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Estate Planning Failures of the Rich and Famous V
 

UNITED SECURITY BANCSHARES INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operation.

United Security Bancshares, Inc., a Delaware corporation, is a bank holding company with its principal offices in Thomasville, Alabama. At December 31, 2012, 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,...

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Introduction and Overview

United Security Bancshares, Inc., a Delaware corporation ("Bancshares," "USBI"
or the "Company"), is a bank holding company with its principal offices in
Thomasville, Alabama. Bancshares operates one commercial banking subsidiary,
First United Security Bank (the "Bank" or "FUSB"). At December 31, 2012, 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.

The Bank owns all of the stock of Acceptance Loan Company, Inc. ("ALC"), an
Alabama corporation. ALC is a finance company organized for the purpose of
making and purchasing consumer loans. ALC operates twenty-four finance company
offices located in Alabama and Southeast Mississippi. The headquarters of ALC is
located in Jackson, Alabama. The Bank is the funding source for ALC.

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 consumer oriented.

FUSB Reinsurance, Inc. ("FUSB Reinsurance"), an Arizona corporation and a
wholly-owned subsidiary of the Bank, 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.

At December 31, 2012, Bancshares had consolidated assets of $567.1 million,
deposits of $489.0 million and shareholders' equity of $68.6 million. Total
assets decreased by $54.7 million, or 8.8%, in 2012. Net income attributable to
USBI increased from a loss of $(9.1) million in 2011 to income of $2.2 million
in 2012. Net income attributable to USBI per share increased from a loss of
$(1.51) in 2011 to income of $0.36 in 2012. These results are explained in more
detail throughout this section.

Delivery of the best possible banking services to customers remains an overall
operational focus of the Company. We recognize that attention to details and
responsiveness to customers' desires are critical to customer satisfaction. The
Company continues to employ current technology, both in its financial services
and in the training of its 290.67 full-time equivalent employees, to ensure
customer satisfaction and convenience.

The following discussion and financial information are presented to aid in an
understanding of the current consolidated financial position, changes in
financial position and results of operations of Bancshares and should be read in
conjunction with the Audited Consolidated Financial Statements and Notes thereto
included herein. The emphasis of this discussion is on the years 2012 and 2011.
All yields presented and discussed herein are based on the accrual basis and not
on the tax-equivalent basis, unless otherwise indicated.

Forward-Looking Statements

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This Annual Report on Form 10-K for the year ended December 31, 2012 (this
"Annual Report"), other annual and periodic reports filed by Bancshares and its
subsidiaries under the Securities Exchange Act of 1934, as amended, and any
other written or oral statements made by or on behalf of Bancshares may include
"forward-looking statements," within the meaning of the Private Securities
Litigation Reform Act of 1995, that reflect Bancshares' current views with
respect to future events and financial performance. Such forward-looking
statements are based on general assumptions and are subject to various risks,
uncertainties and other factors that may cause actual results to differ
materially from the views, beliefs and projections expressed in such statements.
These risks, uncertainties and other factors include, but are not limited to:



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1. Possible changes in economic and business conditions that may affect the

prevailing interest rates, the prevailing rates of inflation, the amount

        of growth, stagnation or recession in the global, U.S., Alabama and
        Mississippi economies, the value of investments, the collectibility of
        loans and the ability to retain and grow deposits;



2. Possible changes in monetary and fiscal policies, laws and regulations and

other activities of governments, agencies and similar organizations;

3. Possible changes in regulation and laws affecting the financial services

        industry, such as banks, securities brokers and dealers, investment
        companies and finance companies, and attendant changes in patterns and
        effects of competition in the financial services industry;




    4.  The ability of Bancshares to achieve its expected operating results in the
        markets in which Bancshares operates and Bancshares' ability to expand
        into new markets and to maintain profit margins; and




    5.  Since 2008, the residential and commercial mortgage market in the United
        States has experienced a variety of difficult economic conditions that
        have adversely affected and may continue to adversely affect the

performance and market value of our residential and commercial mortgage

loans. Across the United States, delinquencies, foreclosures and losses

with respect to residential and commercial mortgage loans generally

increased from 2008 through 2012. In addition, from 2008 through 2012,

prices and appraisal values declined. It is possible that values may

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remain stagnant or decline in the near term. An extended period of flat or

declining values may result in increased delinquencies, losses on

residential and commercial mortgage loans and reduced value of collateral

that secure real estate loans. Bad economic conditions have also impacted

        consumer loan customers. High unemployment and a stagnant economy may
        continue to adversely effect the performance of our consumer loans.

In addition, Bancshares' business is subject to a number of general and market risks that would affect any forward-looking statements, including the risks discussed in Part I, Item 1A of this Annual Report.


The words "believe," "expect," "anticipate," "project" and similar expressions
signify forward-looking statements. Readers are cautioned not to place undue
reliance on any forward-looking statements made by or on behalf of Bancshares.
Any such statements speak only as of the date such statements were made, and
Bancshares undertakes no obligation to update or revise any forward-looking
statements.

Critical Accounting Estimates


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 areas
include accounting for the allowance for loan losses, other real estate owned
and deferred income taxes.

Allowance for Loan Losses

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



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Other Real Estate Owned


Other real estate owned ("OREO") that consists of properties obtained through
foreclosure or in satisfaction of loans is reported at the lower of cost or fair
value, less estimated costs to sell at the date acquired, with any loss
recognized as a charge-off through the allowance for loan losses. Additional
OREO losses for subsequent valuation adjustments are determined on a specific
property basis and are included as a component of other non-interest expense
along with holding costs. Any gains or losses on disposal realized at the time
of disposal are reflected in non-interest expense. Significant judgments and
complex estimates are required in estimating the fair value of OREO, and the
period of time within which such estimates can be considered current is
significantly shortened during periods of market volatility, as experienced
during 2011 and 2012. As a result, the net proceeds realized from sales
transactions could differ significantly from appraisals, comparable sales and
other estimates used to determine the fair value of OREO.

Deferred Income Taxes

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Management's determination of the realization of deferred tax assets is based
upon management's judgment of various future events and uncertainties, including
the timing and amount of future income earned by subsidiaries and the
implementation of various tax planning strategies to maximize realization of the
deferred tax asset. Management believes that the Company's subsidiaries will be
able to generate sufficient operating earnings to realize the deferred tax
benefits. As management periodically evaluates its ability to realize the
deferred tax asset, subjective judgments are made that may impact the resulting
provision for income tax.

Other Significant Accounting Policies


Other significant accounting policies, not involving the same level of
measurable uncertainties as those discussed above, are nevertheless important to
an understanding of the consolidated financial statements. Policies related to
revenue recognition, investment securities, fair value measurements and
long-lived assets require difficult judgments on complex matters that are often
subject to multiple and recent changes in the authoritative guidance. Certain of
these matters are among topics currently under re-examination by accounting
standard setters and regulators. Specific conclusions have not been reached by
these standard setters, and outcomes cannot be predicted with confidence. Also,
see Note 2, "Summary of Significant Accounting Policies," in the "Notes to
Consolidated Financial Statements" included in this Annual Report, as it
discusses accounting policies that we have selected from acceptable
alternatives.

Overview of 2012

The following discussion should be read in conjunction with our consolidated financial statements, accompanying notes and other schedules presented herein.


For the year ended December 31, 2012, net income attributable to USBI was $2.2
million, compared with net loss attributable to USBI of $(9.1) million for the
year ended December 31, 2011. Basic and diluted net income attributable to USBI
per common share was $0.36 for the year ended December 31, 2012, compared with
net loss attributable to USBI per common share of $(1.51) for 2011.

Other results for the year ended December 31, 2012 were as follows:



  •   Total assets decreased 8.8% to $567.1 million since year-end 2011.



• Deposits decreased 7.2% to $489.0 million, compared with $527.1 million at

December 31, 2011.



• Loans net of unearned interest and fees decreased 11.6% to $356.7 million,

         compared with $403.4 million at December 31, 2011.



• At year-end 2012, our total risk-based capital was 17.05%, significantly

above a number of financial institutions in our peer group and well above

         the minimum requirements of 10%, to achieve the highest regulatory rating
         of "well-capitalized."




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• Our net interest income decreased 3.2% to $34.2 million in 2012, compared

with $35.3 million in 2011. The decrease in net interest income was due

primarily to a decline in interest-earning assets along with a decrease in

         the yield on earning assets. These decreases were somewhat offset by a
         decline in the cost of interest-bearing liabilities.




     •   Provision for loan losses decreased to $4.3 million for the year ended
         December 31, 2012, or 1.2% annualized of average loans, compared with
         $18.8 million, or 4.6% annualized of average loans, for the year ended
         December 31, 2011.



• Non-interest income decreased 36.2% to $5.6 million in 2012, compared with

$8.7 million in 2011. Non-interest income in 2011 benefited from net gains

         on investment securities of $2.6 million, which declined to $1,000 in
         2012.



• Non-interest expense decreased 19.4% to $32.5 million in 2012, compared

with $40.3 million in 2011. Impairment of goodwill was $4.1 million in

2011, with no impairment charged in 2012. Impairment of OREO decreased

$2.8 million in 2012 compared to 2011.




