FIRST US BANCSHARES, INC. - Quarter Report: 2012 March (Form 10-Q)

FIRST US BANCSHARES, INC. - Quarter Report: 2012 March (Form 10-Q)

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FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2012

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

For the transition period from to

Commission File Number: 0-14549

United Security Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		63-0843362
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

131 West Front Street
Post Office Box 249
Thomasville, AL		36784
(Address of Principal Executive Offices)		(Zip Code)

(334) 636-5424

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

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


Class		Outstanding at May 11, 2012
Common Stock, $0.01 par value		6,036,792 shares

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES


		PAGE
	PART I. FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS

	Condensed Consolidated Statements of Financial Condition at March 31, 2012 (Unaudited) and December 31, 2011		4

	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2012 and 2011 (Unaudited)		5

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2012 and 2011 (Unaudited)		6

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (Unaudited)		7

	Notes to Condensed Consolidated Financial Statements (Unaudited)		8

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		31

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		34

ITEM 4.	CONTROLS AND PROCEDURES		35

	PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS		36

ITEM 1A.	RISK FACTORS		36

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		36

ITEM 6.	EXHIBITS		36

Signature Page			37

FORWARD-LOOKING STATEMENTS

Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). In addition, United Security Bancshares, Inc. and its subsidiaries (the “Company” or “USBI”), through its senior management, from time to time makes forward-looking statements concerning its expected future operations and performance and other developments. The words “estimate,” “project,” “intend,” “anticipate,” “expect,” “believe” and similar expressions are indicative of forward-looking statements. Such forward-looking statements are necessarily estimates reflecting the Company’s best judgment based upon current information and involve a number of risks and uncertainties, and various factors could cause results to differ materially from those contemplated by such forward-looking statements. Such factors could include those identified from time to time in the Company’s Securities and Exchange Commission (“SEC”) filings and other public announcements, including the risk factors described in Part I, Item 1A of the Company’s Annual Report on Form 10-K, for the year ended December 31, 2011. With respect to the adequacy of the allowance for loan losses for the Company, these factors include, but are not limited to, the rate of growth (or lack thereof) in the economy, the relative strength and weakness in the consumer and commercial credit sectors and in the real estate markets and collateral values. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to revise forward-looking statements to reflect circumstances or events that occur after the dates on which the forward-looking statements are made, except as required by law.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In Thousands of Dollars, Except Per Share Data)


	March 31,			December 31,
	2012			2011
	(Unaudited)
ASSETS
Cash and Due from Banks	$	11,844		$	9,491
Interest-Bearing Deposits in Other Banks		58,082			43,306

Total Cash and Cash Equivalents		69,926			52,797
Investment Securities Available-for-Sale, at fair market value		113,647			122,170
Investment Securities Held-to-Maturity, at cost		5,161			1,170
Federal Home Loan Bank Stock, at cost		2,861			2,861
Loans, net of allowance for loan losses of $20,771 and $22,267, respectively		365,849			381,085
Premises and Equipment, net		9,083			9,050
Cash Surrender Value of Bank-Owned Life Insurance		13,020			12,922
Accrued Interest Receivable		3,542			3,958
Investment in Limited Partnerships		1,437			1,456
Other Real Estate Owned		14,633			16,774
Other Assets		18,264			17,567

Total Assets	$	617,423		$	621,810


LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	533,660		$	527,073
Accrued Interest Expense		675			790
Short-Term Borrowings		225			356
Long-Term Debt		10,000			20,000
Other Liabilities		7,903			7,384

Total Liabilities		552,463			555,603

Commitments and Contingencies (See Note 13)
Shareholders’ Equity:
Common Stock, par value $0.01 per share, 10,000,000 shares authorized; 7,322,560 shares issued; 6,017,732 and 6,015,737 shares outstanding, respectively		73			73
Surplus		9,259			9,259
Accumulated Other Comprehensive Income, net of tax		2,936			3,004
Retained Earnings		73,854			75,091
Less Treasury Stock: 1,304,828 and 1,306,823 shares at cost, respectively		(21,150	)		(21,208	)
Noncontrolling Interest		(12	)		(12	)

Total Shareholders’ Equity		64,960			66,207

Total Liabilities and Shareholders’ Equity	$	617,423		$	621,810

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

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands of Dollars, Except Per Share Data)


	Three Months Ended
	March 31,
	2012			2011
	(Unaudited)
INTEREST INCOME:
Interest and Fees on Loans	$	9,083		$	9,087
Interest on Investment Securities		927			1,357

Total Interest Income		10,010			10,444

INTEREST EXPENSE:
Interest on Deposits		1,375			1,597
Interest on Borrowings		85			270

Total Interest Expense		1,460			1,867

NET INTEREST INCOME		8,550			8,577
PROVISION FOR LOAN LOSSES		2,215			1,305

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		6,335			7,272

NON-INTEREST INCOME:
Service and Other Charges on Deposit Accounts		628			716
Credit Life Insurance Income		119			122
Other Income		527			351

