(27	)

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 (i) the length of time and the extent to which fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, (iii) whether the Company intends to sell securities and (iv) whether it is more likely than not that the Company will be required to sell the securities before recovery of their amortized cost bases.

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As of June 30, 2016, 13 debt securities had been in a loss position for more than 12 months, and 11 debt securities had been in a loss position for less than 12 months. As of December 31, 2015, 13 debt securities had been in a loss position for more than 12 months, and 102 debt securities had been in a loss position for less than 12 months. As of both June 30, 2016 and December 31, 2015, the losses for all securities were considered to be a direct result of the effect that the prevailing interest rate environment had on the value of debt securities and were not related to the creditworthiness of the issuers. Further, the Company has the current intent and ability to retain its investments in the issuers for a period of time that management believes to be sufficient to allow for any anticipated recovery in fair value. Therefore, the Company did not recognize any other-than-temporary impairments as of June 30, 2016 and December 31, 2015.

Investment securities available-for-sale with a carrying value of $78.4 million and $61.3 million as of June 30, 2016 and December 31, 2015, respectively, were pledged to secure public deposits and for other purposes.

Gains realized on sales of securities available-for-sale were approximately $0.4 million for both the six months ended June 30, 2016 and the year ended December 31, 2015. There were no losses on sales of securities during the six months ended June 30, 2016 or the year ended December 31, 2015.

6. LOANS AND ALLOWANCE FOR LOAN LOSSES

Portfolio Segments

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

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

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

Secured by multi-family residential properties – This portfolio segment includes mortgage loans secured by apartment buildings.

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

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

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

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

Other loans – Other loans include credit cards, overdrawn checking accounts reclassified to loans and overdraft lines of credit.

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As of June 30, 2016 and December 31, 2015, the composition of the loan portfolio by reporting segment and portfolio segment was as follows:

	June 30, 2016
	FUSB		ALC		Total
	(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans	$	24,306	$	—	$	24,306
Secured by 1-4 family residential properties		33,326		15,430		48,756
Secured by multi-family residential properties		5,972		—		5,972
Secured by non-farm, non-residential properties		105,541		—		105,541
Other		190		—		190
Commercial and industrial loans		38,160		—		38,160
Consumer loans		6,366		80,886		87,252
Other loans		364		—		364
Total loans		214,225		96,316		310,541
Less: Unearned interest, fees and deferred cost		192		7,857		8,049
Allowance for loan losses		1,138		2,453		3,591
Net loans	$	212,895	$	86,006	$	298,901

	December 31, 2015
	FUSB		ALC		Total
	(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans	$	11,827	$	—	$	11,827
Secured by 1-4 family residential properties		30,730		17,233		47,963
Secured by multi-family residential properties		11,845		—		11,845
Secured by non-farm, non-residential properties		83,883		—		83,883
Other		115		—		115
Commercial and industrial loans		29,377		—		29,377
Consumer loans		7,057		76,131		83,188
Other loans		379		—		379
Total loans		175,213		93,364		268,577
Less: Unearned interest, fees and deferred cost		149		9,215		9,364
Allowance for loan losses		1,329		2,452		3,781
Net loans	$	173,735	$	81,697	$	255,432

Although the Company has a diversified loan portfolio, 59.5% and 58.0% of the portfolio was concentrated in loans secured by real estate located primarily within a single geographic region of the United States as of June 30, 2016 and December 31, 2015, respectively. As of June 30, 2016, loans with variable interest rate payment terms represented 56.1% of the Bank’s loan portfolio, while loans with fixed interest rate payment terms represented 43.9% of the portfolio. As of December 31, 2015, variable rate loans represented 52.1% of the Bank’s portfolio, while fixed rate loans represented 47.9%. At ALC, all loans are originated under fixed interest rate payment terms.

Related Party Loans

In the ordinary course of business, the Bank makes loans to certain officers and directors of the Company, including companies with which they are associated. These loans are made on the same terms as those prevailing for comparable transactions with non-related parties. Management believes that such loans do not represent more than a normal risk of collectability, nor do they present other unfavorable features. The aggregate balances of such related party loans and commitments as of both June 30, 2016 and December 31, 2015 were $2.9 million. During the six months ended June 30, 2016, there was one new loan to these parties, and repayments by active related parties were $71 thousand. During the year ended December 31, 2015, there were no new loans to these related parties, and repayments by active related parties were $0.2 million.

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Allowance for Loan Losses

The following tables present changes in the allowance for loan losses by loan portfolio segment and loan type as of June 30, 2016 and December 31, 2015. While no portion of the allowance is in any way restricted to any individual loan or group of loans and the entire allowance is available to absorb losses from any and all loans, these tables represent management's allocation of the allowance for loan losses to specific loan categories as of the dates indicated.

	FUSB
	Six Months Ended June 30, 2016
	Commercial & Industrial		Commercial Real Estate			Consumer			Residential Real Estate			Other			Total
	(Dollars in Thousands)
Allowance for loan losses:
Beginning balance	$	133	$	1,118		$	28		$	36		$	14		$	1,329
Charge-offs		—		—			(27	)		(7	)		—			(34	)
Recoveries		19		230			34			10			—			293
Provision		57		(577	)		(18	)		96			(8	)		(450	)
Ending balance		209		771			17			135			6			1,138
Ending balance individually evaluated for impairment		64		291			—			5			—			360
Ending balance collectively evaluated for impairment	$	145	$	480		$	17		$	130		$	6		$	778
Loan receivables:
Ending balance		38,160		136,009			6,366			33,326			364			214,225
Ending balance individually evaluated for impairment		427		1,934			—			251			—			2,612
Ending balance collectively evaluated for impairment	$	37,733	$	134,075		$	6,366		$	33,075		$	364		$	211,613

	ALC
	Six Months Ended June 30, 2016
	Commercial & Industrial		Commercial Real Estate		Consumer			Residential Real Estate			Other		Total
	(Dollars in Thousands)
Allowance for loan losses:
Beginning balance	$	—	$	—	$	2,202		$	250		$	—	$	2,452
Charge-offs		—		—		(1,511	)		(21	)		—		(1,532	)
Recoveries		—		—		351			29			—		380
Provision		—		—		1,229			(76	)		—		1,153
Ending balance		—		—		2,271			182			—		2,453
Ending balance individually evaluated for impairment		—		—		—			—			—		—
Ending balance collectively evaluated for impairment	$	—	$	—	$	2,271		$	182		$	—	$	2,453
Loan receivables:
Ending balance		—		—		80,886			15,430			—		96,316
Ending balance individually evaluated for impairment		—		—		—			—			—		—
Ending balance collectively evaluated for impairment	$	—	$	—	$	80,886		$	15,430		$	—	$	96,316

15

	FUSB & ALC
	Six Months Ended June 30, 2016
	Commercial & Industrial		Commercial Real Estate			Consumer			Residential Real Estate			Other			Total
	(Dollars in Thousands)
Allowance for loan losses:
Beginning balance	$	133	$	1,118		$	2,230		$	286		$	14		$	3,781
Charge-offs		—		—			(1,538	)		(28	)		—			(1,566	)
Recoveries		19		230			385			39			—			673
Provision		57		(577	)		1,211			20			(8	)		703
Ending balance		209		771			2,288			317			6			3,591
Ending balance individually evaluated for impairment		64		291			—			5			—			360
Ending balance collectively evaluated for impairment	$	145	$	480		$	2,288		$	312		$	6		$	3,231
Loan receivables:
Ending balance		38,160		136,009			87,252			48,756			364			310,541
Ending balance individually evaluated for impairment		427		1,934			—			251			—			2,612
Ending balance collectively evaluated for impairment	$	37,733	$	134,075		$	87,252		$	48,505		$	364		$	307,929

	FUSB
	Year Ended December 31, 2015
	Commercial & Industrial			Commercial Real Estate			Consumer			Residential Real Estate			Other		Total
	(Dollars in Thousands)
Allowance for loan losses:
Beginning balance	$	141		$	2,810		$	114		$	421		$	—	$	3,486
Charge-offs		—			(767	)		(17	)		(68	)		—		(852	)
Recoveries		61			12			70			111			—		254
Provision		(69	)		(937	)		(139	)		(428	)		14		(1,559	)
Ending balance		133			1,118			28			36			—		1,329
Ending balance individually evaluated for impairment		80			230			—			—			—		310
Ending balance collectively evaluated for impairment	$	53		$	888		$	28		$	36		$	14	$	1,019
Loan receivables:
Ending balance		29,377			107,670			7,057			30,730			379		175,213
Ending balance individually evaluated for impairment		444			2,018			—			252			—		2,714
Ending balance collectively evaluated for impairment	$	28,933		$	105,652		$	7,057		$	30,478		$	379	$	172,499

16

	ALC
	Year Ended December 31, 2015
	Commercial & Industrial		Commercial Real Estate		Consumer			Residential Real Estate			Other		Total
	(Dollars in Thousands)
Allowance for loan losses:
Beginning balance	$	—	$	—	$	2,336		$	346		$	—	$	2,682
Charge-offs		—		—		(2,552	)		(187	)		—		(2,739	)
Recoveries		—		—		712			22			—		734
Provision		—		—		1,706			69			—		1,775
Ending balance		—		—		2,202			250			—		2,452
Ending balance individually evaluated for impairment		—		—		—			—			—		—
Ending balance collectively evaluated for impairment	$	—	$	—	$	2,202		$	250		$	—	$	2,452
Loan receivables:
Ending balance		—		—		76,131			17,233			—		93,364
Ending balance individually evaluated for impairment		—		—		—			—			—		—
Ending balance collectively evaluated for impairment	$	—	$	—	$	76,131		$	17,233		$	—	$	93,364

	FUSB & ALC
	Year Ended December 31, 2015
	Commercial & Industrial			Commercial Real Estate			Consumer			Residential Real Estate			Other		Total
	(Dollars in Thousands)
Allowance for loan losses:
Beginning balance	$	141		$	2,810		$	2,450		$	767		$	—	$	6,168
Charge-offs		—			(767	)		(2,569	)		(255	)		—		(3,591	)
Recoveries		61			12			782			133			—		988
Provision		(69	)		(937	)		1,567			(359	)		14		216
Ending balance		133			1,118			2,230			286			—		3,781
Ending balance individually evaluated for impairment		80			230			—			—			—		310
Ending balance collectively evaluated for impairment	$	53		$	888		$	2,230		$	286		$	14	$	3,471
Loan receivables:
Ending balance		29,377			107,670			83,188			47,963			379		268,577
Ending balance individually evaluated for impairment		444			2,018			—			252			—		2,714
Ending balance collectively evaluated for impairment	$	28,933		$	105,652		$	83,188		$	47,711		$	379	$	265,863

Credit Quality

The Bank utilizes a credit grading system that provides a uniform framework for establishing and monitoring credit risk in the loan portfolio. Under this system, each loan is graded based on pre-determined risk metrics and categorized into one of nine risk grades. These risk grades can be summarized into categories described as pass, special mention, substandard, doubtful and loss, as described in further detail below.

● Pass (Risk Grades 1-5): Loans in this category include obligations in which the probability of default is considered low.

● Special Mention (Risk Grade 6): Loans in this category exhibit potential credit weaknesses or downward trends deserving Bank management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Although a special mention asset has a higher probability of default than pass-rated categories, its default is not imminent.

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● Substandard (Risk Grade 7): Loans in this category have defined weaknesses that jeopardize the orderly liquidation of debt. A substandard loan is inadequately protected by the current worth and paying capacity of the obligor or by the collateral pledged, if any. Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned. There is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified as substandard.

● Doubtful (Risk Grade 8): Loans classified as doubtful have all of the weaknesses found in substandard loans, with the added characteristic that the weaknesses make collection of debt in full, based on currently existing facts, conditions and values, highly questionable or improbable. Serious problems exist such that partial loss of principal is likely; however, because of certain important, reasonably specific pending factors that may work to strengthen the assets, the loans’ classification as estimated losses is deferred until a more exact status may be determined. Such pending factors may include proposed merger, acquisition or liquidation procedures, capital injection, perfection of liens on additional collateral and refinancing plans. Loans classified as doubtful may include loans to borrowers that have demonstrated a history of failing to live up to agreements.

● Loss (Risk Grade 9): Loans are classified in this category when borrowers are deemed incapable of repayment of unsecured debt. Loans to such borrowers are considered uncollectable and of such little value that continuance as active assets of the Bank is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not prudent to defer writing off these assets, even though partial recovery may be effected in the future.