     •   Shareholders' equity totaled $68.6 million, with a corresponding book
         value of $11.40 per share, at December 31, 2012. Return on average assets
         in 2012 was 0.37%, and return on average shareholders' equity was 3.27%.

These items are discussed in further detail throughout this "Management's Discussion and Analysis of Financial Condition and Results of Operations" section.

Summary of Consolidated Operating Results



                                                               Year Ended December 31,
                                                                2012               2011
                                                              (In Thousands of Dollars)
Interest Income                                            $       38,753        $  42,346
Interest Expense                                                    4,556            7,018

Net Interest Income                                                34,197           35,328
Provision for Loan Losses                                           4,338           18,802

Net Interest Income After Provision for Loan Losses                29,859           16,526
Non-Interest Income                                                 5,565            8,728
Non-Interest Expense                                               32,484           40,288

Income (Loss) Before Income Taxes                                   2,940          (15,034 )
Benefit From (Provision for) Income Taxes                             745           (5,958 )

Net Income (Loss)                                          $        2,195        $  (9,076 )

Less: Net Loss Attributable to Noncontrolling Interest                 -                (1 )

Net Income (Loss) Attributable to USBI                     $        2,195        $  (9,075 )



Net Interest Income

Net interest income is an effective measurement of how well management has
matched interest-earning assets and interest-bearing liabilities and is the
Company's principal source of income. Fluctuations in interest rates materially
affect net interest income. Although market rates were stable during 2012, the
yield on earning assets declined by 35 basis points, while the cost of
interest-earning liabilities declined by 46 basis points, as longer-term time
deposits repriced at lower rates, improving the net interest margin by 4 basis
points, from 6.17% in 2011 to 6.21% in 2012.



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Net interest income decreased 3.2% to $34.2 million in 2012, compared to an
increase of 1.6% in 2011. The decrease in net interest income in 2012 was
primarily due to a decline in interest-earning assets along with a decrease in
the yield on earning assets. These decreases were somewhat offset by a decline
in the cost of interest-bearing liabilities.

Interest income declined $3.6 million in 2012: $2.6 million was the result of
decreased interest-earning assets, and $1.0 million was due to a 35 basis point
decline in the yield on interest-earning assets. Interest expense declined $2.5
million in 2012: $0.8 million resulted from decreased interest-bearing
liabilities, and $1.6 million was due to a 46 basis point decline in the cost of
interest-bearing liabilities.

Overall, volume, rate and yield changes in interest-earning assets and
interest-bearing liabilities contributed to the decrease in net interest income
during 2012. As to volume, the Company's average earning assets decreased $22.6
million during 2012, or 3.9%, while average interest-bearing liabilities
decreased $23.9 million, or 4.9%. The Company's average loans declined by $29.8
million, or 7.3%, during 2012, and average investment securities increased by
$5.7 million, or 3.4%, for a net decrease in interest-earning assets of $22.6
million, or 3.9%. Average interest-bearing liabilities declined $23.9 million,
or 4.9%. Average borrowings declined $18.7 million, average time deposits
declined $19.4 million, average savings deposits increased $12.8 million and
average interest-bearing demand deposits increased $1.3 million.

One of the major challenges that we face at the Bank and ALC is investing in
quality interest earning assets. Average loans have declined over the last two
years at the Bank and ALC. Difficult economic conditions and fierce competition
among lenders for quality loans will continue to affect our ability to grow
loans. Reducing non-performing assets and attracting and retaining quality loan
customers at the bank and ALC remain the primary focus of management.

The Company's ability to produce net interest income is measured by a ratio called the interest margin. The interest margin is net interest income as a percentage of average earning assets. The interest margin improved slightly from 6.17% in 2011 to 6.21% in 2012.


Interest margins are affected by several factors, one of which is the
relationship of rate-sensitive earning assets to rate-sensitive interest-bearing
liabilities. This factor determines the effect that fluctuating interest rates
will have on net interest income. Rate-sensitive earning assets and
interest-bearing liabilities are those that can be repriced to current market
rates within a relatively short time. The Company's objective in managing
interest rate sensitivity is to achieve reasonable stability in the interest
margin throughout interest rate cycles by maintaining the proper balance of
rate-sensitive assets and interest-bearing liabilities. For further analysis and
discussion of interest rate sensitivity, refer to the section entitled
"Liquidity and Interest Rate Sensitivity Management."

An additional factor that affects the interest margin is the interest rate
spread. The interest rate spread measures the difference between the average
yield on interest-earning assets and the average rate paid on interest-bearing
liabilities. This measurement is a more accurate reflection of the effect that
market interest rate movements have on interest rate-sensitive assets and
liabilities. The interest rate spread improved from 5.95% in 2011 to 6.06% in
2012. The average amount of interest-bearing liabilities, as noted in the table
"Yields Earned on Average Interest-Earning Assets and Rates Paid on Average
Interest-Bearing Liabilities," decreased 4.9% in 2012, while the average rate of
interest paid decreased from 1.4% in 2011 to 0.98% in 2012. Average
interest-earning assets decreased 3.9% in 2012, while the average yield on
earning assets decreased from 7.4% in 2011 to 7.0% in 2012.

The percentage of earning assets funded by interest-bearing liabilities also
affects the Company's interest margin. The Company's earning assets are funded
by interest-bearing liabilities, non-interest-bearing demand deposits and
shareholders' equity. The net return on earning assets funded by
non-interest-bearing demand deposits and shareholders' equity exceeds the net
return on earning assets funded by interest-bearing liabilities. The Company's
percentage of earning assets funded by interest-bearing liabilities has
decreased slightly since



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2011. In 2012, 84.2% of the Company's average earning assets were funded by interest-bearing liabilities, compared with 85.1% in 2011.

Yields Earned on Average Interest-Earning Assets and

Rates Paid on Average Interest-Bearing Liabilities



                                                                       December 31,
                                                      2012                                     2011
                                        Average                    Yield/        Average                    Yield/
                                        Balance      Interest      Rate %        Balance      Interest      Rate %
                                                      (In Thousands of Dollars, Except Percentages)
ASSETS
Interest-Earning Assets:
Loans (Note A)                         $ 376,644     $  35,373        9.39 %    $ 406,436     $  37,064        9.12 %
Taxable Investments                      157,457         2,801        1.78 %      143,127         4,346        3.04 %
Non-Taxable Investments                   14,716           575        3.91 %       23,394           936        4.00 %
Federal Funds Sold                         1,585             4        0.25 %           -             -         0.00 %

Total Interest-Earning Assets            550,402        38,753        7.04 

% 572,957 42,346 7.39 %


Non-Interest-Earning Assets:
Other Assets                              48,595                                   52,816

Total                                  $ 598,997                                $ 625,773

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Liabilities:
Demand Deposits                        $ 121,498     $     707        0.58 %    $ 120,166     $   1,014        0.84 %
Savings Deposits                          67,803           223        0.33 %       54,988           351        0.64 %
Time Deposits                            268,496         3,503        1.30 %      287,907         4,895        1.70 %
Borrowings                                 5,573           123        2.21 %       24,255           758        3.13 %

Total Interest-Bearing Liabilities 463,370 4,556 0.98 % 487,316 7,018 1.44 %


Non-Interest-Bearing Liabilities:
Demand Deposits                           59,443                                   59,142
Other Liabilities                          9,127                                    2,147
Shareholders' Equity                      67,057                                   77,168

Total                                  $ 598,997                                $ 625,773

Net Interest Income (Note B)                         $  34,197                                $  35,328

Net Yield on Interest-Earning Assets                                  6.21 %                                   6.17 %




Note A -For the purpose of these computations, non-accruing loans are included in

the average loan amounts outstanding. These loans amounted to $22,667,706

and $21,728,886 for 2012 and 2011, respectively. Note B -Loan fees of $3,711,430 and $3,430,230 for 2012 and 2011, respectively,

         are included in interest income amounts above.




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Changes in Interest Earned and Interest Expense Resulting from

Changes in Volume and Changes in Rates


The following table sets forth the effect that varying levels of
interest-earning assets and interest-bearing liabilities and the applicable
rates had on changes in net interest income for 2012 versus 2011 and 2011 versus
2010.



                                            2012 Compared to 2011                     2011 Compared to 2010
                                             Increase (Decrease)                       Increase (Decrease)
                                              Due to Change In:                         Due to Change In:
                                                   Average                                   Average
                                      Volume         Rate          Net          Volume         Rate          Net
                                                               (In Thousands of Dollars)
Interest Earned On:
Loans                                $ (2,717 )    $  1,026      $ (1,691 )    $   (506 )    $   (516 )    $ (1,022 )
Taxable Investments                       435        (1,980 )      (1,545 )        (376 )      (1,137 )      (1,513 )
Non-Taxable Investments                  (347 )         (14 )        (361 )          82           (29 )          53
Federal Funds                              -              4             4            -             -             -

Total Interest-Earning Assets (2,629 ) (964 ) (3,593 )

       (800 )      (1,682 )      (2,482 )

Interest Expense On:
Demand Deposits                            11          (318 )        (307 )          42          (207 )        (165 )
Savings Deposits                           82          (210 )        (128 )          30           (27 )           3
Time Deposits                            (330 )      (1,062 )      (1,392 )         (90 )      (1,088 )      (1,178 )
Other Borrowings                         (584 )         (51 )        (635 )      (1,393 )        (322 )      (1,715 )

Total Interest-Bearing Liabilities (821 ) (1,641 ) (2,462 )

     (1,411 )      (1,644 )      (3,055 )

Increase (Decrease) in Net
Interest Income                      $ (1,808 )    $    677      $ (1,131 )    $    611      $    (38 )    $    573



Provision 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. The expense recorded each year is a reflection of actual net losses
experienced during the year and management's judgment as to the adequacy of the
allowance to absorb losses inherent to the portfolio. Charge-offs exceeded
recoveries by $7.3 million in 2012, and a provision of $4.3 million was expensed
for loan losses in 2012, compared to $18.8 million in 2011. The provision for
2012 and 2011 was 1.2% and 4.6% of average loans, respectively. The provisions
in 2011 and 2012 were high due to charge-offs and impairments in the real estate
development loan portfolio at the Bank. Net charge-offs at the Bank were $4.2
million for the year ending December 31, 2012, compared to $14.2 million for the
year ending December 31, 2011. At the Bank, net charge-offs of commercial real
estate decreased from $12.9 million in 2011 to $2.8 million in 2012. The
severely depressed real estate market in the Bank's market area continues to
adversely impact real estate values and the ability of borrowers to perform,
particularly when performance is based on real estate sales. These conditions
are the primary cause for the large amount of net charge-offs in 2011 compared
to 2012. ALC had net charge-offs of $3.1 million for the year ending
December 31, 2012, compared to $3.2 million for the year ending December 31,
2011. For the Company, net charge-offs as a percentage of average loans were
2.0% and 4.3% for the years ended December 31, 2012 and 2011, respectively.

We believe that growing the loan portfolio at the Bank and ALC with quality customers, along with working through and reducing non-performing loans, should result in both lower provisions for loan losses and a reduced allowance for loans losses.


The ratio of the allowance to loans, net of unearned income, at December 31,
2012 and 2011 was 5.40% and 5.52%, respectively. For additional information
regarding the Company's allowance for loan losses, see "Loans and Allowance for
Loan Losses."



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Non-Interest Income


The following table presents the major components of non-interest income for the
years indicated.



                                                          2012               2011
                                                        (In Thousands of Dollars)

Service Charges and Other Fees on Deposit Accounts $ 2,522 $

2,888

 Credit Life Insurance Commissions and Fees                     955         

924

 Bank-Owned Life Insurance                                      461         

482

 Investment Securities Gains, Net                                 1            2,550
 Other Income                                                 1,626            1,884

 Total Non-Interest Income                            $       5,565       $    8,728



Total non-interest income decreased by $3.2 million, or 36.2%, in 2012 compared
to 2011. Service charges and fees on deposit accounts decreased by $366,000, or
12.7%, in 2012, compared to 2011. In 2012, fees generated from customer
overdrafts and non-sufficient funds decreased by $354,000, and regular account
service charges decreased by $12,000. The decrease in overdraft and
non-sufficient funds charges can be attributed to a change in the regulations
that prohibits the Bank from assessing these charges for certain non-recurring
electronic transactions. Regular account service charges continued to decline as
customers switched from accounts with a monthly service charge to a no-service
charge account. This no-service charge account, introduced in the fourth quarter
of 2007, has allowed the Bank to attract new customers and has otherwise been
profitable by requiring electronic statements and encouraging ATM and debit card
use, which generates additional fees.

Service charges and other fees on deposit accounts is the largest component of
non-interest income. Revenues from this source have declined in recent years,
which appears to be a trend that will continue. Management constantly searches
for new sources of fee income from new financial services and products, however,
income from these non-interest sources will continue to decline as a percentage
of total revenue.

Net gains on security sales were $1,000 and $2.6 million in 2012 and 2011,
respectively. Income generated in the area of securities gains and losses is
dependent on factors that include investment portfolio strategies, interest rate
changes and asset liability management strategies.

Other income includes fee income generated from other banking services, such as
letters of credit, ATMs, debit and credit cards, check cashing and wire
transfers. Other income decreased by $258,000, or 13.7%, in 2012, compared to an
increase of 65.1% in 2011, due to a non-recurring $4.2 million insurance
settlement received in 2010.



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Non-Interest Expense


The following table presents the major components of non-interest expense for
the years indicated.



                                                      Year Ended December 31,
                                                       2012               2011
                                                     (In Thousands of Dollars)
   Salaries and Employee Benefits                  $      14,590        $  14,491
   Occupancy                                               1,899            1,922
   Furniture and Equipment                                 1,293            1,283
   Impairment on Limited Partnerships                         70            

76

   Legal, Accounting and Other Professional Fees           1,361            1,429
   Stationery and Supplies                                   510              538
   Telephone/Communication                                   631              686
   Advertising                                               307              389
   Collection and Recovery                                   499              516
   Impairment on Other Real Estate                         3,583           

6,390

   Impairment of Goodwill                                     -             

4,098

   Realized Loss on Sale of OREO                           1,283            

1,607

   FDIC Insurance Assessments                                787            

835

   Other                                                   5,671            

6,027


   Total Non-Interest Expense                      $      32,484        $  

40,287


   Efficiency Ratio                                         81.7 %          

91.5 %

   Total Non-Interest Expense to Average Assets              5.4 %          

6.4 %



Non-interest expense decreased by $7.8 million, or 19.4%, to $32.5 million in
2012, from $40.3 million in 2011. Impairment of goodwill was $4.1 million in
2011, with no impairment charged in 2012. Impairment of OREO decreased by $2.8
million in 2012 compared to 2011. Impairment on OREO at the Bank was $3.0
million and $0.6 million at ALC for 2012, compared to $5.0 million at the Bank
and $1.4 million at ALC in 2011. The severely depressed real estate market,
along with the continued decline in real estate values, have had a negative
effect on these expenses. If the economy remains weak and real estate values
decline, further impairment and losses could result.

Premiums paid to the FDIC in the form of deposit assessments decreased slightly
in 2012 compared to 2011. These assessments were $787,000 in 2012, compared to
$835,000 in 2011. Estimated assessments for 2013 are $0.8 million.

Salaries and employee benefits expense increased by $99,000, or 0.7%, in 2012,
compared to an increase of 5.3% in 2011. In 2012, salary expense increased by
$16,000, or 0.1%, health insurance expense decreased by $132,000, or 8.3%, and
all other compensation and benefit costs increased by $215,000, or 14.2%, when
compared with 2011. All other compensation and benefits includes the accrual for
the long-term incentive compensation plan in the amount of $408,500 for 2012 and
$38,200 for 2011. The 2011 accrual was reduced due to an adjustment as a result
of the severance agreement with an executive officer. In 2011, the Company made
discretionary contributions on behalf of participants in the United Security
Bancshares, Inc. Employee Stock Ownership Plan (With 401(k) Provisions) (the
"Plan") in the form of a match that was equal to 2% of each participant's
elective deferrals. No discretionary match was made in 2012. The Company's
matching contributions to the Plan totaled $297,728 and $427,291 in 2012 and
2011, respectively.

The Bank invests in limited partnerships that operate qualified affordable
housing projects. These partnerships receive tax benefits in the form of tax
deductions from operating losses and tax credits. Although the Bank accounts for
certain of these investments utilizing the cost method, management analyzes the
Bank's investments in limited partnerships for potential impairment on an annual
basis. The investment balances in these



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partnerships were $836,000 at December 31, 2012 and $1.5 million at December 31,
2011. Losses in these investments amounted to $70,000 and $76,000 for 2012 and
2011, respectively.

Provision for Income Taxes

A net operating income before tax generated a tax expense of $0.7 million for
2012, compared to a tax benefit of $6.0 million in 2011. The calculation of the
income tax provision requires the use of estimates and judgments of management.
As part of the Company's overall business strategy, management must take into
account tax laws and regulations that apply to specific tax issues faced by the
Company in each year. This analysis includes an evaluation of the amount and
timing of the realization of income tax assets or liabilities.

Management's determination of the realization of the net deferred tax asset is
based upon an evaluation of the four possible sources of taxable income: 1) the
future reversals of taxable temporary differences; 2) future taxable income,
exclusive of reversing temporary differences and carryforwards; 3) taxable
income in prior carryback years; and 4) tax-planning strategies. In making a
conclusion, management has evaluated the available positive and negative
evidence impacting these sources of taxable income. The primary sources of
positive and negative evidence impacting taxable income are summarized below:

Positive Evidence


• History of earnings - The Company has a strong history of generating

earnings and has demonstrated positive earnings in 18 of the last 20

years. After carryback of the 2011 loss, the Company still has

approximately $3.5 million in taxable income to carryback if necessary. In

addition to the remaining taxable income available in a carryback year,

the Company has a full 19-year carryforward period for federal tax

purposes and seven years for the State of Alabama to absorb and use any

operating losses triggered as a result of reversing deductible

         differences, such as loan charge-offs or sales of other real estate.