At ALC, because the loan portfolio is more uniform in nature, each loan is categorized into one of two risk grades, depending on whether the loan is considered to be performing or nonperforming. Performing loans are loans that are paying principal and interest in accordance with a contractual agreement. Nonperforming loans are loans that are either not paying as contractually agreed or that have demonstrated characteristics that indicate a probability of loss.

The tables below illustrate the carrying amount of loans by credit quality indicator as of June 30, 2016.

	FUSB
	Pass 1-5		Special Mention 6		Substandard 7		Doubtful 8		Total
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	22,679	$	—	$	1,627	$	—	$	24,306
Secured by 1-4 family residential properties		31,787		221		1,318		—		33,326
Secured by multi-family residential properties		5,972		—		—		—		5,972
Secured by non-farm, non-residential properties		100,898		3,841		802		—		105,541
Other		190		—		—		—		190
Commercial and industrial loans		36,998		470		692		—		38,160
Consumer loans		6,250		—		116		—		6,366
Other loans		364		—		—		—		364
Total	$	205,138	$	4,532	$	4,555	$	—	$	214,225

	ALC
	Performing		Nonperforming		Total
	(Dollars in Thousands)
Loans secured by real estate:
Secured by 1-4 family residential properties	$	15,094	$	336	$	15,430
Consumer loans		79,689		1,197		80,886
Total	$	94,783	$	1,533	$	96,316

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The tables below illustrate the carrying amount of loans by credit quality indicator as of December 31, 2015.

	FUSB
	Pass 1-5		Special Mention 6		Substandard 7		Doubtful 8		Total
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	9,862	$	—	$	1,965	$	—	$	11,827
Secured by 1-4 family residential properties		29,252		228		1,250		—		30,730
Secured by multi-family residential properties		11,845		—		—		—		11,845
Secured by non-farm, non-residential properties		78,647		4,315		921		—		83,883
Other		115		—		—		—		115
Commercial and industrial loans		28,170		482		725		—		29,377
Consumer loans		6,905		—		152		—		7,057
Other loans		379		—		—		—		379
Total	$	165,175	$	5,025	$	5,013	$	—	$	175,213

	ALC
	Performing		Nonperforming		Total
	(Dollars in Thousands)
Loans secured by real estate:
Secured by 1-4 family residential properties	$	16,964	$	269	$	17,233
Consumer loans		74,743		1,388		76,131
Total	$	91,707	$	1,657	$	93,364

The following tables provide an aging analysis of past due loans by class as of June 30, 2016.

	FUSB
	As of June 30, 2016
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days And Accruing
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	65	$	—	$	126	$	191	$	24,115	$	24,306	$	—
Secured by 1-4 family residential properties		272		40		353		665		32,661		33,326		—
Secured by multi-family residential properties		—		—		—		—		5,972		5,972		—
Secured by non-farm, non-residential properties		—		—		—		—		105,541		105,541		—
Other		—		—		—		—		190		190		—
Commercial and industrial loans		55		24		—		79		38,081		38,160		—
Consumer loans		5		42		16		63		6,303		6,366		—
Other loans		—		—		—		—		364		364		—
Total	$	397	$	106	$	495	$	998	$	213,227	$	214,225	$	—

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	ALC
	As of June 30, 2016
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days And Accruing
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Secured by 1-4 family residential properties		130		53		332		515		14,915		15,430		—
Secured by multi-family residential properties		—		—		—		—		—		—		—
Secured by non-farm, non-residential properties		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		—
Commercial and industrial loans		—		—		—		—		—		—		—
Consumer loans		822		438		1,190		2,450		78,436		80,886		—
Other loans		—		—		—		—		—		—		—
Total	$	952	$	491	$	1,522	$	2,965	$	93,351	$	96,316	$	—

The following tables provide an aging analysis of past due loans by class as of December 31, 2015.

	FUSB
	As of December 31, 2015
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days And Accruing
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	—	$	—	$	86	$	86	$	11,741	$	11,827	$	—
Secured by 1-4 family residential properties		118		206		360		684		30,046		30,730		—
Secured by multi-family residential properties		—		—		—		—		11,845		11,845		—
Secured by non-farm, non-residential properties		530		—		148		678		83,205		83,883		—
Other		—		—		—		—		115		115		—
Commercial and industrial loans		22		52		—		74		29,303		29,377		—
Consumer loans		49		4		83		136		6,921		7,057		—
Other loans		—		—		—		—		379		379		—
Total	$	719	$	262	$	677	$	1,658	$	173,555	$	175,213	$	—

20

	ALC
	As of December 31, 2015
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days And Accruing
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Secured by 1-4 family residential properties		91		206		252		549		16,684		17,233		—
Secured by multi-family residential properties		—		—		—		—		—		—		—
Secured by non-farm, non-residential properties		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		—
Commercial and industrial loans		—		—		—		—		—		—		—
Consumer loans		965		567		1,377		2,909		73,222		76,131		—
Other loans		—		—		—		—		—		—		—
Total	$	1,056	$	773	$	1,629	$	3,458	$	89,906	$	93,364	$	—

The following table provides an analysis of non-accruing loans by class as of June 30, 2016 and December 31, 2015.

	Loans on Non-Accrual Status
	June 30, 2016		December 31, 2015
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	126	$	339
Secured by 1-4 family residential properties		1,032		968
Secured by multi-family residential properties		—		—
Secured by non-farm, non-residential properties		70		213
Commercial and industrial loans		82		47
Consumer loans		1,309		1,535
Total loans	$	2,619	$	3,102

Impaired Loans

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the related loan agreement. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the liquidation of the collateral. All loans of $0.5 million or more that have a credit quality risk grade of seven or above are identified for impairment analysis. Impaired loans, or portions thereof, are charged off when deemed uncollectable.

21

As of June 30, 2016, the carrying amount of impaired loans consisted of the following:

	June 30, 2016
Impaired loans with no related allowance recorded	Carrying Amount		Unpaid Principal Balance		Related Allowances
	(Dollars in Thousands)
Loans secured by real estate
Construction, land development and other land loans	$	—	$	—	$	—
Secured by 1-4 family residential properties		54		54		—
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		—		—		—
Commercial and industrial		—		—		—
Total loans with no related allowance recorded	$	54	$	54	$	—
Impaired loans with an allowance recorded
Loans secured by real estate
Construction, land development and other land loans	$	1,377	$	1,377	$	177
Secured by 1-4 family residential properties		197		197		5
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		557		557		114
Commercial and industrial		427		427		64
Total loans with an allowance recorded	$	2,558	$	2,558	$	360
Total impaired loans
Loans secured by real estate
Construction, land development and other land loans	$	1,377	$	1,377	$	177
Secured by 1-4 family residential properties		251		251		5
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		557		557		114
Commercial and industrial		427		427		64
Total impaired loans	$	2,612	$	2,612	$	360

22

As of December 31, 2015, the carrying amount of impaired loans consisted of the following:  

	December 31, 2015
Impaired loans with no related allowance recorded	Carrying Amount		Unpaid Principal Balance		Related Allowances
	(Dollars in Thousands)
Loans secured by real estate
Construction, land development and other land loans	$	—	$	—	$	—
Secured by 1-4 family residential properties		54		54		—
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		—		—		—
Commercial and industrial		—		—		—
Total loans with no related allowance recorded	$	54	$	54	$	—
Impaired loans with an allowance recorded
Loans secured by real estate
Construction, land development and other land loans	$	1,445	$	1,445	$	95
Secured by 1-4 family residential properties		198		198		5
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		573		573		130
Commercial and industrial		444		444		80
Total loans with an allowance recorded	$	2,660	$	2,660	$	310
Total impaired loans
Loans secured by real estate
Construction, land development and other land loans	$	1,445	$	1,445	$	95
Secured by 1-4 family residential properties		252		252		5
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		573		573		130
Commercial and industrial		444		444		80
Total impaired loans	$	2,714	$	2,714	$	310

The average net investment in impaired loans and interest income recognized and received on impaired loans during the six months ended June 30, 2016 and the year ended December 31, 2015 were as follows:

	June 30, 2016
	Average Recorded Investment		Interest Income Recognized		Interest Income Received
	(Dollars in Thousands)
Loans secured by real estate
Construction, land development and other land loans	$	1,405	$	21	$	22
Secured by 1-4 family residential properties		251		7		5
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		562		16		16
Commercial and industrial		435		12		12
Total	$	2,653	$	56	$	55

23

	December 31, 2015
	Average Recorded Investment		Interest Income Recognized		Interest Income Received
	(Dollars in Thousands)
Loans secured by real estate
Construction, land development and other land loans	$	1,493	$	44	$	46
Secured by 1-4 family residential properties		139		14		14
Secured by multi-family residential properties		1,892		—		—
Secured by non-farm, non-residential properties		3,329		35		36
Commercial and industrial		264		26		26
Total	$	7,117	$	119	$	122

Loans on which the accrual of interest has been discontinued amounted to $2.6 million and $3.1 million as of June 30, 2016 and December 31, 2015, respectively. If interest on those loans had been accrued, there would have been $16 thousand and $0.1 million of interest accrued for the six-month period ended June 30, 2016 and year ended December 31, 2015, respectively. Interest income related to these loans as of June 30, 2016 and December 31, 2015 was $10 thousand and $0.3 million, respectively.

Troubled Debt Restructurings

Troubled debt restructurings include loans with respect to which concessions have been granted to borrowers that generally would not have otherwise been considered had the borrowers not been experiencing financial difficulty. The concessions may include payment schedule modifications, interest rate reductions, maturity date extensions, modifications of note structure, principal balance reductions or some combination of these concessions. Restructured loans may involve loans remaining on non-accrual, moving to non-accrual or continuing on accrual status, depending on the individual facts and circumstances of the borrower. Non-accrual restructured loans are included with all other non-accrual loans. In addition, all accruing restructured loans are reported as troubled debt restructurings. Generally, restructured loans remain on non-accrual until the customer has attained a sustained period of repayment performance under the modified loan terms (generally a minimum of six months). However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms and whether the loan should be returned to or maintained on non-accrual status. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, then the loan remains on non-accrual. As of June 30, 2016 and December 31, 2015, respectively, the Company had $0.5 million and $1.5 million of non-accruing loans that were previously restructured and that remained on non-accrual status. For the six months ended June 30, 2016, the Company had $37 thousand in restructured loans that were restored to accrual status based on a sustained period of repayment performance. For the year ended December 31, 2015, the Company had no restructured loans that were restored to accrual status based on a sustained period of repayment performance.

The following table provides the number of loans remaining in each loan category, as of June 30, 2016 and December 31, 2015, that the Bank had previously modified in a troubled debt restructuring, as well as the pre- and post-modification principal balance as of each date.

	June 30, 2016						December 31, 2015
	Number of Loans		Pre- Modification Outstanding Principal Balance		Post- Modification Principal Balance		Number of Loans		Pre- Modification Outstanding Principal Balance		Post- Modification Principal Balance
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans		2	$	1,960	$	1,446		3	$	2,220	$	1,698
Secured by 1-4 family residential properties		5		459		325		4		200		103
Secured by non-farm, non-residential properties		2		113		47		2		113		52
Commercial loans		2		116		93		2		116		94
Total		11	$	2,648	$	1,911		11	$	2,649	$	1,947

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Restructured loan modifications primarily included maturity date extensions and payment schedule modifications. There were no modifications to principal balances of the loans that were restructured. Accordingly, there was no impact on the Company’s allowance for loan losses resulting from the modifications. None of the loans that were previously modified in a troubled debt restructuring as of June 30, 2016 and December 31, 2015 have defaulted subsequent to modification.

All loans with a principal balance of $0.5 million or more that have been modified in a troubled debt restructuring are considered impaired and evaluated individually for impairment. The nature and extent of impairment of restructured loans, including those that have experienced a subsequent payment default, are considered in the determination of an appropriate level of allowance for loan losses. This evaluation resulted in an allowance for loan losses attributable to such restructured loans of $6 thousand and $1 thousand as of June 30, 2016 and December 31, 2015, respectively.

7. OTHER REAL ESTATE OWNED

Other real estate and certain other assets acquired in foreclosure are reported at the lower of the investment in the loan or the fair value of the property, less estimated costs to sell. The following table summarizes foreclosed property activity as of the six months ended June 30, 2016 and 2015:

	June 30, 2016
	FUSB			ALC			Total
	(Dollars in Thousands)
Beginning balance	$	5,327		$	711		$	6,038
Transfers from loans and fixed assets		269			68			337
Sales proceeds		(629	)		(251	)		(880	)
Gross gains		—			27			27
Gross losses		(23	)		(71	)		(94	)
Net gains (losses)		(23	)		(44	)		(67	)
Impairment		—			(23	)		(23	)
Ending balance	$	4,944		$	461		$	5,405

	June 30, 2015
	FUSB			ALC			Total
	(Dollars in Thousands)
Beginning balance	$	6,997		$	738		$	7,735
Transfers from loans		996			118			1,114
Sales proceeds		(1,274	)		(96	)		(1,370	)
Gross gains		4			—			4
Gross losses		(190	)		(60	)		(250	)
Net gains (losses)		(186	)		(60	)		(246	)
Impairment		(24	)		(41	)		(65	)
Ending balance	$	6,509		$	659		$	7,168

Valuation adjustments are recorded in other non-interest expense and are primarily post-foreclosure write-downs that are a result of continued declining property values based on updated appraisals or other indications of value, such as offers to purchase. Fair value less estimated cost to sell of foreclosed residential real estate held by the Company was $1.0 million and $1.1 million as of June 30, 2016 and 2015, respectively. In addition, the Company held $0.2 million in consumer mortgage loans collateralized by residential real estate that were in the process of foreclosure as of both June 30, 2016 and December 31, 2015.

25

8. INVESTMENT IN LIMITED PARTNERSHIP

The Company holds investments in affordable housing projects for which it provides funding as a limited partner and has received tax credits related to its investments in the projects based on its partnership share. The net assets of the partnership consist primarily of apartment complexes, and the primary liabilities consist of those associated with the operation of the partnership. The Company has determined that this structure requires evaluation as a VIE under Accounting Standards Codification (“ASC”) Topic 810, Consolidation. The Company consolidates one fund in which it has a 99.9% limited partnership interest. Assets recorded by the Company as a result of the consolidation were less than $0.1 million as of both June 30, 2016 and December 31, 2015.

9. SHORT-TERM BORROWINGS

Short-term borrowings consist of federal funds purchased, securities sold under repurchase agreements and short-term Federal Home Loan Bank (“FHLB”) advances. Short-term borrowings totaled $5.4 million and $7.4 million as of June 30, 2016 and December 31, 2015, respectively.

Federal funds purchased, which represent unsecured lines of credit that generally mature within one to four days, are available to the Company through arrangements with correspondent banks and the Federal Reserve. As of both June 30, 2016 and December 31, 2015, there were no federal funds purchased outstanding, and the Company had $18.8 million in available unused lines.

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 as of both June 30, 2016 and December 31, 2015 totaled $0.4 million.

Short-term FHLB advances are secured borrowings available to the Company as an alternative funding source. The Company had $5.0 million in outstanding FHLB advances with a maturity date of less than six months as of June 30, 2016. As of December 31, 2015, the Company had $7.0 million in outstanding FHLB advances with a maturity date of less than six months.

10. LONG-TERM DEBT

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 often offer more attractive rates than other mid- and long-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. The Company had long-term FHLB advances outstanding of $15.0 million and $5.0 million as of June 30, 2016 and December 31, 2015, respectively. Long-term FHLB advances with remaining terms to maturity of less than 12 months were $5.0 million as of June 30, 2016. There were no long-term FHLB advances with remaining terms to maturity of less than 12 months as of December 31, 2015.

Assets pledged associated with FHLB advances totaled $22.6 million and $14.0 million as of June 30, 2016 and December 31, 2015, respectively. As of June 30, 2016 and December 31, 2015, the Company had $152.6 million and $152.5 million, respectively, in remaining credit from the FHLB (subject to available collateral).

11. INCOME TAXES

The provision for income taxes was $0.2 million and $0.7 million for the six-month periods ended June 30, 2016 and 2015, respectively. The Company’s effective tax rate was 23.9% and 29.2%, respectively, for the same periods. The effective tax rate is impacted by recurring permanent differences, such as those associated with bank-owned life insurance and tax-exempt investments and loan income.

26

The Company had a net deferred tax asset of $7.1 million and $7.8 million as of June 30, 2016 and December 31, 2015, respectively. The reduction in the net deferred tax asset resulted primarily from the impact of changes in the fair value of securities available-for-sale.

12. DEFERRED COMPENSATION PLANS

The Bank has entered into supplemental compensation benefits agreements with certain directors and executive officers.  The measurement of the liability under these agreements includes estimates involving life expectancy, length of time before retirement and the expected returns on the bank-owned life insurance policies used to fund those agreements. Should these estimates prove to be materially wrong, the cost of these agreements could change accordingly. The related deferred compensation obligation to these directors and executive officers included in other liabilities was $3.6 million as of both June 30, 2016 and December 31, 2015.

In addition, non-employee directors may elect to defer payment of all or any portion of their USBI and FUSB director fees under the United Security Bancshares, Inc. Non-Employee Directors’ Deferred Compensation Plan (the “Deferral Plan”). The Deferral Plan, which was ratified by shareholders at the annual meeting held on May 11, 2004, permits non-employee directors to invest their directors’ fees and to receive the adjusted value of the deferred amounts in cash and/or shares of USBI’s common stock. The Company uses shares held as treasury stock to satisfy stock-based obligations. A total of 112,282 shares and 103,571 shares were deferred under the Deferral Plan as of June 30, 2016 and December 31, 2015, respectively. Cash deferrals under the Deferral Plan were less than $0.1 million as of June 30, 2016 and December 31, 2015.

13. STOCK OPTION GRANTS

In accordance with the Company’s 2013 Incentive Plan, stock option awards have been granted to certain employees and non-employee directors. The awards were granted with an exercise price equal to the market price of USBI’s common stock on the date of grant and have vesting periods ranging from one to three years, with 10-year contractual terms. The Company expects to use shares held as treasury stock to satisfy share option exercises. Currently, the Company holds a sufficient number of treasury shares to satisfy potential exercises.

The Company recognizes the cost of services received in exchange for stock option awards based on the grant date fair value of the award, with compensation expense recognized on a straight-line basis over the award’s vesting period. The fair value of outstanding awards was determined using the Black-Scholes option pricing model based on the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company’s common stock.

	2016			2015
Risk-free interest rate		1.58	%		1.52	%
Expected term	7.5 years			7.5 years
Expected stock price volatility		25.25	%		54.04	%
Dividend yield		1.50	%		1.50	%

The following table summarizes the Company's stock option activity for the periods presented.

	Six Months Ended
	June 30, 2016				June 30, 2015
	Number of Shares		Average Exercise Price		Number of Shares		Average Exercise Price
Options:
Outstanding, beginning of period		175,550	$	8.17		83,400	$	8.09
Granted		97,000		8.30		96,150		8.23
Exercised		—		—		—		—
Expired		—		—		—		—
Forfeited		—		—		2,500		8.09
Options outstanding, end of period		272,550	$	8.21		177,050	$	8.16
Options exercisable, end of period		175,550	$	8.17		81,900	$	8.09

Stock-based compensation expense related to stock options totaled $0.1 million for both six-month periods ended June 30, 2016 and 2015, respectively. The aggregate intrinsic value of stock options outstanding (calculated as the amount by which the market value of underlying stock exceeds the exercise price of the option) was $0.1 million as of June 30, 2016 and less than $0.1 million as of  June 30, 2015.

27

14. DERIVATIVE FINANCIAL INSTRUMENTS

Derivatives Designated as Hedging Instruments

On April 1, 2016, FUSB entered into a forward interest rate swap contract on a variable rate FHLB advance (indexed to three-month LIBOR) with a total notional amount of $10.0 million. The interest rate swap contract was designated as a derivative instrument in a cash flow hedge under ASC Topic 815, Derivatives and Hedging, with the objective of protecting the quarterly interest rate payments on the FHLB advance from the risk of variability of those payments resulting from changes in the three-month LIBOR interest rate throughout the seven-year period beginning on April 5, 2016 and ending on April 5, 2023. Under the swap arrangement, which became effective on April 5, 2016, FUSB will pay a fixed interest rate of 1.46% and receive a variable interest rate based on three-month LIBOR on the total notional amount of $10.0 million, with quarterly net settlements.

No ineffectiveness related to the interest rate swap designated as a cash flow hedge was recognized in the consolidated statements of operations for the three- and six-month periods ended June 30, 2016. The accumulated net after-tax loss related to the effective cash flow hedge included in accumulated other comprehensive income totaled $140 thousand as of June 30, 2016. Amounts reported in accumulated other comprehensive income related to this derivative are reclassified to other interest expense as interest payments are made on FUSB’s variable rate FHLB advance. During the next twelve months, FUSB estimates that $68 thousand will be reclassified as an increase to interest expense.

Derivatives Not Designated as Hedging Instruments

In 2014, FUSB entered into three separate interest rate cap agreements to mitigate risks associated with increases in interest rates on an aggregate notional amount of $40 million. The interest rate caps qualify as derivatives but were not designated as hedging instruments. Accordingly, changes in the fair value of the instruments are included in results of operations. Under the three agreements, the Company paid an up-front premium totaling approximately $126 thousand, in return for the ability to receive cash flows if interest rates rise above a strike rate indexed to three-month LIBOR. The agreements have contractual terms that mature at various dates in 2017. As of June 30, 2016, the strike rate had not been achieved on any of the three agreements, and accordingly, the Company has received no cash flows associated with the agreements. Since the inception of the agreements, on a quarterly basis, the Company has recorded the current fair value of the derivatives within other assets on the Company’s consolidated balance sheet, with changes in the fair value included in interest expense on the Company’s consolidated statements of operations. As of June 30, 2016, the fair value of each of the three derivative agreements was zero. During the six months ended June 30, 2016, approximately $3 thousand was recognized as interest expense associated with the agreements.

15. SEGMENT REPORTING

Under ASC Topic 280, Segment Reporting, certain information is disclosed for the two reportable operating segments of the Company, FUSB and ALC. The reportable segments were determined using the internal management reporting system. These segments comprise the Company’s and FUSB’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 as of and for the year ended December 31, 2015. 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 tables below.

						All
	FUSB			ALC		Other			Eliminations			Consolidated
	(Dollars in Thousands)
For the three months ended June 30, 2016:
Net interest income	$	3,683		$	3,231	$	3		$	—		$	6,917
Provision (reduction in reserve) for loan losses		(170	)		706		—			—			536
Total non-interest income		1,120			342		834			(816	)		1,480
Total non-interest expense		4,463			2,478		458			(144	)		7,255
Income before income taxes		510			389		379			(672	)		606
Provision for income taxes		123			130		(109	)		—			144
Net income	$	387		$	259	$	488		$	(672	)	$	462
Other significant items:
Total assets	$	603,722		$	89,758	$	83,936		$	(175,662	)	$	601,754
Total investment securities		213,085			—		80			—			213,165
Total loans, net		290,473			86,006		—			(77,578	)		298,901
Investment in subsidiaries		5			—		78,511			(78,511	)		5
Fixed asset additions		337			12		—			—			349
Depreciation and amortization expense		191			56		—			—			247
Total interest income from external customers		3,211			4,267		—			—			7,478
Total interest income from affiliates		1,036			—		3			(1,039	)		—
For the six months ended June 30, 2016:
Net interest income	$	7,281		$	6,291	$	6		$	—		$	13,578
Provision (reduction in reserve) for loan losses		(450	)		1,153		—			—			703
Total non-interest income		1,842			593		1,508			(1,474	)		2,469
Total non-interest expense		8,798			4,904		898			(279	)		14,321
Income before income taxes		775			827		616			(1,195	)		1,023
Provision for income taxes		171			288		(215	)		—			244
Net income	$	604		$	539	$	831		$	(1,195	)	$	779
Other significant items:
Fixed asset additions		3,561			17		—			—			3,578
Depreciation and amortization expense		371			108		—			—			479
Total interest income from external customers		6,335			8,339		—			—			14,674
Total interest income from affiliates		2,048			—		5			(2,053	)		—