     •   Creation of future taxable income - The Company has projected future

taxable income that will be sufficient to absorb the remaining deferred

tax assets after the reversal of future taxable temporary differences. The

         taxable income forecasting process utilizes the forecasted pre-tax
         earnings and adjusts for book-tax differences that will be exempt from
         taxation, primarily tax-exempt interest income and bank-owned life
         insurance, as well as temporary book-tax differences, including the
         allowance for loan losses. The projections relied upon for this process

are consistent with those used from the Company's financial forecasting

         process. Management believes that the projections resulting from the
         taxable income forecasting process are sound, however, there can be no

assurance that such taxable income will be realized due to unanticipated

         changes in economic and competitive factors.




     •   Strong capital position - At December 31, 2012, the Company had a Tier 1

capital ratio of 10.51% calculated as a percent of 2012 average assets,

substantially above the 5.00% minimum standard to be considered well

capitalized per regulatory guidelines. Also, the total risk-based capital

         ratio of 17.05% substantially exceeds the 10.00% minimum standard to be
         considered well capitalized.



• Ability to implement tax-planning strategies - The Company has the ability

to implement tax planning strategies to maximize the realization of

deferred tax assets, such as the sale of assets. As an example, during the

year ended December 31, 2012, the Company's portfolio of securities

available for sale had $5.0 million of gross unrealized pre-tax gains that

could accelerate the recognition of the associated taxable temporary

differences, which management would consider to be a tax planning strategy

         to maximize the realization of the deferred tax assets that may expire
         unutilized.

The largest losses experienced were in one type of loan - real estate development. Of the loan loss provision expensed in 2011, 44.1%, or $8.3 million, was in the loan category of real estate loans on undeveloped land or residential lots. Of the loan loss provision expensed in 2012, 25.0%, or $1.1




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million, was in the category of real estate development loans, raw land or
residential lots. Impairment of OREO originated from these loans amounted to
$2.1 million and $1.6 million for 2011 and 2012, respectively. Except in unusual
circumstances, the Company no longer invests in these types of loans and is
focused on managing this segment of the loan portfolio aggressively.

Negative Evidence

• Cumulative loss position - The Company is currently in a three-year

cumulative loss position. Excluding the goodwill impairment in 2011, as

this item is nondeductible for income tax purposes, the cumulative

continuing operations pre-tax loss position for 2010 through 2012 is $9.6

million. The cumulative loss primarily has resulted from the unprecedented

provision for loan losses of $42.3 million during these periods, which

management believes will continue to be reduced in future periods. During

2012, the provision for loan losses decreased $14.5 million to $4.3

million, as compared to the provision for loan losses of $18.8 million in

2011.



The Company believes that the positive evidence, when considered in its
entirety, outweighs the negative evidence of recent pre-tax losses. See Note 2,
"Summary of Significant Accounting Policies," and Note 12, "Income Taxes," in
the "Notes to Consolidated Financial Statements" included in this Annual Report
for additional information about income taxes.

Loans and Allowance for Loan Losses


Total loans outstanding net of unearned interest decreased by $46.7 million in
2012, with a loan portfolio totaling $356.7 million as of December 31, 2012.
Total loans at the Bank declined 12.5% to $281.6 million in 2012, representing
77.9% of the Company's loans. Loans at ALC declined 8.1% to $75.1 million in
2012. For 2012, on an average basis, loans represented 68.4% of the Company's
earning assets and provided 91.3% of the Company's interest income. More
stringent underwriting standards at the Bank and ALC, and difficult economic
conditions, have led to decreased lending activity. Although quarterly loan
growth is a major focus for management in the coming years, quality loan growth
will remain a major challenge.

Real estate loans decreased 14.4% to $256.4 million in 2012. The Bank's real
estate loan portfolio is comprised of construction loans to both businesses and
individuals for commercial and residential development, commercial buildings,
both rental property and owner occupied, with most of this activity being
commercial. Real estate loans also consist of other loans secured by real
estate, such as one-to-four family dwellings, including mobile homes, loans on
land only, multi-family dwellings, non-farm, non-residential real estate and
home equity loans. Real estate loans at the Bank declined by $35.8 million, or
13.8%, in 2012 to a balance of $223.3 million at December 31, 2012. Real estate
loans at ALC are primarily secured by residential properties, mobile homes and
land. These loans declined 18.5% to $33.0 million as of year-end 2012. Real
estate loans remain the largest component of the Company's loan portfolio,
comprising 70.9% of total loans outstanding, down from 73.4% at year-end 2011.
Real estate lending will likely be the largest segment of the Bank's portfolio.
Management will focus on growing owner occupied commercial loans with decreased
reliance on development lending in 2013.

Consumer loans represent the second largest component of the Company's loan
portfolio. These loans include loans to individuals for household, family and
other personal expenditures, including credit cards and other related credit
plans. Consumer loans increased by $1.3 million at ALC and declined by $4.3
million at the Bank during 2012. ALC's consumer loans represent 75.2% of the
total consumer loans, with a balance at year-end 2012 of $62.5 million. These
loans at the Bank amounted to $15.5 million at December 31, 2012. The increase
at ALC was the result of a shift of emphasis away from real estate loans to
consumer loans. The decline in consumer loans at the Bank resulted from
decreased demand due to bad economic conditions and an overall tightening of
underwriting standards.



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Commercial, financial and agricultural loans decreased by 3.6% during 2012 to
$42.9 million at December 31, 2012. Loans to tax exempt entities, such as
municipalities and counties, increased by $9.2 million in 2012 and decreased by
$2.8 million in 2011. All other commercial loans declined by $9.8 million in
2012. All of the commercial loans originated at the Bank. The increase in 2012
resulted from one loan to a municipal water authority in the amount of $10.5
million that was funded in 2012.

The allowance for loan losses is maintained at a level that, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio and
changes in its risk profile, credit concentrations, historical trends and
economic conditions. This evaluation also considers the balance of impaired
loans. Losses on individually-identified impaired loans may be measured based on
the present value of expected future cash flows discounted at each loan's
original effective market interest rate. As a practical expedient, impairment
may be measured based on the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. When the measure of the
impaired loan is less than the recorded investment in the loan, the impairment
is recorded through the provision and added to the allowance for loan losses.
Large pools of smaller balance, homogeneous loans are subjected to a collective
evaluation for impairment, considering delinquency and repossession statistics,
historical charge-off trends, trends in the economy and other factors. Though
management believes the allowance for loan losses to be adequate, taking into
consideration the views of regulators, the current economic environment and the
amount of subjective judgment involved in the calculation, there can be no
assurance that the allowance for loan losses is sufficient, and ultimate losses
may vary from their estimates. Estimates are reviewed periodically, and, as
adjustments become necessary, they are reported in earnings during the periods
in which they become known.

The Bank's loan policy requires immediate recognition of a loss if significant
doubt exists as to the repayment of the principal balance of a loan. Consumer
installment loans at the Bank and ALC are generally recognized as losses if they
become 120 days delinquent. Exceptions are made specifically for loans that are
secured by real estate and if the borrower is in a repayment plan under the
bankruptcy statutes. At the time of the plan approval, any amount above the cash
flow value of the plan is charged-off, and as long as the loans are paying in
accordance with the bankruptcy plan, they are not charged-off.

A credit review of the Bank's individual loans is conducted periodically. A risk
rating is assigned to each loan and is reviewed at least annually. In assigning
risk, management takes into consideration the capacity of the borrower to repay,
collateral values, current economic conditions and other factors. Management
also monitors the credit quality of the loan portfolio through the use of an
annual outside comprehensive loan review. Based on the underwriting standards in
the loan policy, the Bank does not actively market mortgages to subprime
borrowers. However, over time, some of the Bank's customers could migrate into
categories that might demonstrate some of the same characteristics as subprime
borrowers. With current underwriting standards and ongoing monitoring of credit
quality within the portfolio, the volume of such customers is inconsequential.

The Bank utilizes a written loan policy, which guides lending personnel in
applying consistent underwriting standards. This policy is intended to aid loan
officers and lending personnel in making sound credit decisions and to assure
compliance with state and federal regulations. The policy is comprehensive in
scope and includes guidance on both desirable and undesirable loans. Individual
loan officer lending limits are reviewed and approved annually by the Board of
Directors. Documentation requirements for various loan types are also included
in the policy. The lending function is managed by utilizing various committees,
consisting of management and board members. The Executive Loan Committee, made
up of senior management, has lending authority up to $2.0 million. Loan requests
exceeding $2.0 million require approval of the Directors' Loan Committee, made
up of four outside directors and the Chief Executive Officer ("CEO"). Loans in
excess of $10.0 million require the approval of the Board of Directors. The
Problem Asset Review Committee, composed of the CEO, the Chief Credit Officer
("CCO"), the Executive Vice President ("EVP"), Commercial Division, and the EVP,
Retail Division, with attendance of the Special Assets Manager, meets monthly to
review problem assets. Impaired loans in excess of $500,000 are reviewed monthly
to assist the CCO in calculating and evaluating the



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adequacy of the allowance for loan losses. OREO with balances of $500,000 and
over are also reviewed at the monthly meetings, along with non-performing loans
of $250,000 and greater. This same committee reviews non-performing loans of
$50,000 and over on a quarterly basis.

The Credit Policy Committee, chaired by the CCO, consisting of the CEO, the EVP,
Commercial Division, the EVP, Retail Division, and one senior lender, meets
weekly to review loan downgrades, upgrades, charge-offs, and any loan policy
changes.

The Credit Quality Control Committee, chaired by the CCO, meets quarterly to
assess the adequacy of the allowance for loan losses. This committee, consisting
of senior management, as well as various lending and credit administration
personnel, reviews valuations for non-performing loans and OREO prior to the
release of financial statements and the filing of quarterly results.

ALC's management oversees its loan portfolio by establishing credit criteria and
underwriting standards through a loan committee comprised of members of ALC's
Board of Directors and ALC's district and office managers. This Committee is
aided by a formal loan policy, which is reviewed at least annually with
revisions made as directed by ALC's Board of Directors and management. ALC's
individual branches are supervised by three district managers who report to the
ALC COO. Because of the very nature of ALC's business, many of the borrowers
served by ALC could be deemed to demonstrate some of the same characteristics as
subprime borrowers. Although the Company and ALC believe that serving the
communities in which ALC is located includes service to these customers, ALC's
management and loan officers remain diligent in making careful loan decisions
based on the credit criteria and underwriting standards established by the loan
committee.

The following table shows the Company's loan distribution as of December 31,
2012 and 2011.



                                                       Year Ended December 31,
                                                       2012               2011
                                                      (In Thousands of Dollars)
   Real Estate                                     $    256,354       $    299,594
   Installment (Consumer)                                62,521             65,483
   Commercial, Financial and Agricultural                42,903             

43,060

   Less: Unearned Interest, Commissions and Fees         (5,100 )           (4,786 )

   Total                                           $    356,678       $    403,351


The amounts of total loans (excluding installment loans) outstanding at December 31, 2012, which, based on the remaining scheduled repayments of principal, are due in (1) one year or less, (2) more than one year but within five years and (3) more than five years, are shown in the following table.



                                                                      Maturing
                                                            After One
                                             Within         but Within        After Five
                                            One Year        Five Years          Years            Total
                                                             (In Thousands of Dollars)
Commercial, Financial and Agricultural      $  31,383      $     11,298      $        222      $  42,903
Real Estate-Mortgage                          104,855           121,791            29,708        256,354

Total                                       $ 136,238      $    133,089      $     29,930      $ 299,257


Variable rate loans totaled approximately $57.3 million and are included in the one-year category.




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Non-Performing Assets


Accruing loans past due 90 days or more at December 31, 2012 declined to $1.6
million, a decrease of $761,000 compared to year-end 2011. Accruing loans past
due 90 days or more at the Bank declined by $224,000 to $0 at December 31, 2012.
These loans at ALC declined by $537,000 million to $1.6 million over the same
period. These loans are closely monitored, and, if any deterioration in the
borrowers ability to pay occurs, they are placed on non-accrual status.

Impaired loans totaled $54.3 million and $61.9 million as of December 31, 2012
and 2011, respectively. The decrease in impaired loans at December 31, 2012
resulted from paydowns of $6.9 million, charge-offs of $3.4 million, transfers
to other real estate or repossessions of $6.7 million, and upgrades of $3.4
million, offset somewhat by the addition of $12.8 million in newly impaired
loans. The decline in real estate values and the severely depressed real estate
market have affected the value of the underlying collateral and the borrowers'
ability to service the debt on these loans. There was approximately $11.1
million in the allowance for loan losses specifically allocated to these
impaired loans at each of December 31, 2012 and 2011. Loans totaling $28.1
million and $34.6 million for 2012 and 2011, respectively, although considered
impaired under Financial Accounting Standards Board ("FASB") Accounting
Standards Codification ("ASC") Topic 310, have no measurable impairment, and no
allowance for loan losses is specifically allocated to these loans. The average
recorded investment in impaired loans for 2012 and 2011 was approximately $54.2
million and $49.5 million, respectively. Income recognized on impaired loans
amounted to approximately $2.5 million in 2012 and $2.2 million in 2011.

Non-performing assets as a percentage of loans net of unearned interest and
other real estate was 10.4% at December 31, 2012, compared to 8.5% at
December 31, 2011. Non-performing assets increased by $2.9 million in 2012
compared to 2011, loans on non-accrual increased by $7.1 million and loans past
due 90 days or more declined by $761,000. Other real estate acquired in
settlement of loans consisted of 4 residential properties and 38 commercial
properties totaling $11.1 million at the Bank and 71 residential properties and
12 commercial properties totaling $2.2 million at ALC. Management is making
every effort to dispose of these properties in a timely manner, but the national
economic downturn and the severely depressed real estate market in the market
areas of the Bank and ALC are negatively impacting this process. Management
reviews these loans and reports to the Bank's Board of Directors monthly.

Loans are considered restructured loans if concessions have been granted to
borrowers that are experiencing financial difficulty. The concessions granted
generally involve the modification of terms of the loan, such as changes in
payment schedule or interest rate, which generally would not otherwise be
considered. Restructured loans can involve loans remaining on nonaccrual, moving
to nonaccrual or continuing on accrual status, depending on the individual facts
and circumstances of the borrower. Nonaccrual restructured loans are included
and treated with all other nonaccrual loans. In addition, all accruing
restructured loans are being reported as troubled debt restructurings.
Generally, restructured loans remain on nonaccrual 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 nonaccrual status. If the
borrower's ability to meet the revised payment schedule is not reasonably
assured, the loan remains on nonaccrual. Based on the above, the Company had
$12,397,049 and $1,821,696 of non-accruing loans that were restructured and
remained on nonaccrual status at December 31, 2012 and 2011, respectively. In
addition, the Company had $119,020 of restructured loans that were restored to
accrual status based on a sustained period of repayment performance at
December 31, 2012, compared to $2.5 million at December 31, 2011.



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The following table presents information on non-performing loans and real estate acquired in settlement of loans.



                                                           Consolidated
                                                 December 31,        December 31,
                                                     2012                2011
                                                    (In Thousands of Dollars)
  Non-Performing Assets:

Loans Accounted for on a Non-Accrual Basis $ 23,618 $ 16,502

  Accruing Loans Past Due 90 Days or More                1,571              

2,332

  Real Estate Acquired in Settlement of Loans           13,286              16,774

  Total                                         $       38,475      $       35,608

  Non-Performing Assets as a Percent of Net
  Loans and Other Real Estate                            10.40 %              8.48 %





                                                               FUSB
                                                 December 31,        December 31,
                                                     2012                2011
                                                    (In Thousands of Dollars)
  Non-Performing Assets:

Loans Accounted for on a Non-Accrual Basis $ 23,351 $ 14,616

  Accruing Loans Past Due 90 Days or More                   -               

224

  Real Estate Acquired in Settlement of Loans           11,089              12,606

  Total                                         $       34,440      $       27,446

  Non-Performing Assets as a Percent of Net
  Loans and Other Real Estate                            11.77 %              8.21 %





                                                               ALC
                                                 December 31,       December 31,
                                                     2012               2011
                                                    (In Thousands of Dollars)
   Non-Performing Assets:

Loans Accounted for on a Non-Accrual Basis $ 267 $ 1,886

   Accruing Loans Past Due 90 Days or More               1,571              

2,108

   Real Estate Acquired in Settlement of Loans           2,197              4,168

   Total                                         $       4,035      $       8,162

Non-Performing Assets as a Percent of Net

   Loans and Other Real Estate                            5.22 %            

9.50 %




Summarized below is information concerning income on those loans with deferred
interest or principal payments resulting from deterioration in the financial
condition of the borrower.



                                                                   December 31,
                                                              2012                2011
                                                             (In Thousands of Dollars)
Total Loans Accounted for on a Non-Accrual Basis          $      23,618     

$ 16,502 Interest Income That Would Have Been Recorded Under Original Terms

                                                    1,058     

1,460

Interest Income Reported and Recorded During the Year               158                36




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Allocation of Allowance for Loan Losses


The following table shows an allocation of the allowance for loan losses for the
two years indicated.



                                                                     December 31,
                                                       2012                                2011
                                                               Percent                             Percent
                                                              of Loans                            of Loans
                                                               in Each                             In Each
                                                              Category                            Category
                                            Allocation        to Total          Allocation        To Total
                                            Allowance           Loans           Allowance           Loans
                                                    (In Thousands of Dollars, Except Percentages)
Commerical, Financial and Agricultural     $        977              12 %      $      1,145              11 %
Real Estate                                      15,334              71              18,163              73
Installment (Consumer)                            2,967              17               2,959              16

Total                                      $     19,278             100 %      $     22,267             100 %


In establishing the allowance for loan losses, management created the following risk groups for evaluating the loan portfolio:

• Large classified loans and impaired loans are evaluated individually, with

specific reserves allocated based on management's review, consistent with

        ASC Topic 310.