28

						All
	FUSB			ALC		Other			Eliminations			Consolidated
	(Dollars in Thousands)
For the three months ended June 30, 2015:
Net interest income	$	3,991		$	3,176	$	3		$	—		$	7,170
Provision (reduction in reserve) for loan losses		(445	)		490		—			—			45
Total non-interest income		861			235		1,093			(1,121	)		1,068
Total non-interest expense		4,386			2,477		386			(142	)		7,107
Income before income taxes		911			444		710			(979	)		1,086
Provision for income taxes		264			153		(105	)		—			312
Net income	$	647		$	291	$	815		$	(979	)	$	774
Other significant items:
Total assets	$	562,900		$	84,139	$	81,816		$	(168,205	)	$	560,650
Total investment securities		246,096			—		80			—			246,176
Total loans, net		237,357			79,971		—			(72,335	)		244,993
Investment in subsidiaries		5			—		76,488			(76,488	)		5
Fixed asset additions		639			87		—			—			726
Depreciation and amortization expense		155			61		—			—			216
Total interest income from external customers		3,640			4,095		—			—			7,735
Total interest income from affiliates		918			—		3			(921	)		—
For the six months ended June 30, 2015:
Net interest income	$	7,835		$	6,037	$	5		$	—		$	13,877
Provision (reduction in reserve) for loan losses		(970	)		849		—			—			(121	)
Total non-interest income		2,011			455		2,206			(2,313	)		2,359
Total non-interest expense		8,667			4,970		743			(296	)		14,084
Income before income taxes		2,149			673		1,468			(2,017	)		2,273
Provision for income taxes		635			239		(211	)		—			663
Net income	$	1,514		$	434	$	1,679		$	(2,017	)	$	1,610
Other significant items:
Fixed asset additions	$	1,610		$	249	$	—		$	—		$	1,859
Depreciation and amortization expense		308			120		—			—			428
Total interest income from external customers		7,217			7,838		1			—			15,056
Total interest income from affiliates		1,801			—		4			(1,805	)		—

29

16. GUARANTEES, COMMITMENTS AND CONTINGENCIES

The Bank’s exposure to credit loss in the event of nonperformance by the other party for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making these commitments as it does for on-balance sheet instruments. For interest rate swap transactions and commitments to purchase or sell securities for forward delivery, the contract or notional amounts do not represent exposure to credit loss. The Bank controls the credit risk of these derivative instruments through credit approvals, limits and monitoring procedures. Certain derivative contracts have credit risk for the carrying value plus the amount to replace such contracts in the event of counterparty default. All of the Bank’s financial instruments are held for risk management and not for trading purposes. During the six-month periods ended June 30, 2016 and 2015, respectively, there were no credit losses associated with derivative contracts.

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

	June 30, 2016		December 31, 2015
	(Dollars in Thousands)
Standby letters of credit	$	183	$	683
Commitments to extend credit	$	45,439	$	61,427

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. As of June 30, 2016 and December 31, 2015, the potential amount of future payments that the Bank could be required to make under its standby letters of credit, which represent the Bank’s total credit risk in this category, is included in the table above.

A commitment to extend credit is an agreement 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 the 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. As of both June 30, 2016 and December 31, 2015, there were no outstanding commitments to purchase securities for delayed delivery and no outstanding commitments to sell securities for delayed delivery.

Litigation

The Company is a party to certain ordinary course 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 ordinary course litigation should not have a material adverse effect on the Company’s consolidated financial statements or results of operations.

17. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company follows the provisions of ASC 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. The assumptions used in the estimation of the fair value of the Company’s financial instruments are detailed below. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather represent a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance.

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Fair Value Hierarchy

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

● Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange or Nasdaq. 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.

The Company rarely transfers assets and liabilities measured at fair value between Level 1 and Level 2 measurements. Trading account assets and securities available-for-sale may be periodically transferred to or from Level 3 valuation based on management’s conclusion regarding the best method of pricing for an individual security. Such transfers are accounted for as if they occurred at the beginning of a reporting period. There were no such transfers during the six months ended June 30, 2016 or the year ended December 31, 2015.

Fair Value Measurements on a Recurring Basis

Securities Available-for-Sale

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

Interest Rate Derivative Agreements

Interest rate derivative agreements are used by the Company to mitigate risk associated with changes in interest rates. The fair value of these agreements is based on information obtained from third-party financial institutions. This information is periodically evaluated by the Company and, as necessary, corroborated against other third-party valuations. The Company classifies these derivative assets within Level 2 of the valuation hierarchy.

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The following table presents assets and liabilities measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015. 

	Fair Value Measurements as of June 30, 2016 Using
	Totals At June 30, 2016		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Investment securities, available-for-sale
Mortgage-backed securities:
Residential	$	112,516	$	—	$	112,516	$	—
Commercial		53,311		—		53,311		—
Obligations of states and political subdivisions		10,929		—		10,929		—
Obligations of U.S. government-sponsored agencies		2,008		—		2,008		—
Corporate notes		769		—		769		—
U.S. Treasury securities		80		—		80		—
Other liabilities - derivatives		221		—		221		—

	Fair Value Measurements as of December 31, 2015 Using
	Totals At December 31, 2015		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Investment securities, available-for-sale
Mortgage-backed securities:
Residential	$	135,494	$	—	$	135,494	$	—
Commercial		45,509		—		45,509		—
Obligations of states and political subdivisions		14,998		—		14,998		—
Obligations of U.S. government-sponsored agencies		1,982		—		1,982		—
Corporate notes		780		—		780		—
U.S. Treasury securities		80		—		80		—
Other assets - derivatives		3		—		3		—

Fair Value Measurements on a Non-recurring Basis

Impaired Loans

Loans that are considered impaired are loans for which, based on current information and events, it is probable that the Company will be unable to collect all principal and interest payments due under the contractual terms of the loan agreement. Impaired loans can be measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price or the fair value of the collateral less estimated selling cost if the loan is collateral-dependent. For the Company, the fair value of impaired loans is primarily measured based on the value of the collateral securing the loans (typically real estate). The Company determines the fair value of the collateral based on independent appraisals performed by qualified licensed appraisers. The appraisals may include a single valuation approach or a combination of approaches, including comparable sales and income approaches. Appraised values are discounted for estimated costs to sell and may be discounted further based on management’s knowledge of the collateral, changes in market conditions since the most recent appraisal and/or management’s knowledge of the borrower and the borrower’s business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. Impaired loans are evaluated by management for additional impairment at least quarterly and are adjusted accordingly.

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OREO

OREO consists of properties obtained through foreclosure or in satisfaction of loans and is recorded at the lower of the loan’s carrying amount or the fair value of the property, less estimated cost to sell. Estimates of fair value are generally based on third-party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes discounted based on management’s knowledge of the property and/or changes in market conditions from the date of the most recent appraisal. Such discounts are typically significant unobservable inputs for determining fair value.

The following table presents the balances of impaired loans and OREO measured at fair value on a non-recurring basis as of June 30, 2016 and December 31, 2015.

	Fair Value Measurements as of June 30, 2016 Using
	Totals At June 30, 2016		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Impaired loans	$	2,198	$	—	$	—	$	2,198
OREO		5,405		—		—		5,405

	Fair Value Measurements as of December 31, 2015 Using
	Totals At December 31, 2015		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Impaired loans	$	2,350	$	—	$	—	$	2,350
OREO		6,038		—		—		6,038

33

Non-recurring Fair Value Measurements Using Significant Unobservable Inputs

The following table presents information regarding assets and liabilities measured at fair value using significant unobservable inputs (Level 3) as of June 30, 2016. The table includes the valuation techniques and the significant unobservable inputs utilized. The range of each unobservable input and the weighted average within the range utilized as of June 30, 2016 are both included. Following the table is a description of the valuation technique and the sensitivity of the technique to changes in the significant unobservable input.

	Level 3 Significant Unobservable Input Assumptions
	Fair Value June 30, 2016		Valuation Technique	Unobservable Input	Quantitative Range of Unobservable Inputs (Weighted Average)
	(Dollars in Thousands)
Non-recurring fair value measurements:
Impaired loans	$	2,198	Multiple data points, including discount to appraised value of collateral based on recent market activity	Appraisal comparability adjustment (discount)	9% - 10% (9.5%)
OREO	$	5,405	Discount to appraised value of property based on recent market activity for sales of similar properties	Appraisal comparability adjustment (discount)	9% - 10% (9.5%)

Impaired Loans

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

OREO

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

Fair Value of Financial Instruments

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

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

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

Investment securities: Fair values of investment 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.

Derivative instruments: The fair value of derivative instruments is based on information obtained from a third-party financial institution. This information is periodically evaluated by the Company and, as necessary, corroborated against other third-party information.

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

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

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

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

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

Long-term debt: The fair value of this debt is estimated using discounted cash flows based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements as of June 30, 2016 and December 31, 2015.

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.

The estimated fair value and related carrying or notional amounts, as well as the level within the fair value hierarchy, of the Company’s financial instruments as of June 30, 2016 and December 31, 2015, were as follows:

	June 30, 2016
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(Dollars in Thousands)
Assets:
Cash and cash equivalents	$	42,725	$	42,725	$	42,725	$	—	$	—
Investment securities available-for-sale		179,613		179,613		—		179,613		—
Investment securities held-to-maturity		33,552		33,769		—		33,769		—
Federal Home Loan Bank stock		1,368		1,368		—		—		1,368
Loans, net of allowance for loan losses		298,901		297,242		—		—		297,242
Liabilities:
Deposits		495,618		496,015		—		496,015		—
Short-term borrowings		5,352		5,352		—		5,352		—
Long-term borrowings		15,000		14,998		—		14,998		—
Other liabilities - derivatives		221		221		—		221		—

	December 31, 2015
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(Dollars in Thousands)
Assets:
Cash and cash equivalents	$	44,072	$	44,072	$	44,072	$	—	$	—
Investment securities available-for-sale		198,843		198,843		—		198,843		—
Investment securities held-to-maturity		32,359		32,184		—		32,184		—
Federal Home Loan Bank stock		1,025		1,025		—		—		1,025
Loans, net of allowance for loan losses		255,432		256,392		—		—		256,392
Other assets – derivatives		3		3		—		3		—
Liabilities:
Deposits		479,258		478,833		—		478,833		—
Short-term borrowings		7,354		7,352		—		7,352		—
Long-term borrowings		5,000		4,977		—		4,977		—

35

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

DESCRIPTION OF THE COMPANY’S BUSINESS

United Security Bancshares, Inc., a Delaware corporation (“USBI”), is a bank holding company with its principal offices in Thomasville, Alabama. USBI operates one commercial banking subsidiary, First US Bank (the “Bank” or “FUSB”). As of June 30, 2016, in addition to a loan production office in Jefferson County, Alabama, that opened in April 2016, the Bank operated and served its customers through nineteen banking offices located in Brent, Bucksville, Butler, Calera, Centreville, Coffeeville, Columbiana, Fulton, Gilbertown, Grove Hill, Harpersville, Jackson, Thomasville, Tuscaloosa and Woodstock, Alabama. On July 29, 2016, the Bank's Brent office was permanently closed.

The Bank owns all of the stock of Acceptance Loan Company, Inc., an Alabama corporation (“ALC”). ALC is a finance company organized for the purpose of making and purchasing consumer loans. ALC’s principal office is located in Mobile, Alabama. The Bank is the funding source for ALC. As of June 30, 2016, in addition to its principal office, ALC operated twenty-one finance company offices located in Alabama and southeast Mississippi.

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

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

Delivery of the best possible financial services to customers remains an overall operational focus of USBI and its subsidiaries (collectively, the “Company”). We recognize that attention to detail and responsiveness to customers’ desires are critical to customer satisfaction. The Company continues to upgrade technology, both in its financial services and in the training of its 280 full-time equivalent employees, to ensure customer satisfaction and convenience.

The preparation of the Company’s consolidated financial statements requires management to make subjective judgments associated with estimates. These estimates are necessary to comply with accounting principles generally accepted in the United States of America and general banking practices. These estimates include accounting for the allowance for loan losses, other real estate owned, valuation of deferred tax assets and fair value measurements. A description of these estimates, which significantly affect the determination of consolidated financial position, results of operations and cash flows, is set forth in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in USBI’s Annual Report on Form 10-K as of and for the year ended December 31, 2015.

The emphasis of this discussion is a comparison of assets, liabilities and shareholders’ equity as of June 30, 2016 to December 31, 2015, while comparing income and expense for the six-month periods ended June 30, 2016 and 2015.

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

This information should be read in conjunction with the Company’s unaudited consolidated financial statements and related notes appearing elsewhere in this report and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" appearing in USBI’s Annual Report on Form 10-K as of and for the year ended December 31, 2015.