    •   The allowance for large pools of smaller-balance, homogeneous loans is

based on such factors as changes in the nature and volume of the portfolio,

overall portfolio quality, adequacy of the underlying collateral value,

loan concentrations, historical charge-off trends and economic conditions

        that may affect the borrowers' ability to pay, consistent with ASC Topic
        450.

Net charge-offs as shown in the "Summary of Loan Loss Experience" table below indicate the trend for the last two years.

Summary of Loan Loss Experience


This table summarizes the Bank's loan loss experience for each of the two years
indicated.



                                                                   December 31,
                                                              2012                2011
                                                             (In Thousands

of Dollars) Balance of Allowance for Loan Loss at Beginning of Period

                                                    $     22,267         $   20,936
Charge-Offs:
Commercial, Financial and Agricultural                          (1,277 )             (407 )
Real Estate-Mortgage                                            (4,307 )          (14,938 )
Installment (Consumer)                                          (3,449 )           (3,413 )
Credit Cards                                                       (17 )               (3 )

                                                                (9,050 )          (18,761 )
Recoveries:
Commercial, Financial and Agricultural                             156                152
Real Estate-Mortgage                                               671                310
Installment (Consumer)                                             894                828
Credit Cards                                                         2                 -

                                                                 1,723              1,290
Net Charge-Offs                                                 (7,327 )          (17,471 )
Provision for Loan Losses                                        4,338             18,802

Balance of Allowance for Loan Loss at End of Period $ 19,278

$ 22,267


Ratio of Net Charge-Offs During Period to Average
Loans Outstanding                                                 1.95 %             4.30 %




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Investment Securities Available-for-Sale and Derivative Instruments


Investment securities, which are classified as available-for-sale, are carried
at fair value. They include mortgage-backed securities, obligations of states,
counties and political subdivisions, U.S. treasury and government sponsored
agency securities and other securities. Investment securities held-to-maturity
consists of obligations of states, counties and political subdivisions and U.S.
government sponsored agency securities, which are carried at cost. Investment
securities declined from $123.3 million at December 31, 2011 to $113.7 million
at December 31, 2012.

Because of their liquidity, credit quality and yield characteristics, the
majority of the purchases of taxable securities have been purchases of
agency-guaranteed mortgage-backed obligations and collateralized mortgage
obligations ("CMOs"). The mortgage-backed obligations in which the Bank invests
represent an undivided interest in a pool of residential mortgages or may be
collateralized by a pool of residential mortgages ("mortgage-backed
securities"). The Company does not invest in mortgage-backed securities that
contain Alt-A type mortgages or subprime mortgages.

Mortgage-backed securities and CMOs present some degree of additional risk in
that mortgages collateralizing these securities can be refinanced, thereby
affecting the future yield and market value of the portfolio. Management expects
the annual repayment of the underlying mortgages to vary as a result of monthly
repayment of principal and/or interest required under terms of the underlying
promissory notes. Further, the actual rate of repayment is subject to changes
depending upon the terms of the underlying mortgages, the relative level of
mortgage interest rates and the structure of the securities. When relative
interest rates decline to levels below that of the underlying mortgages,
acceleration of principal repayment is expected as some borrowers on the
underlying mortgages refinance to lower rates. When the underlying rates on
mortgage loans are comparable to market rates, repayment more closely conforms
to scheduled amortization in accordance with terms of the promissory note with
additional repayment as a result of sales of homes collateralizing the mortgage
loans constituting the security. Although maturities of the underlying mortgage
loans may range up to 30 years, scheduled principal and normal prepayments
substantially shorten the average maturities.

Interest rate risk contained in the overall securities portfolio is formally
monitored on a monthly basis. Management assesses each month how risk levels in
the investment portfolio affect overall company-wide interest rate risk.
Expected changes in forecasted yield, earnings and market value of the bond
portfolio are generally attributable to fluctuations in interest rates, as well
as volatility caused by general uncertainty over the economy, inflation and
future interest rate trends.

The composition of the Bank's investment portfolio reflects the Bank's
investment strategy of maximizing portfolio yields commensurate with risk and
liquidity considerations. The primary objectives of the Bank's investment
strategy are to maintain an appropriate level of liquidity and to provide a tool
to assist in controlling the Bank's interest rate position, while at the same
time producing adequate levels of interest income. As of December 31, 2012, the
investment portfolio had an estimated average maturity of 2.8 years.

Fair market values of securities can vary significantly as interest rates
change. The gross unrealized gains and losses in the securities portfolio are
not expected to have a material impact on liquidity or other funding needs.
There were net unrealized gains of $3.1 million in the securities portfolio on
December 31, 2012, versus $3.0 million net unrealized gains at year-end 2011.



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Investment Securities


The following table sets forth the amortized costs of investment securities, as
well as their fair value and related unrealized gains or losses on the dates
indicated.



                                                                    Available-for-Sale
                                                                       December 31,
                                                                  2012               2011
                                                                (In Thousands of Dollars)
Mortgage-Backed Securities                                    $      74,117       $   96,104
Obligations of States, Counties and Political Subdivisions           13,395 

14,684

U.S. Treasury and Government Sponsored Agency Securities                 80            6,565
Other Securities                                                         -                 9

Total Book Value                                                     87,592          117,362

Net Unrealized Gains                                                  5,022            4,808

Total Market Value                                            $      92,614       $  122,170





                                                                 Held-to-Maturity
                                                                   December 31,
                                                                 2012         2011
                                                                 (In Thousands of
                                                                     Dollars)

Obligations of States, Counties and Political Subdivisions $ -

$ 1,170

U.S. Treasury and Government Sponsored Agency Securities$ 21,136

 $    -

  Total Book Value                                             $  21,136     $ 1,170


Investment Securities Maturity Schedule




                                                                Stated 

Maturity as of December 31, 2012

                                                                After One But           After Five But
                                         Within One              Within Five              Within Ten                  After
                                            Year                    Years                    Years                  Ten Years
                                      Amount      Yield       Amount      Yield        Amount      Yield        Amount      Yield
                                                               (In Thousands of Dollars, Except Yields)
Investment Securities
Available-for-Sale:
U.S. Treasury and Government
Sponsored Agency Securities          $     -        0.00 %    $    80       0.25 %    $     -        0.00 %    $     -        0.00 %
State, County and Municipal
Obligations                               403       5.81        2,341       

5.62 1,760 5.61 10,477 5.74 Mortgage-Backed Securities

                 77       3.49        2,491       3.03        24,728       2.92        50,257       2.25

Total                                $    480       5.44 %    $ 4,912       4.22 %    $ 26,488       3.10 %    $ 60,734       2.85 %

Total Securities With Stated
Maturity                                                                                                       $ 92,614       3.01 %


Available-for-sale securities are stated at fair value and tax equivalent market yields.




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Condensed Portfolio Maturity Schedule




                                                     Dollar           

Portfolio

Maturity Summary as of December 31, 2012 Amount Percentage

                                                  (In Thousands
                                                   of Dollars)
   Maturing in 3 months or less                  $             1            

0.00 %

   Maturing in greater than 3 months to 1 year               479            

0.42

   Maturing in greater than 1 to 3 years                     580            

0.51

   Maturing in greater than 3 to 5 years                   4,332            

3.81

   Maturing in greater than 5 to 15 years                 73,711            

64.80

   Maturing in over 15 years                              34,647            30.46

   Total                                         $       113,750           100.00 %


Condensed Portfolio Repricing Schedule




                                                    Dollar           

Portfolio

Repricing Summary as of December 31, 2012 Amount Percentage

                                                 (In Thousands
                                                  of Dollars)
    Repricing in 30 days or less                $         5,332            

4.69 %

    Repricing in 31 days to 1 year                        1,173            

1.03

    Repricing in greater than 1 to 3 years                1,339            

1.18

    Repricing in greater than 3 to 5 years                6,892            

6.06

    Repricing in greater than 5 to 15 years              71,566            

62.91

    Repricing in over 15 years                           27,448            24.13

    Total                                       $       113,750           100.00 %


The tables above reflect all securities at market value on December 31, 2012.

Security Gains


Non-interest income from securities transactions was a gain for the years ended
December 31, 2012 and 2011. Transactions affecting the Bank's investment
portfolio are directed by the Bank's 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.

The table below shows the associated net gains for the years ended December 31,
2012 and 2011.



                                                December 31,
                                            2012         2011
                    Investment Securities   $ 764     $ 2,549,963

Volumes of sales, as well as other information regarding investment securities, are discussed further in Note 3, "Investment Securities," in the "Notes to Consolidated Financial Statements" included in this Annual Report.

Long-Lived Assets


The Company's long-lived assets consist of the excess of cost over the fair
value of net assets of acquired businesses ("goodwill"). Goodwill is tested for
impairment on an annual basis or more often if events and circumstances indicate
that impairment may exist.