EXECUTIVE OVERVIEW

For the three months ended June 30, 2016, the Company’s net income was $0.5 million, or $0.07 per diluted share, compared to $0.8 million, or $0.12 per diluted share, for the three months ended June 30, 2015. For the six months ended June 30, 2016, the Company's net income was $0.8 million, or $0.12 per diluted share, compared to $1.6 million, or $0.25 per diluted share, for the six months ended June 30, 2015. The decrease in net income in both periods resulted primarily from higher loan loss provisions in 2016, which decreased net interest income after provision for loan losses by $0.5 million and $0.8 million for the three- and six-month periods ended June 30, 2016, respectively, compared to the corresponding periods of 2015. The increase in loan loss provision was due in part to loan growth and in part to reductions in the pace of credit quality improvement from which the Bank benefited in 2015. Net loans increased $34.9 million during the second quarter of 2016 and $43.5 million for the six months ended June 30, 2016. Although the growth in net loans was significant, the majority of growth occurred during the latter part of the second quarter, and accordingly, did not result in significant growth in interest and fees on loans during either the three or six months ended June 30, 2016.

The three months ended June 30, 2016 represented the third consecutive quarter of growth in the Company’s loan portfolio and is reflective of continued focus by management at both the Bank and ALC on efforts to grow the portfolio with a diversified mix of assets of acceptable credit quality. Improvement in asset quality over the past several years has enabled management to deploy more resources to loan origination efforts in recent quarters, particularly at the Bank. The loan growth strategy at the Bank has been focused on the larger metropolitan areas of Birmingham and Tuscaloosa, Alabama which have produced the majority of the Bank’s loan growth over the past three quarters. During the second quarter of 2016, management continued efforts to execute on this strategy through the opening of a loan production office in Mountain Brook, a suburb of Birmingham. In addition, the design and planning phase continued for a new 40,000 square foot office complex on a parcel of land located in the Birmingham area along U.S. Highway 280 that was purchased by the Bank during the first quarter. Construction is expected to begin during the third quarter of 2016, and once completed, the office complex is intended to serve as the Bank’s focal point in the Birmingham area. The complex will house a retail branch of the Bank, as well as the Birmingham commercial lending team and certain members of the Bank’s executive management team. Approximately 25% of the square footage of the office complex will be utilized by the Bank, with the remainder to be leased to commercial tenants. It is expected that the office complex will be operational by the second half of 2017.

As of June 30, 2016, the Company continued to maintain excess funding capacity to provide adequate liquidity for ongoing operations and to fund future loan growth and capital expenditures. The Company benefits from a strong deposit base, a liquid investment portfolio and access to funding from a variety of external sources, such as federal funds lines, Federal Home Loan Bank (“FHLB”) advances and brokered deposits.

Additional significant financial results for the first six months of 2016 are summarized below.

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● Net loans increased $43.5 million, an increase of 17.0% from December 31, 2016, or 34.0% on an annualized basis. Of the total growth, $39.2 million was attributable to the Bank’s commercial loan portfolio, while $4.3 million was attributable to growth in ALC’s consumer loan portfolio. Of the Bank’s growth, $21.7 million represented real estate loans secured by non-farm, non-residential collateral, $12.5 million represented construction real estate, and $8.8 million represented commercial and industrial (C&I) loans. ALC’s growth was comprised of $8.1 million in point-of-sale consumer lending, offset in part by reductions of $1.8 million and $2.0 million in ALC’s real estate and traditional consumer lending portfolios, respectively. The growth at both the Bank and ALC is indicative of management’s ongoing efforts to broaden the Company’s commercial loan portfolio with a diversified mix of real estate and C&I loans, while growing point-of-sale consumer lending at ALC. Management believes that continued success in loan growth efforts, combined with continued adherance to established credit underwriting standards, will strengthen both the diversity and credit quality of the Company’s loan portfolio, while improving interest and fee income on loans. 

● Due to the growth in loan demand, management redeployed certain investment assets to the loan portfolio. As a result, the investment securities portfolio (including both available-for-sale and held-to-maturity securities) decreased to $213.2 million as of June 30, 2016, compared to $231.2 million as of December 31, 2015. Growth in deposits and borrowings also contributed to the funding side of the Company’s balance sheet. Total deposits increased $16.4 million while short-term borrowings and long-term debt increased $8.0 million on a net basis.

● Non-performing assets decreased $1.1 million from levels as of December 31, 2015, to $8.0 million as of June 30, 2016. Non-performing assets as a percentage of total assets were reduced to 1.33% as of June 30, 2016, compared to 1.59% as of December 31, 2015 and 1.96% as of June 30, 2015. Of the total decrease during the first six months of 2016, $0.6 million represented reductions in OREO, while $0.5 million was attributable to reductions in non-accrual loans.

● Total interest income decreased $0.4 million for the six months ended June 30, 2016 compared to the same period in 2015, primarily due to lower average yields in the Bank’s loan portfolio. The reduced yields are indicative of the current sustained low interest rate environment, as well as management’s continued focus on maintaining established credit standards as the loan portfolio grows. As a result of the low interest rate environment, the Company was able to reduce interest expense by $0.1 million during the six months ended June 30, 2016 compared to the same period of 2015.

● The provision for loan losses increased $0.8 million comparing the six months ended June 30, 2016 to the corresponding period of 2015. Approximately $0.3 million of the increase resulted from the loan growth experienced by the Bank and ALC during the period. The remaining amount was primarily attributable to the impact on the Bank’s allowance for loan losses and continued stabilization of credit quality in the Bank’s loan portfolio. Over the past two years, the Bank has experienced substantial improvement in the credit quality of its loan portfolio, as evidenced by declining historical loss rates in the calculation of the allowance for loan losses. This has resulted in negative provisions (reductions in reserve), which have had a positive impact on the Company’s pre-tax income. As the credit quality of the portfolio continues to stabilize, these reductions in reserve decrease, which has a negative impact on the Company’s pre-tax income. The decrease in the Bank’s reduction in reserve for the six months ended June 30, 2016 compared to the six months ended June 30, 2015 was $0.5 million.

● Non-interest income increased $0.1 million during the six months ended June 30, 2016 compared to the corresponding period of 2015. The increase was attributable to increases in the levels of income from credit insurance and other ancillary services sold primarily at ALC. These increases were partially offset by reductions in service charges on deposit accounts at the Bank. During both the six months ended June 30, 2016 and 2015, the Company realized gains on the sale of investment securities of $0.4 million. 

● Non-interest expense increased $0.2 million for the six months ended June 30, 2016 compared to the corresponding period of 2015 as a result of increased costs associated with information technology, as well as the closure of one of the Bank’s retail branches. These increases were partially offset by reductions in other real estate/foreclosure expenses.  

37

RESULTS OF OPERATIONS

	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2016		2015		2016		2015
	(Dollars in Thousands)
Interest income	$	7,478	$	7,735	$	14,674	$	15,056
Interest expense		561		565		1,096		1,179
Net interest income		6,917		7,170		13,578		13,877
Provision (reduction in reserve) for loan losses		536		45		703		(121	)
Net interest income after provision (reduction in reserve) for loan losses		6,381		7,125		12,875		13,998
Non-interest income		1,480		1,068		2,469		2,359
Non-interest expense		7,255		7,107		14,321		14,084
Income before income taxes		606		1,086		1,023		2,273
Provision for income taxes		144		312		244		663
Net income	$	462	$	774	$	779	$	1,610

Net Interest Income

Net interest income is calculated as the difference between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates, as well as volume and mix changes in earning assets and interest-bearing liabilities, can materially impact net interest income. The Company’s earning assets are comprised of loans at both the Bank and ALC, as well as taxable and nontaxable investments and federal funds sold by the Bank. Interest-bearing liabilities are comprised of interest-bearing demand deposits and savings and time deposits, as well as short-term borrowings and long-term debt. Net interest income for the Company totaled $13.6 million and $13.9 million for the six months ended June 30, 2016 and 2015, respectively.

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The following tables show, for the three and six months ended June 30, 2016 and June 30, 2015, the average balances of each principal category of assets, liabilities and shareholders’ equity. Additionally, the tables provide an analysis of interest revenue or expense associated with each category, along with the accompanying yield or rate percentage. Net yield is calculated for each period presented as net interest income divided by average total interest-earning assets.

	Three Months Ended							Three Months Ended
	June 30, 2016							June 30, 2015
	Average Balance		Interest		Annualized Yield/ Rate %			Average Balance		Interest		Annualized Yield/ Rate %
	(Dollars in Thousands)
ASSETS
Interest-earning assets:
Loans – FUSB (Note A)	$	191,262	$	2,099		4.39	%	$	170,313	$	2,425		5.34	%
Loans – ALC (Note A)		84,595		4,267		20.18	%		75,198		4,095		22.28	%
Taxable investments		240,835		980		1.63	%		254,319		1,065		1.69	%
Non-taxable investments		15,105		131		3.47	%		16,086		150		3.62	%
Federal funds sold		923		1		—			—		—		—
Total interest-earning assets		532,720		7,478		5.61	%		515,916		7,735		5.90	%
Non-interest-earning assets:
Other assets		50,015							47,595
Total	$	582,735						$	563,511
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Demand deposits	$	148,709	$	132		0.35	%	$	148,920	$	144		0.38	%
Savings deposits		78,276		36		0.19	%		73,750		34		0.19	%
Time deposits		179,572		345		0.77	%		184,229		379		0.80	%
Borrowings		16,613		48		1.13	%		5,773		8		0.59	%
Total interest-bearing liabilities		423,170		561		0.53	%		412,672		565		0.54	%
Non-interest-bearing liabilities:
Demand deposits		74,428							68,168
Other liabilities		6,839							6,708
Shareholders’ equity		78,298							75,963
Total	$	582,735						$	563,511
Net interest income (Note B)			$	6,917						$	7,170
Net yield on interest-earning assets						5.19	%						5.47	%

Note A	—	For the purpose of these computations, non-accruing loans are included in the average loan amounts outstanding. At FUSB, these loans averaged $1.2 million and $2.0 million for the three months ended June 30, 2016 and 2015, respectively. At ALC, these loans averaged $1.5 million and $1.8 million for the respective periods presented.
Note B	—	Loan fees are included in the interest amounts presented. At FUSB, loan fees totaled $0.1 million for both the three months ended June 30, 2016 and 2015. At ALC, loan fees totaled $0.7 million and $0.8 million for the respective periods presented.

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	Six Months Ended							Six Months Ended
	June 30, 2016							June 30, 2015
	Average Balance		Interest		Annualized Yield/ Rate %			Average Balance		Interest		Annualized Yield/ Rate %
	(Dollars in Thousands)
ASSETS
Interest-earning assets:
Loans – FUSB (Note A)	$	184,176	$	4,080		4.43	%	$	175,941	$	4,817		5.48	%
Loans – ALC (Note A)		83,847		8,339		19.89	%		74,366		7,838		21.08	%
Taxable investments		241,775		1,974		1.63	%		253,504		2,104		1.66	%
Non-taxable investments		16,018		276		3.45	%		16,318		297		3.64	%
Federal funds sold		1,923		5		0.52	%		—		—		—
Total interest-earning assets		527,739		14,674		5.56	%		520,129		15,056		5.79	%
Non-interest-earning assets:
Other assets		49,019							47,387
Total	$	576,758						$	567,516
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Demand deposits	$	148,049	$	270		0.36	%	$	149,964	$	287		0.38	%
Savings deposits		76,903		71		0.19	%		72,911		67		0.19	%
Time deposits		180,131		695		0.77	%		186,431		810		0.87	%
Borrowings		13,029		60		0.92	%		5,615		15		0.53	%
Total interest-bearing liabilities		418,112		1,096		0.52	%		414,921		1,179		0.57	%
Non-interest-bearing liabilities:
Demand deposits		73,241							69,128
Other liabilities		7,666							7,602
Shareholders’ equity		77,739							75,865
Total	$	576,758						$	567,516
Net interest income (Note B)			$	13,578						$	13,877
Net yield on interest-earning assets						5.15	%						5.29	%

Note A	—	For the purpose of these computations, non-accruing loans are included in the average loan amounts outstanding. At FUSB, these loans averaged $1.3 million and $2.7 million for the six months ended June 30, 2016 and 2015, respectively. At ALC, these loans averaged $1.7 million and $1.8 million for the respective periods presented.
Note B	—	Loan fees are included in the interest amounts presented. At FUSB, loan fees totaled $0.2 million for both the six months ended June 30, 2016 and 2015, respectively. At ALC, loan fees totaled $1.0 million and $1.6 million for the respective periods presented.

Net interest income decreased $0.3 million in both the three- and six-month periods ended June 30, 2016, compared to the corresponding periods of 2015. The decreases in both periods were due primarily to reduced yield on loans and investment securities at the Bank. Reduced yields resulted from the general interest rate environment, which remained at relatively low levels during the first six months of 2016, as well as management’s ongoing strategic efforts over the past several years to focus on problem asset resolution and improve the credit quality of the loan portfolio through the tightening of credit standards. The Bank’s average loan balance increased $20.9 million and $8.2 million during the three- and six-month periods ended June 30, 2016, respectively, compared to the corresponding periods in 2015. The majority of the Bank's loan growth was in real estate loans secured by non-farm, non-residential collateral, construction real estate, and the commercial and industrial (C&I) portfolio.

The reduction in interest income at FUSB was partially offset by increased interest income at ALC due to higher average loan balances in both the three- and six-month periods ended June 30, 2016 compared to the corresponding periods in 2015. ALC’s average loan balance increased $9.4 million and $9.5 million during the three- and six-month periods ended June 30, 2016, respectively, compared to the corresponding periods in 2015. The majority of ALC’s loan growth was achieved in the point-of-sale consumer lending portfolio.

The average balance of the Bank’s investment securities portfolio was reduced in both the three- and six-month periods ended June 30, 2016. This reduction, coupled with modestly reduced yields in the investment portfolio, resulted in a reduction of interest income of $0.1 million and $0.2 million for the three-and six-month periods ended June 30, 2016, respectively, compared to the corresponding periods of 2015. The investment securities portfolio provides an additional source of liquidity and diversification, as well as a resource to enhance interest income. Changes in the investment portfolio result primarily from management’s decisions on the allocation of assets to higher-yielding loan portfolios and non-interest-earning assets.

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Interest expense decreased approximately $0.1 million comparing the six months ended June 30, 2016 to the corresponding period of 2015. The decrease resulted primarily from a reduction in the average volume of higher-cost time deposits, as well as the repricing of certain time deposits at lower rates.

We expect that continued growth of net loan volumes at both the Bank and ALC with loans of sufficient credit quality will enable management to enhance net interest income; however, in the current interest rate environment, it is expected that the average yield on new loan originations will generally be lower than the yield on loans in the Bank’s existing portfolio. At both the Bank and ALC, management is continuing to focus efforts on new loan origination within the parameters of established credit policy, while also maintaining vigilance in the deployment of strategies to effectively manage risks associated with interest rate fluctuations. Net interest income could continue to experience downward pressure as a result of increased competition for quality loan opportunities, lower reinvestment yields and fewer opportunities to reduce future funding costs.

Provision (Reduction in Reserve) for Loan Losses

The provision for loan losses is an expense used to establish the allowance for loan losses. Actual loan losses, net of recoveries, are charged directly to the allowance for loan losses. The expense recorded for each reporting period is a reflection of actual net losses experienced during the period and management’s judgment as to the adequacy of the allowance to absorb losses inherent in the portfolio as of the balance sheet date. The Company’s provision for loan losses was $0.5 million and $0.7 million for the three and six months ended June 30, 2016, respectively, compared to $45 thousand and a credit (or reduction in reserve) of $0.1 million for the three and six months ended June 30, 2015, respectively.

The following table presents the provision (reduction in reserve) for loan losses for the Bank and ALC for the three and six months ended June 30, 2016 and 2015.

	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2016			2015			2016			2015
FUSB	$	(170	)	$	(445	)	$	(450	)	$	(970	)
ALC		706			490			1,153			849
Total	$	536		$	45		$	703		$	(121	)

At FUSB, a reduction in the reserve for loan losses occurred during all periods presented. These reductions resulted from improvement in the overall credit quality of the Bank’s loan portfolio, including declining historical loss rates used in the calculation of the allowance for loan losses. As of June 30, 2016, the Bank’s allowance for loan losses as a percentage of loans was 0.53%, compared to 1.46% as of June 30, 2015. For the three months ended June 30, 2016, the Bank experienced net recoveries of $0.2 million, compared to net recoveries of $14 thousand during the three months ended June 30, 2015. For the six months ended June 30, 2016, the Bank experienced net recoveries of $0.3 million, compared to net charge-offs of $67 thousand during the six months ended June 30, 2015. 

At ALC, the provision for loan losses increased by approximately $0.2 million comparing the three months ended June 30, 2016 to the three months ended June 30, 2015. The increase resulted from growth in ALC’s loan balances and was partially offset by improvement in the overall credit quality of ALC’s loan portfolio, including declining historical loss rates used in the calculation of the allowance for loan losses. As of June 30, 2016, ALC’s allowance for loan losses as a percentage of loans was 2.77%, compared to 3.10% as of June 30, 2015. During the three months ended June 30, 2016, net charge-offs at ALC totaled $0.6 million, compared to net charge-offs of $0.5 million during the three months ended June 30, 2015. For the six months ended June 30, 2016, net charge-offs at ALC totaled $1.2 million, compared to net charge-offs of $1.0 million during the six months ended June 30, 2015.

Based on management's evaluation of the portfolio, we believe that the Company's allowance for loan losses is adequate to absorb losses inherent in the loan portfolio as of June 30, 2016. While we believe that the methodologies and calculations that heve been used in the determination of the allowance are adequate, our conclusions are based on estimates and judgments and are, therefore, approximate and imprecise. Factors beyond our control, such as changes in economic conditions impacting the national economy or the local service areas in which we operate, may negatively and materially affect asset quality and the adequacy of the allowance for loan losses, as well as the resulting provision for loan losses. Furthermore, the reductions in the reserve for loan losses recorded by the Bank as of June 30, 2016 and 2015 are not expected to continue at any significant level on an ongoing basis.

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Non-Interest Income

Non-interest income represents fees and income derived from sources other than interest-earning assets. The following table presents the major components of non-interest income. Expanded discussion of certain significant non-interest income items and fluctuations is provided below the table.

	Three Months Ended June 30,										Six Months Ended June 30,
	2016		2015		$ Change			% Change			2016		2015		$ Change			% Change
	(Dollars in Thousands)										(Dollars in Thousands)
Service charges and other fees on deposit accounts	$	426	$	472	$	(46	)		(9.7	)%	$	843	$	926	$	(83	)		(9.0	)%
Credit insurance commissions and fees		162		114		48			42.1	%		314		189		125			66.1	%
Bank-owned life insurance		105		104		1			1.0	%		210		208		2			1.0	%
Net gain on sale and prepayment of investment securities		396		84		312			371.4	%		398		361		37			10.2	%
Other income		391		294		97			33.0	%		704		675		29			4.3	%
Total non-interest income	$	1,480	$	1,068	$	412			38.6	%	$	2,469	$	2,359	$	110			4.7	%

Service Charges and Other Fees on Deposit Accounts

Service charges and other fees are generated on deposit accounts held at FUSB. The decrease in this category of non-interest income during both the second quarter of 2016 and the six months ended June 30, 2016 compared to the corresponding periods in 2015 resulted primarily from decreased fees generated from customer overdrafts and non-sufficient funds charges. Revenues from these sources have generally declined in recent years. Management continues to search for new sources of fee income from our financial services and products; however, income from non-sufficient funds and overdraft charges are not expected to increase at a significant rate in the near future.

Credit Insurance Commissions and Fees

Credit insurance commissions and fees are generated from credit life and credit accident and health insurance policies offered at both the Bank and ALC to consumer loan customers through FUSB Reinsurance. The majority of these sales have historically been generated at ALC. The increase in non-interest income in this category during the three and six months ended June 30, 2016 compared to the corresponding periods of 2015 resulted primarily from a renewed focus by ALC management on generating these types of sales during the period.  In general, however, revenues from this category of non-interest income have declined in recent years as ALC management has shifted the loan portfolio mix to loans of higher credit quality. This mix-shift has resulted in a larger proportion of borrowers who generally do not have a significant need for credit insurance. Accordingly, income from credit insurance commissions and fees is not expected to increase at a significant rate for the foreseeable future.

Bank-owned Life Insurance

The Bank utilizes bank-owned life insurance as a tool to offset the cost of certain retirement benefit programs. The income derived from bank-owned life insurance represents the increase in the cash surrender value of the policies (which is generally non-taxable) over the periods presented. The cash surrender value of the policies totaled $14.4 million and $14.3 million as of June 30, 2016 and December 31, 2015, respectively. The insurance policies are adjustable-rate assets with minimum guaranteed rates of interest between 2% and 4%. Accordingly, management does not expect significant fluctuation in the income derived from these assets.

Net Gain on Sale and Prepayment of Investment Securities

The investment securities portfolio is used by management to provide liquidity, to generate interest income, and for use as collateral for public deposits and wholesale funding. Management reviews the securities in the investment portfolio periodically and, from time to time, may determine that it is appropriate to sell securities that are designated as securities available-for-sale. When this occurs, a gain or loss is recorded as the difference between the fair value of the security on the date of sale and the security’s carrying value. In addition, a gain may be recognized for prepayment penalties earned by the Company when a security is called by the debtor prior to its maturity date. During the six months ended June 30, 2016, securities with a carrying value of $12.3 million were sold, while securities with a carrying value of $11.2 million were prepaid before maturity. During the six months ended June 30, 2015, securities with a carrying value of $15.8 million were sold, while securities with a carrying value of $4.0 million were prepaid before maturity. As a result of these transactions, the Company realized net gains on the sale of securities of $0.4 million during both six-month periods ended June 30, 2016 and 2015. Gains realized as a result of prepayments were nominal in both six-month periods. In addition, no losses were realized on the sale or prepayment of securities in either six-month period ended June 30, 2016 or 2015. The determination of whether to sell investment securities is made by management based on specific facts and circumstances at a given point in time. Accordingly, no assessment can be made as to the level of gains or losses that could be incurred from sales of investment securities or prepayment penalties in the future.

Other Income

Other non-interest income primarily consists of fee income generated by the Bank for ancillary services, such as letters of credit, ATMs, debit and credit cards, wire transfers and real estate rental. Other non-interest income is generated at ALC for services including ALC’s auto club membership program, which provides services to members such as emergency roadside assistance, lock and key services and emergency travel expenses. The increases in this category during the three months and six months ended June 30, 2016 compared to the corresponding periods of 2015 resulted primarily from increased sales of ancillary services, including auto club membership programs, at ALC. Given the nature of the types of revenues categorized as other income, there is uncertainty as to the level of revenue that will be derived from these sources in the future.

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Non-Interest Expense

Non-interest expense represents expenses incurred from sources other than interest-bearing liabilities. The following table presents the major components of non-interest expense for the periods indicated. Expanded discussion of certain significant non-interest expense items and fluctuations is provided below the table.

	Three Months Ended June 30,										Six Months Ended June 30,
	2016		2015		$ Change			% Change			2016		2015		$ Change			% Change
	(Dollars in Thousands)										(Dollars in Thousands)
Salaries and employee benefits	$	4,236	$	4,215	$	21			0.5	%	$	8,400	$	8,407	$	(7	)		(0.1	)%
Net occupancy and equipment expense		782		780		2			0.3	%		1,551		1,603		(52	)		(3.2	)%
Other real estate/foreclosure expense:
Write-downs, net of gain or loss on sale		76		231		(155	)		(67.1	)%		90		311		(221	)		(71.1	)%
Carrying costs		53		116		(63	)		(54.3	)%		156		256		(100	)		(39.1	)%
Total other real estate/foreclosure expense		129		347		(218	)		(62.8	)%		246		567		(321	)		(56.6	)%
Insurance expense and assessments		251		261		(10	)		(3.8	)%		520		536		(16	)		3.0	%
Other		1,857		1,504		353			23.5	%		3,604		2,971		633			21.3	%
Total non-interest expense	$	7,255	$	7,107	$	148			2.1	%	$	14,321	$	14,084	$	237			1.7	%

Salaries and Employee Benefits

Salaries and employee benefits expense, the largest category of non-interest expense, totaled $2.7 million at the Bank and $1.5 million at ALC for both the second quarter of 2016 and the second quarter of 2015. For both six-month periods ended June 30, 2016 and 2015, salaries and benefits expense totaled $5.4 million at the Bank and $3.0 million at ALC. The expense amounts for the Bank are inclusive of salaries and benefits paid to certain members of management and employees for work performed on behalf of USBI, as well as current and deferred fees paid to members of the Bank’s and USBI’s Boards of Directors. Management remains committed to providing salaries and benefits packages to employees at competitive levels in order to ensure that we continue to provide quality service to our customers. Accordingly, we expect salaries and employee benefits expense to generally increase commensurate with market-based increases over time.