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A test of goodwill for impairment consists of two steps in which the need for
recognition is determined in Step One. In Step Two, the measurement of the
actual impairment to be recognized, if deemed required by Step One, is
calculated. The Company tested its goodwill as of October 31, 2011, which
indicated impairment of all of the $4.1 million of goodwill reported by the
Company. Refer to the discussion of intangible assets in Note 2, "Summary of
Significant Accounting Policies," in the "Notes to Consolidated Financial
Statements" included in this Annual Report for a discussion of these approaches
and Note 7, "Goodwill and Intangible Assets," in the "Notes to Consolidated
Financial Statements" included in this Annual Report for a discussion of the
assumptions.

Deposits

Core deposits, which exclude time deposits of $100,000 or more, provide for a
relatively stable funding source that supports earning assets. The Company's
core deposits totaled $380.1 million, or 77.7% of total deposits, at
December 31, 2012, and totaled $391.4 million, or 74.3% of total deposits, at
December 31, 2011.

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. Management anticipates that such
deposits will continue to be the Company's primary source of funding in the
future, although economic and competitive factors could affect this funding
source. The Company's loan-to-deposit ratio was 69.0% at December 31, 2012 and
72.3% at the end of 2011. Loans declined in 2012 by $46.7 million, and deposits
declined by $38.1 million.

Time deposits in excess of $100,000 and brokered deposits decreased 19.7% to
$108.9 million as of December 31, 2012. Included in these large deposits are
$21.9 million in brokered certificates of deposit at year-end 2012, compared
with $35.3 million at year-end 2011. Management has used brokered deposits as a
funding source when rates and terms are more attractive than other funding
sources.

The sensitivity of the Bank's deposit rates to changes in market interest rates
is reflected in its average interest rate paid on interest-bearing deposits.
During 2012, although market interest rates remained unchanged, the Bank's
average rate on interest bearing deposits declined from 1.35% in 2011 to 0.97%
in 2012, as longer-term certificates of deposit matured and repriced at lower
rates.

Management, as part of an overall program to emphasize the growth of transaction
deposit accounts, continues to promote online banking and an online bill paying
program, as well as enhance the telephone-banking product. In addition,
continued effort is being placed on deposit promotions, direct-mail campaigns
and cross-selling efforts.

Average Daily Amount of Deposits and Rates

The average daily amount of deposits and rates paid on such deposits are summarized for the periods in the following table.



                                                                      December 31,
                                                           2012                             2011
                                                  Amount             Rate             Amount        Rate
                                                     (In Thousands of Dollars, Except Percentages)
Non-Interest Bearing Demand Deposit Accounts   $      59,443                        $   59,142
Interest-Bearing Demand Deposit Accounts             121,498            0.58 %         120,166       0.84 %
Savings Deposits                                      67,803            0.33            54,988       0.64
Time Deposits                                        268,496            1.30           287,907       1.70

Total                                          $     517,240            0.97 %      $  522,203       1.35 %





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Maturities of time certificates of deposit of $100,000 or more outstanding at December 31, 2012 are summarized as follows:



                                                    Time
                                               Certificates of
                   Maturities                      Deposit
                   3 Months or Less           $      23,270,592
                   Over 3 Through 6 Months           22,103,613
                   Over 6 Through 12 Months          16,724,667
                   Over 12 Months                    46,828,279

                   Total                      $     108,927,151



Other Borrowings

Other interest-bearing liabilities consist of federal funds purchased,
securities sold under agreements to repurchase and Federal Home Loan Bank
("FHLB") advances. This category continues to be utilized as an alternative
source of funds. During 2012, the average other interest-bearing liabilities
represented 1.2% of the average total interest-bearing liabilities, compared to
5.0% in 2011. The advances from the FHLB are an alternative to funding sources
with similar maturities, such as certificates of deposit. These advances
generally offer more attractive rates when compared to other mid-term financing
options. Securities sold under agreements to repurchase averaged $449,215 in
2011 and $651,752 in 2012. For additional information and discussion of these
borrowings, refer to Notes 10 and 11, "Short-Term Borrowings" and "Long-Term
Debt," respectively, in the "Notes to Consolidated Financial Statements"
included in this Annual Report.

The following table shows information for the last two years regarding the Bank's short- and long-term borrowings consisting of treasury, tax and loan deposits, federal funds purchased, securities sold under agreements to repurchase and other borrowings from the FHLB.



                                           Short-Term  Borrowings              Long-Term  Borrowings
                                           Maturity Less Than One               Maturity One Year or
                                                    Year                              Greater
                                                  (Dollars in Thousands, Except Percentages)
Year-Ended December 31:
2012                                      $                    638             $                   -
2011                                                           356                             20,000
Weighted Average Interest Rate
at Year-End:
2012                                                          1.50 %                             0.00 %
2011                                                          2.00                               2.17
Maximum Amount Outstanding at
Any Month's End:
2012                                      $                  1,332             $               20,000
2011                                                         1,595                             30,000
Average Amount Outstanding
During the Year:
2012                                      $                    654             $                4,918
2011                                                           884                             23,370
Weighted Average Interest Rate
During the Year:
2012                                                          1.50 %                             2.30 %
2011                                                          0.77                               3.12


Shareholders' Equity

The Company has always placed great emphasis on maintaining its strong capital
base. At December 31, 2012, shareholders' equity totaled $68.6 million, or 12.1%
of total assets, compared to 10.6% for year-end 2011.



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This level of equity should indicate to the Company's shareholders, customers
and regulators that Bancshares is financially sound and offers the ability to
sustain an appropriate degree of leverage to provide a desirable level of
profitability and growth.

Although shareholders' equity is well above minimum regulatory capital levels,
it was eroded by operating losses during 2010 and 2011. Refer to the
Consolidated Statements of Shareholders' Equity in the financial statements for
a complete description of the changes to the components of shareholders' equity
for 2012 and 2011.

In connection with the United Security Bancshares, Inc. Non-Employee Directors'
Deferred Compensation Plan, no shares were purchased in 2012, and 275 shares
were purchased in 2011. 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 Bancshares' common stock. For more information related to
this plan, see Note 14, "Long-Term Incentive Compensation Plan," in the "Notes
to Consolidated Financial Statements" included in this Annual Report.

Bancshares 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, 2008, 2009, 2010, 2011 and 2012, the Board
of Directors 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, 2013. There are 242,303 shares available for repurchase under this
plan, at management's discretion.

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. There were
no cash dividends declared during 2012.

Bancshares is required to comply with capital adequacy standards established by
the Federal Reserve and the FDIC. Currently, there are two basic measures of
capital adequacy: a risk-based measure and a leverage measure. The risk-based
capital standards are designed to make regulatory capital requirements more
sensitive to differences in risk profile among banks and bank holding companies,
to account for off-balance sheet exposure and to minimize disincentives for
holding liquid assets. Assets and off-balance sheet items are assigned to risk
categories, each with a specified risk weight factor. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance sheet items. The banking regulatory agencies also have adopted
regulations that supplement the risk-based guidelines to include a minimum
leverage ratio of 3% of Tier 1 Capital (as defined below) to total assets, less
goodwill (the "leverage ratio"). Depending upon the risk profile of the
institution and other factors, the regulatory agencies may require a leverage
ratio of 1% or 2% higher than the minimum 3% level.

The minimum standard for the ratio of total capital to risk-weighted assets is
8%. At least 50% of that capital level must consist of common equity, undivided
profits and non-cumulative perpetual preferred stock, less goodwill and certain
other intangibles ("Tier 1 Capital"). The remainder ("Tier II Capital") may
consist of a limited amount of other preferred stock, mandatory convertible
securities, subordinated debt and a limited amount of the allowance for loan
losses. The sum of Tier 1 Capital and Tier II Capital is "total risk-based
capital."

Risk-Based Capital Requirements



                                                                         Well-               Bancshares'
                                                Minimum               Capitalized             Ratio at
                                               Regulatory             Regulatory            December 31,
                                              Requirements           Requirements               2012
Total Capital to Risk-Weighted Assets                  8.00 %                10.00 %                17.05 %
Tier I Capital to Risk-Weighted Assets                 4.00 %                 6.00 %                15.76 %
Tier I Leverage Ratio                                  3.00 %                 5.00 %                10.51 %




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The Bank exceeded the ratios required for well-capitalized banks, as defined by federal banking regulators, in addition to meeting the minimum regulatory ratios.

Ratio Analysis


The following table presents operating and equity performance ratios for each of
the last two years.



                                                        December 31,
                                                     2012          2011
           Return on Average Assets                    0.37 %       (1.45 )%
           Return on Average Equity                    3.27 %      (11.76 )%
           Cash Dividend Payout Ratio                   N/A           N/A
           Average Equity to Average Assets Ratio     11.19 %       12.33 %

Liquidity and Interest Rate Sensitivity Management


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

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

Investment securities forecasted to mature or reprice over the twelve months
ending December 31, 2013 are estimated to be more than $6.5 million, or about
5.8%, of the investment portfolio as of December 31, 2012. For comparison,
principal payments on investment securities totaled $32.2 million in 2012.