Net Occupancy and Equipment Expense

This category of non-interest expense includes expenses associated with depreciation of buildings, equipment and furniture and fixtures, rent of office space, utilities expense and maintenance and repair costs. The majority of the Bank’s office space is owned, while the majority of ALC’s office space is leased. The decrease in this category for the three and six months ended June 30, 2016 compared to the three and six months ended June 30, 2015 resulted from reduced costs at the Bank associated with changes in service contract arrangements with the Bank's primary core processing vendor. The Bank previously expensed the costs of the arrangement as occupancy and equipment expense. Under the current service contract arrangement, related expenses are accounted for as other non-interest expense. The resulting decrease to net occupancy and equipment expense was partially offset by increases in depreciation resulting from capital expenditures at the Bank. Occupancy and equipment expense is expected to increase over time as the Company depreciates expenditures associated with capital and technological improvements. During the three and six months ended June 30, 2016, the Company recorded $0.3 and $3.6 million, respectively, in additions to premises and equipment. The majority of these expenditures were associated with the purchase of land in the Birmingham, Alabama metropolitan area for future branch expansion.

Other Real Estate / Foreclosure Expense

Other real estate / foreclosure expense includes both the cost of carrying OREO and write-downs of OREO. Cost of carrying OREO includes property taxes, attorneys’ fees, maintenance costs, security costs and the cost of obtaining independent property appraisals. Write-downs include impairments recorded on existing OREO properties in order to carry the property at the lower of cost or fair value, less estimated cost to sell.

Both OREO write-downs and carrying costs decreased during the three and six months ended June 30, 2016 compared to the corresponding periods of 2015 as a result of continued reduction in the levels of OREO at the Bank and ALC. OREO totaled $4.9 million and $0.5 million at FUSB and ALC, respectively, as of June 30, 2016, compared to $6.5 million and $0.7 million, respectively, as of June 30, 2015, a decrease of $1.8 million for the Company on a consolidated basis.

Although management continued to reduce OREO levels during the three- and six-month periods ended June 30, 2016, there continues to be uncertainty with respect to economic conditions and real estate values in certain of the service areas in which both the Bank and ALC operate. In addition, as the level of OREO is reduced, it becomes more difficult to work out remaining OREO at the same pace as previously experienced. Accordingly, continued reduction of carrying costs cannot be expected with any level of certainty. Furthermore, if the national or local economy weakens, or if real estate values decline further in the Company's primary service areas, additional write-downs of existing OREO could be required. Additionally, the pace of migration of properties into OREO could increase, resulting in the potential for increased levels of both write-downs and carrying cost.

Insurance Expense and Assessments

This category of non-interest expense includes the cost of corporate insurance maintained by the Company, as well as FDIC insurance and state banking assessments. The Bank pays assessments to the FDIC based on a prescribed regulatory calculation that factors in average total assets and the Company’s supervisory ratings, as determined by regulatory examinations. Total expense in this category decreased modestly during the three- and six-month periods ended June 30, 2016 compared to the corresponding periods of 2015. This category of expense is generally expected to increase over time based on growth in the Company’s balance sheet and expansion of the Company's activities.

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Other

This category includes the costs of professional services (including legal, accounting and auditing), information technology and advertising/marketing fees, as well as costs associated with recording and filing, telephone, postage, stationery and printing, employee training and other miscellaneous expenses. The increase in this category comparing both the three- and six-month periods ended June 30, 2016 to the corresponding periods of 2015 was driven primarily by expenses associated with information technology services provided by the Bank’s primary core processing vendor. These expenses represented approximately $0.2 million and $0.5 million of the increase in other non-interest expense for the three- and six-month periods ended June 30, 2016, respectively. These increases were offset by reductions in occupancy and equipment expense due to changes in service contract arrangements with the core processing vendor. In addition, approximately $0.1 million of the increase in both the three- and six-month periods ended June 30, 2016 was associated with the closure of one of the Bank’s branches in the second quarter of 2016. The branch closing was undertaken as part of an effort to evaluate the profitability of branches and make adjustments that will positively impact the Company’s cost structure over time, while maintaining the Bank's ability to effectively serve its customer base. Management currently anticipates additional branch closures to occur during the third and fourth quarters of 2016.  We will continue to maintain vigilance in the evaluation of all costs in this category; however, the level of other non-interest expense is generally expected to increase over time as a result of continued focus on technology, training, marketing and business development.

Provision for Income Taxes

The provision for income taxes was $0.1 million and $0.3 million for the three months ended June 30, 2016 and 2015, respectively. The effective tax rate was 23.8% for the second quarter of 2016, compared to 28.7% for the second quarter of 2015. For the six months ended June 30, 2016 and 2015, the effective tax rate was 23.9% and 29.2%, respectively. The Company’s effective tax rate is expected to fluctuate based on recurring items, such as changes in tax-exempt interest income earned from bank-qualified municipal bonds and loans and the cash surrender value of bank-owned life insurance. Management makes decisions about whether to invest in tax-exempt instruments on a case-by-case basis after considering a number of factors, including investment return, credit quality and the consistency of such investments with the Company’s overall strategy. The Company’s effective tax rate is expected to fluctuate commensurate with the level of these investments as compared to total pre-tax income.

BALANCE SHEET ANALYSIS

Investment Securities

The investment securities portfolio is used by management to provide liquidity, to generate interest income and for use as collateral for public deposits and wholesale funding. Risk and return can be adjusted by altering the duration, composition and/or balance of the portfolio. The expected average life of securities in the investment portfolio was 2.6 years and 2.9 years as of June 30, 2016 and December 31, 2015, respectively.

Available-for-sale securities are recorded at estimated fair value, with unrealized gains or losses recognized, net of taxes, in accumulated other comprehensive income, a separate component of shareholders’ equity. As of June 30, 2016, available-for-sale securities totaled $179.6 million, or 84.3% of the total investment portfolio, compared to $198.8 million, or 86.0% of the total investment portfolio, as of December 31, 2015. Available-for-sale securities consisted of residential and commercial mortgage-backed securities, U.S. Treasury securities, obligations of U.S. government-sponsored agencies, obligations of state and political subdivisions and corporate notes.

Held-to-maturity securities are recorded at amortized cost and represent securities that the Company both intends and has the ability to hold to maturity. As of June 30, 2016, held-to-maturity securities totaled $33.6 million, or 15.7% of the total investment portfolio, compared to $32.4 million, or 14.0% of the total investment portfolio, as of December 31, 2015. Held-to-maturity securities consisted of commercial mortgage-backed securities, obligations of U.S. government-sponsored agencies and obligations of state and political subdivisions.

Due to the growth in loan demand, management redeployed certain investment assets to the loan portfolio. As a result, the investment securities portfolio (including both available-for-sale and held-to-maturity securities) decreased to $213.2 million as of June 30, 2016, compared to $231.2 million as of December 31, 2015. In addition, the Company realized gains on the sale of securities totaling $0.4 million during both of the six-month periods ended June 30, 2016 and 2015. Sales transactions affecting the Bank’s investment portfolio are directed by asset and liability management activities and strategies. Although short-term losses may occur from time to time, the “pruning” of the portfolio is designed to maintain the strength of the investment portfolio.

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Loans and Allowance for Loan Losses

The tables below summarize loan balances by portfolio segment for both FUSB and ALC at the end of each of the most recent five quarters as of June 30, 2016.

	FUSB
	2016				2015
	June 30,		March 31,		December 31,		September 30,		June 30,
	(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans	$	24,306	$	18,023	$	11,827	$	11,900	$	12,363
Secured by 1-4 family residential properties		33,326		30,623		30,730		32,049		30,564
Secured by multi-family residential properties		5,972		11,580		11,845		13,005		17,163
Secured by non-farm, non-residential properties		105,541		82,754		83,883		75,840		81,621
Other		190		168		115		116		57
Commercial and industrial loans		38,160		34,568		29,377		18,796		18,198
Consumer loans		6,366		6,614		7,057		6,848		6,910
Other loans		364		407		379		486		786
Total loans	$	214,225	$	184,737	$	175,213	$	159,040	$	167,662
Less unearned interest, fees and deferred cost		192		174		149		164		191
Allowance for loan losses		1,138		1,068		1,329		1,941		2,449
Net loans	$	212,895	$	183,495	$	173,735	$	156,935	$	165,022

	ALC
	2016				2015
	June 30,		March 31,		December 31,		September 30,		June 30,
	(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans	$	—	$	—	$	—	$	—	$	—
Secured by 1-4 family residential properties		15,430		16,265		17,223		17,993		19,129
Secured by multi-family residential properties		—		—		—		—		—
Secured by non-farm, non-residential properties		—		—		—		—		—
Other		—		—		—		—		—
Commercial and industrial loans		—		—		—		—		—
Consumer loans		80,886		74,669		76,131		74,767		73,342
Other loans		—		—		—		—		—
Total loans	$	96,316	$	90,934	$	93,364	$	92,760	$	92,471
Less unearned interest, fees and deferred cost		7,857		8,147		9,215		9,576		9,941
Allowance for loan losses		2,453		2,307		2,452		2,404		2,559
Net loans	$	86,006	$	80,480	$	81,697	$	80,780	$	79,971

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The tables below summarize changes in the allowance for loan losses and certain asset quality ratios at the end of each of the most recent five quarters as of June 30, 2016 at both FUSB and ALC.

	FUSB
	2016						2015
	Second Quarter			First Quarter			Fourth Quarter			Third Quarter			Second Quarter
	(Dollars in Thousands)
Balance at beginning of period	$	1,068		$	1,329		$	1,941		$	2,449		$	2,880
Charge-offs:
Commercial and industrial		—			—			—			—			—
Commercial real estate		—						(490	)		(173	)		(28	)
Residential real estate		(7	)		—			—			(27	)		—
Consumer		(6	)		(21	)		(1	)		(2	)		(3	)
Total charge-offs		(13	)		(21	)		(491	)		(202	)		(31	)
Recoveries		253			40			68			94			45
Net recoveries (charge-offs)		240			19			(423	)		(108	)		14
Provision (reduction in reserve) for loan losses		(170	)		(280	)		(189	)		(400	)		(445	)
Ending balance	$	1,138		$	1,068		$	1,329		$	1,941		$	2,449
as a % of loans		0.53	%		0.58	%		0.76	%		1.22	%		1.46	%

	ALC
	2016						2015
	Second Quarter			First Quarter			Fourth Quarter			Third Quarter			Second Quarter
	(Dollars in Thousands)
Balance at beginning of period	$	2,307		$	2,452		$	2,404		$	2,559		$	2,521
Charge-offs:
Commercial and industrial		—			—			—			—			—
Commercial real estate		—			—			—			—			—
Residential real estate		(16	)		(5	)		(14	)		(30	)		(63	)
Consumer		(746	)		(765	)		(706	)		(618	)		(573	)
Total charge-offs		(762	)		(770	)		(720	)		(648	)		(636	)
Recoveries		202			178			164			170			184
Net recoveries (charge-offs)		(560	)		(592	)		(556	)		(478	)		(452	)
Provision (reduction in reserve) for loan losses		706			447			604			323			490
Ending balance	$	2,453		$	2,307		$	2,452		$	2,404		$	2,559
as a % of loans		2.77	%		2.79	%		2.91	%		2.89	%		3.10	%

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Nonperforming Assets

Nonperforming assets at the end of the five most recent quarters as of June 30, 2016 were as follows:

	Consolidated
	2016						2015
	June 30,			March 31,			December 31,			September 30,			June 30,
	(Dollars in Thousands)
Non-accrual loans	$	2,619		$	3,277		$	3,102		$	4,222		$	3,819
Other real estate owned		5,405			5,356			6,038			6,656			7,168
Total	$	8,024		$	8,633		$	9,140		$	10,878		$	10,987
Nonperforming assets as a percentage of loans and other real estate		2.61	%		3.17	%		3.45	%		4.37	%		4.27	%
Nonperforming assets as a percentage of total assets		1.33	%		1.50	%		1.59	%		1.98	%		1.96	%

	FUSB
	2016						2015
	June 30,			March 31,			December 31,			September 30,			June 30,
	(Dollars in Thousands)
Non-accrual loans	$	1,086		$	1,463		$	1,445		$	2,624		$	2,028
Other real estate owned		4,944			4,702			5,327			5,961			6,509
Total	$	6,030		$	6,165		$	6,772		$	8,585		$	8,537
Nonperforming assets as a percentage of loans and other real estate		2.75	%		3.26	%		3.75	%		5.21	%		4.91	%
Nonperforming assets as a percentage of total assets		1.00	%		1.07	%		1.17	%		1.56	%		1.52	%

	ALC
	2016						2015
	June 30,			March 31,			December 30,			September 30,			June 30,
	(Dollars in Thousands)
Non-accrual loans	$	1,533		$	1,814		$	1,657		$	1,598		$	1,791
Other real estate owned		461			654			711			695			659
Total	$	1,994		$	2,468		$	2,368		$	2,293		$	2,450
Nonperforming assets as a percentage of loans and other real estate		2.24	%		2.96	%		2.79	%		2.73	%		2.95	%
Nonperforming assets as a percentage of total assets		2.22	%		2.93	%		2.76	%		2.70	%		2.91	%

Loans are considered restructured loans if concessions have been granted to borrowers that are experiencing financial difficulty. The concessions generally involve modification of the terms of the loan, such as changes in payment schedule or interest rate, which generally would not otherwise be considered. Restructured loans can involve loans remaining on non-accrual, moving to non-accrual or continuing on accrual status, depending on the individual facts and circumstances of the borrower. Non-accrual restructured loans are included and treated with all other non-accrual loans. In addition, all accruing restructured loans are reported as troubled debt restructurings. Generally, restructured loans remain on non-accrual until the customer has attained a sustained period of repayment performance under the modified loan terms (generally a minimum of six months). However, performance prior to the restructuring or significant events that coincide with the restructuring are considered in assessing whether the borrower can meet the new terms and whether the loan should be returned to accrual or maintained on non-accrual status. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan remains on non-accrual. The Company had $0.5 million and $1.2 million of non-accruing loans that were restructured and remained on non-accrual status as of June 30, 2016 and 2015, respectively. During the three months ended June 30, 2016, the Company had one restructured loan that was restored to accrual status based on a sustained period of repayment performance. For the three months ended June 30, 2015, the Company had no restructured loans that were restored to accrual status based on a sustained period of repayment performance. 

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Deposits

Total deposits increased by 3.4% to $495.6 million as of June 30, 2016, from $479.3 million as of December 31, 2015. Core deposits, which exclude time deposits of $250 thousand or more, provide for a relatively stable funding source that supports earning assets. Core deposits totaled $470.8 million, or 95.0% of total deposits, as of June 30, 2016, compared with $454.2 million, or 94.8% of total deposits, as of December 31, 2015.

Deposits, in particular core deposits, have historically been the Company’s primary source of funding and have enabled the Company to successfully meet both short-term and long-term liquidity needs. Deposit levels fluctuate throughout the year based on certain seasonal trends, as well as specific circumstances impacting deposit customers. Management anticipates that deposits will continue to be the Company’s primary source of funding in the future, and we will continue to monitor deposit levels closely to help ensure an adequate level of funding for the Company’s activities. However, various economic and competitive factors could affect this funding source in the future, including increased competition from other financial institutions in deposit gathering, national and local economic conditions and interest rate policies adopted by the Federal Reserve and other central banks.

Other Interest-Bearing Liabilities

Other interest-bearing liabilities consist of federal funds purchased, securities sold under agreements to repurchase and FHLB advances. We continue to utilize this category as an alternative source of funds. During the second quarter of 2016, these borrowings represented 3.9% of average interest-bearing liabilities, compared with 1.4% in the second quarter of 2015.

Shareholders’ Equity

The Company has historically placed great emphasis on maintaining its strong capital base. As of June 30, 2016, shareholders’ equity totaled $78.5 million, or 13.1% of total assets, compared to $77.0 million, or 13.4% of total assets, as of December 31, 2015. Management believes that this level of equity is an indicator of the financial soundness of the Company and the Company’s ability to sustain future growth and profitability. The increase in shareholders’ equity during the period ended June 30, 2016 resulted from continued growth in retained earnings and increases in accumulated other comprehensive income related to changes in the fair value of investment securities available-for-sale. The fair value of the available-for-sale portfolio fluctuates based primarily on changes in interest rates. Accordingly, the net unrealized gains during the second quarter of 2016 are not necessarily indicative of future performance of the portfolio.

The Company’s Board of Directors evaluates dividend payments based on the Company’s level of earnings and our desire to maintain a strong capital base, as well as regulatory requirements relating to the payment of dividends. During both the three-month periods ended June 30, 2016 and 2015, the Company declared dividends of $0.02 per common share, or approximately $0.1 million.

As of both June 30, 2016 and December 31, 2015, the Company retained approximately $20.8 million in treasury stock. USBI initiated a share repurchase program in January 2006, under which the Company was authorized to repurchase up to 642,785 shares of common stock before December 31, 2007. In December 2007, and in each year since, the Board of Directors has extended the expiration date of the share repurchase program for an additional year. Currently, the share repurchase program is set to expire on December 31, 2016. There are 242,303 shares available for repurchase under this plan, at management’s discretion. No shares were purchased under this program during the first six months of 2016 or 2015.

As of June 30, 2016 and December 31, 2015, a total of 112,282 and 103,571 shares of stock, respectively, were deferred in connection with USBI’s Non-Employee Directors’ Deferred Compensation Plan. The plan permits non-employee directors to invest their directors’ fees and to receive the adjusted value of the deferred amounts in cash and/or shares of USBI’s common stock. All deferred fees, whether in the form of cash or shares of stock, are reflected as compensation expense in the period earned. The Company classifies all deferred directors' fees allocated to be paid in shares of stock as equity surplus. The Company uses shares of treasury stock to satisfy these obligations when due.

LIQUIDITY AND CAPITAL RESOURCES

The asset portion of the balance sheet provides liquidity primarily from two sources: (1) principal payments and maturities of loans and (2) maturities and principal payments from the investment portfolio. Other short-term investments, such as federal funds sold, may also provide additional sources of liquidity. Loans maturing or repricing in one year or less totaled $124.1 million as of June 30, 2016 and $97.8 million as of December 31, 2015. Investment securities forecasted to mature or reprice in one year or less are estimated to be $15.4 million as of June 30, 2016.

Although the majority of the securities portfolio has a legal final maturity exceeding 10 years, a substantial percentage of the portfolio provides monthly principal and interest payments and consists of securities that are readily marketable and easily convertible into cash on short notice. As of June 30, 2016, the investment securities portfolio had an estimated average life of 2.58 years, and approximately 82.8% of the portfolio (including both available-for-sale and held-to-maturity investments) was expected to be repaid within five years. However, management does not rely solely on the investment portfolio to generate cash flows to fund loans, capital expenditures, dividends, debt repayment and other cash requirements. These activities are also funded by cash flows from loan payments, as well as increases in deposits and short-term borrowings.

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The liability portion of the balance sheet provides liquidity through interest-bearing and non-interest-bearing deposit accounts, which represent the Company’s primary sources of funds. In addition, federal funds purchased, FHLB advances, securities sold under agreements to repurchase and short-term and long-term borrowings are additional sources of available 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 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.

As of June 30, 2016 and December 31, 2015, respectively, the Company had $20 million and $12.0 million in outstanding borrowings under FHLB advances. The Company had up to $152.6 million and $152.5 million in remaining unused credit from the FHLB (subject to available collateral) as of June 30, 2016 and December 31, 2015, respectively. In addition, the Company had $18.8 million in unused established federal funds lines as of June 30, 2016 and December 31, 2015.

Management is not aware of any condition that currently exists that would have a material 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 16, “Guarantees, Commitments and Contingencies,” in the Notes to the Interim Condensed Consolidated Financial Statements for further discussion.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary purpose in managing interest rate risk is to invest capital effectively and preserve the value created by our core banking business. This is accomplished through the development and implementation of lending, funding, pricing and hedging strategies designed to maximize net interest income performance under varying interest rate environments, subject to liquidity and interest rate risk guidelines. Effective interest rate sensitivity management ensures that both assets and liabilities respond to changes in interest rates within an acceptable time frame, thereby minimizing the effect of such interest rate movements on short- and long-term net interest margin and net interest income.

Financial simulation models are the primary tools used to measure interest rate exposure. Using a wide range of scenarios, management is provided with extensive information on the potential impact on net interest income caused by changes in interest rates. In these simulations, assumptions are made about the direction and volatility of interest rates, the slope of the yield curve and the changing composition of the Company’s balance sheet resulting from both strategic plans and customer behavior. Simulation models also incorporate management’s assumptions regarding such factors as loan and deposit growth, pricing, prepayment speeds and spreads between interest rates.

49

Measuring Interest Rate Sensitivity

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

The Company measures changes in net interest income and net interest margin on a monthly basis through income simulation over various interest rate shock scenarios, including plus or minus 1%, 2%, 3% and 4% scenarios. Each month, management evaluates how changes in short- and long-term interest rates may impact future profitability, as reflected in the Company’s net interest margin.

Also on a monthly basis, management calculates how changes in interest rates would impact the market value of the Company’s assets and liabilities, as well as its 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 simulations. The results of these calculations are representative of long-term interest rate risk, both in terms of changes in the present value of the Company’s assets and liabilities and long-term changes in core profitability.

See Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of USBI's Annual Report on Form 10-K as of and for the year ended December 31, 2015 for additional disclosures related to market risk.

ITEM 4. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

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

USBI’s management carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the USBI’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of June 30, 2016, pursuant to the evaluation of these controls and procedures required by Rule 13a-15 of the Exchange Act. Based on that evaluation, USBI’s management concluded, as of June 30, 2016, that USBI’s disclosure controls and procedures are effective to ensure that the information required to be disclosed in USBI’s periodic filings with the SEC is recorded, processed, summarized and reported within the time periods specified.

Changes in Internal Control Over Financial Reporting

There were no changes in USBI’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 16 to Item 1, “Guarantees, Commitments and Contingencies,” for information regarding certain litigation matters relating to the Company.

The Company is a party to certain ordinary course 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 ordinary course litigation should not have a material adverse effect on the Company’s consolidated financial statements or results of operations.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors,” in USBI’s Annual Report on Form 10-K as of and for the year ended December 31, 2015 that could materially affect the Company’s business, financial condition or future results. The risks described in USBI’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

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

The following table sets forth purchases made by or on behalf of USBI or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, of shares of USBI’s common stock during the second quarter of 2016.

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 of Shares that May Yet Be Purchased Under the Programs (1)
April 1 – April 30		1,580		$	8.25		—		242,303
May 1 – May 31		—		$	—		—		242,303
June 1 – June 30		—		$	—		—		242,303
Total		1,580	(2)	$	8.25		—		242,303

(1) On December 16, 2015, the Board of Directors extended the share repurchase program previously approved by the Board on January 19, 2006. Under the repurchase program, USBI is authorized to repurchase up to 642,785 shares of common stock. The expiration date of the extended repurchase program is December 31, 2016. As of June 30, 2016, there were 242,303 shares that may still be purchased under the program.

(2) 1,580 shares were purchased in open-market transactions by an independent trustee for the United Security Bancshares, Inc. 401(k) Plan.

ITEM 6. EXHIBITS

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

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SIGNATURES

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

UNITED SECURITY BANCSHARES, INC.

DATE: August 10, 2016

BY:	/s/ Thomas S. Elley
	Thomas S. Elley
	Its Vice President, Treasurer and Assistant Secretary, Chief Financial Officer and Principal Accounting
	Officer (Duly Authorized Officer and Principal Financial Officer)

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INDEX TO EXHIBITS

Exhibit No.	Description
3.1	Certificate of Incorporation of United Security Bancshares, Inc., incorporated herein by reference to Exhibit 3(i) to Form 10-Q for the quarter ended September 30, 1999.
3.2	Amended and Restated Bylaws of United Security Bancshares, Inc., incorporated by reference to Exhibit 3(ii) to the Current Report on Form 8-K filed August 29, 2007.
3.2A	First Amendment to the Bylaws of United Security Bancshares, Inc., incorporated by reference to Exhibit 3(ii) to the Current Report on Form 8-K filed February 24, 2012.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
32	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Interactive Data Files for the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016.