Although the majority of the securities portfolio has legal final maturities
longer than 10 years, a substantial percentage of the portfolio provides monthly
principal and interest payments and consists of securities that are readily
marketable and easily convertible into cash on short notice. As of December 31,
2012, the bond portfolio had an expected average maturity of 2.8 years, and
approximately 76.9% of the $92.6 million in bonds was expected to be repaid
within 5 years. However, management does not rely solely upon the investment
portfolio to generate cash flows to fund loans, capital expenditures, dividends,
debt repayment and other cash requirements. Instead, these activities are funded
by cash flows from loan payments, as well as increases in deposits and
short-term borrowings.

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



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The Bank, at December 31, 2012, had long-term debt and short-term borrowings
that, on average, represented 0.93% of total liabilities and equity, compared to
3.9% at year-end 2011.

The Bank currently has up to $170.1 million in additional borrowing capacity from the FHLB and $17.8 million in established federal funds lines.


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

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

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

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


The accompanying table shows the Bank's interest rate sensitivity position at
December 31, 2012, as measured by Gap analysis. Over the next 12 months,
approximately $12.1 million more interest-bearing liabilities than
interest-earning assets can be repriced to current market rates at least once.
This analysis indicates that the Bank has a negative gap within the next
12-month range.

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



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Maturity and Repricing Report



                                                                              December 31, 2012
                                                                (In

Thousands of Dollars, Except Percentages)

                                                                  Total 1
                                      0-3           4-12          Year or           1-5           Over 5          Non-Rate
                                    Months         Months          Less            Years           Years         Sensitive          Total
Earning Assets:
Loans (Net of Unearned Income)     $  93,943      $  61,603      $ 155,546  

$ 165,813$ 35,319 $ - $ 356,678Investment Securities

                  5,332          1,173          6,505           7,738          99,507               -          113,750
Federal Home Loan Bank Stock             936             -             936              -               -                -              936
Interest-Bearing Deposits in
Other Banks                           41,945             -          41,945              -               -                -           41,945

Total Earning Assets               $ 142,156      $  62,776      $ 204,932  

$ 173,551$ 134,826 $ - $ 513,309 Percent of Total Earning Assets 27.7 % 12.2 % 39.9 % 33.8 % 26.3 %

            0.0 %         100.0 %
Interest-Bearing Liabilities:
Interest-Bearing Deposits and
Liabilities
Demand Deposits                    $  24,844      $      -       $  24,844       $  99,375       $      -        $       -        $ 124,219
Savings Deposits                      13,059             -          13,059          52,237              -                -           65,296
Time Deposits                         59,340         94,907        154,247          87,524              -                -          241,771
Borrowings                               638             -             638              -               -                -              638
Non-Interest-Bearing
Liabilities:
Demand Deposits                    $      -       $      -       $      -        $      -        $      -        $   57,747       $  57,747

Total Funding Sources              $  97,881      $  94,907      $ 192,788       $ 239,136       $      -        $   57,747       $ 489,671
Percent of Total Funding
Sources                                 20.0 %         19.4 %         39.4 %          48.8 %           0.0 %           11.8 %         100.0 %
Interest-Sensitivity Gap
(Balance Sheet)                    $  44,275      $ (32,131 )    $  12,144 

$ (65,585 ) $ 134,826 $ (57,747 ) $ 23,638 Derivative Instruments

             $      -       $      -       $      -   

$ - $ - $ - $ - Interest-Sensitivity Gap

           $  44,275      $ (32,131 )    $  12,144       $ (65,585 )     $ 134,826       $  (57,747 )     $  23,638
Cumulative Interest-Sensitivity
Gap                                $  44,275      $  12,144            N/A       $ (53,441 )     $  81,385       $   23,638       $  47,276

                                                                                                                   Over 5
                                                                  Total 1                                          Years
                                      0-3           4-12          Year or           1-5                           Non-Rate
                                    Months         Months          Less            Years                         Sensitive          Total
Ratio of Earning Assets to
Funding Sources and Derivative
Instruments                             1.45 %         0.66 %         1.06 %          0.73 %                           2.33 %          1.00 %
Cumulative Ratio                        1.45 %         1.06 %          N/A            0.88 %                           1.05 %          1.05 %

Assessing Short-Term Interest Rate Risk - Net Interest Margin Simulation


On a monthly basis, the Bank simulates how changes in short- and long-term
interest rates will impact future profitability, as reflected by changes in the
Bank's net interest margin. The tables below depict how, as of December 31,
2012, pre-tax net interest margins and pre-tax net income are forecast to change
over time frames of six months, one year, two years and five years under the six
listed interest rate scenarios. The interest rate scenarios are immediate and
parallel shifts in short- and long-term interest rates.



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Average Change in Net Interest Margin from Level Interest Rate Forecast (basis
points, pre-tax):



                         6 Months       1 Year       2 Years       5 Years
                   +1%           8            7             8            12
                   +2%          -1           -5            -3             8
                   +3%         -18          -23           -21             -
                   +4%         -36          -44           -39            -6
                   -1%          -4           -5            -5            -2
                   -2%          -9          -10           -12           -10
                   -3%         -15          -17           -19           -16
                   -4%         -18          -21           -23           -21


Change in Net Interest Income from Level Interest Rate Forecast (dollars,
pre-tax):



                  6 Months           1 Year           2 Years           5 Years
          +1%   $    237,528      $    396,176      $    885,058      $  3,539,966
          +2%        (39,311 )        (270,012 )        (397,137 )       2,454,320
          +3%       (508,015 )      (1,340,999 )      (2,426,492 )          22,934
          +4%     (1,031,568 )      (2,519,222 )      (4,499,237 )      (1,741,237 )
          -1%       (117,678 )        (260,045 )        (536,801 )        (535,146 )
          -2%       (245,709 )        (597,605 )      (1,370,874 )      (2,753,727 )
          -3%       (423,602 )        (984,156 )      (2,197,415 )      (4,690,660 )
          -4%       (514,934 )      (1,198,193 )      (2,693,393 )      (6,095,184 )

Assessing Long-Term Interest Rate Risk - Market Value of Equity and Estimating Modified Durations for Assets and Liabilities


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

Market Value of Equity and Estimated Modified Duration of Assets, Liabilities and Equity Capital


The table below is a summary of expected market value changes for the Company's
assets, liabilities and equity capital, expressed both in dollar terms and as a
percentage of tier one equity.



                                  +1%              +2%              +3%              +4%              -1%                -2%                -3%                -4%
Asset Modified Duration              1.79 %           1.85 %           1.88 %           1.92 %            2.61 %             1.93 %             1.94 %             1.98 %
Liability Modified Duration          3.04 %           2.59 %           2.38 %           2.28 %            2.97 %             2.88 %             2.96 %             3.06 %
Modified Duration Mismatch           1.25 %           0.75 %           0.50 %           0.35 %            0.37 %             0.95 %             1.02 %             1.07 %
Estimated Change in Market
Value of Equity (Pre-Tax)     $ 7,206,281      $ 8,614,068      $ 8,600,505
     $ 8,170,776      $ (2,114,017 )    $ (10,985,784 )    $ (17,715,486 ) 
  $ (24,738,749 )
Change in Market Value of
Equity / Tier One Equity
Capital (Pre-Tax)                    9.16 %          10.95 %          10.93 %          10.39 %           -2.69 %           -13.97 %           -22.52 %           -31.45 %






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Contractual Obligations


The Company has contractual obligations to make future payments on debt and
lease agreements. Long-term debt is reflected on the consolidated statements of
condition, whereas operating lease obligations for office space and equipment
are not recorded on the Consolidated Statements of Condition. The Company and
its subsidiaries have not entered into any unconditional purchase obligations or
other long-term obligations, other than as included in the following table.
These types of obligations are more fully discussed in Note 11, "Long-Term
Debt," and Note 18, "Operating Leases," in the "Notes to Consolidated Financial
Statements" included in this Annual Report.

Many of the Bank's lending relationships, including those with commercial and
consumer customers, contain both funded and unfunded elements. The unfunded
component of these commitments is not recorded in the Consolidated Statements of
Condition. These commitments are more fully discussed in Note 19, "Guarantees,
Commitments and Contingencies," in the "Notes to Consolidated Financial
Statements" included in this Annual Report.

The following table summarizes the Company's contractual obligations as of
December 31, 2012.



                                                               Payment Due by Period
                                                             (In Thousands of Dollars)
                                                                                                       More than
                                                 Less than          One to            Three to           Five
                                    Total         One Year        Three Years        Five Years          Years
Time Deposits                     $ 241,771      $  154,247      $      59,213      $     28,311      $        -
Commitments to Extend Credit         32,123          26,648                 -                 -             5,475
Operating Leases                      1,022             352                492               149               29
Standby Letters of Credit             1,092           1,092                 -                 -                -

Total                             $ 276,008      $  182,339      $      59,705      $     28,460      $     5,504


Off-Balance Sheet Obligations


The Company does not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on its financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that are considered
material, other than "Operating Leases," included in Note 18, and "Guarantees,
Commitments and Contingencies," included in Note 19 in the "Notes to
Consolidated Financial Statements" included in this Annual Report.
Wordcount: 13438



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