Total Non-Interest Income		1,274			1,189

NON-INTEREST EXPENSE:
Salaries and Employee Benefits		3,764			3,570
Occupancy Expense		447			476
Furniture and Equipment Expense		310			303
Impairment on Other Real Estate		2,834			484
Loss on Sale of Other Real Estate		194			339
Other Expense		2,279			2,263

Total Non-Interest Expense		9,828			7,435

INCOME (LOSS) BEFORE INCOME TAXES		(2,219	)		1,026
PROVISION FOR (BENEFIT FROM) INCOME TAXES		(982	)		207

NET INCOME (LOSS)	$	(1,237	)	$	819

BASIC AND DILUTED NET INCOME (LOSS) PER SHARE	$	(0.21	)	$	0.14

DIVIDENDS PER SHARE	$	—		$	0.04

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

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In Thousands of Dollars)


	Three Months Ended
	March 31,
	2012			2011
	(Unaudited)
Net income (loss)	$	(1,237	)	$	819

Other comprehensive income (loss):
Change in unrealized holding gains (losses) on available-for-sale securities arising during period, net of tax (benefit) of $(41) and $95, respectively		(68	)		158

Other comprehensive income (loss)		(68	)		158

Total comprehensive income (loss)	$	(1,305	)	$	977

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

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of Dollars)


	Three Months Ended
	March 31,
	2012			2011
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(1,237	)	$	819

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		180			175
Amortization of premiums and discounts, net		315			150
Provision for loan losses		2,215			1,305
Impairment of OREO		2,834			484
Loss on sale of OREO		194			339
Loss on sale of fixed assets, net		—			89
Net other operating activities		85			1,418

Total adjustments		5,823			3,960

Net cash provided by operating activities		4,586			4,779

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and prepayments of investment securities, available-for- sale		13,091			12,027
Proceeds from maturities and prepayments of investment securities, held-to- maturity		1,170			—
Proceeds from the sale of other real estate		1,257			1,972
Purchase of premises and equipment, net		(213	)		—
Purchase of investment securities available-for-sale		(4,993	)		(9,192	)
Purchase of investment securities held-to-maturity		(5,161	)		—
Net change in loan portfolio		10,877			(1,250	)

Net cash provided by investing activities		16,028			3,557

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in customer deposits		6,587			16,700
Dividends paid		—			(241	)
Increase (decrease) in borrowings		(10,131	)		168
Purchase of treasury stock		59			(2	)

Net cash provided by (used in) financing activities		(3,485	)		16,625

NET INCREASE IN CASH AND CASH EQUIVALENTS		17,129			24,961

CASH AND CASH EQUIVALENTS, beginning of period		52,797			13,531

CASH AND CASH EQUIVALENTS, end of period	$	69,926		$	38,492

SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest	$	1,575		$	2,130
Income Taxes		70			3
NON-CASH TRANSACTIONS:
Other real estate acquired in settlement of loans	$	2,143		$	2,987

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

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. GENERAL

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

The unaudited interim condensed consolidated financial statements, in the opinion of management, reflect all adjustments necessary for a fair presentation of consolidated financial position, results of operations and cash flows for the periods presented. Such adjustments are of a normal, recurring nature. The results of operations for any interim period are not necessarily indicative of results expected for the fiscal year ending December 31, 2012. While certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), management believes that the disclosures herein are adequate to make the information presented not misleading. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The accounting policies followed by the Company are set forth in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. In preparing the unaudited interim condensed consolidated financial statements, management evaluated subsequent events through the date on which the unaudited interim condensed consolidated financial statements were issued.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In April 2011, the FASB issued ASU No. 2011-03, Reconsideration of Effective Control for Repurchase Agreements. ASU No. 2011-03 affects all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendments in ASU No. 2011-03 remove from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. ASU No. 2011-03 also eliminates the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. The guidance is effective prospectively for new transactions or modifications of existing transactions as of the first interim or annual period beginning on or after December 15, 2011. ASU 2011-03 became effective for the Company on January 1, 2012 and did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The standards set forth in ASU 2011-04 supersede most of the accounting guidance currently found in Topic 820 of FASB’s ASC, previously known as Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. The amendments improve comparability of fair value measurements presented and disclosed in financial statements prepared with GAAP and International Financial Reporting Standards (“IFRS”). The amendments also clarify the application of existing fair value measurement requirements. These amendments include (1) the application of the highest and best use and valuation premise concepts, (2) measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity and (3) disclosing quantitative information about the unobservable inputs used within the Level 3 hierarchy. This ASU became effective for the Company’s interim and annual periods beginning after December 15, 2011 and did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. See Note 5 for the newly-required disclosures.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which amends existing standards to allow an entity the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under both options, an entity is required to present each component of net income along with total net income; each component of other comprehensive income along with a total for other comprehensive income; and a total amount for comprehensive income. Any changes pursuant to the options allowed in the amendments should be applied retrospectively. This guidance is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2011. The Company adopted this new guidance with first quarter 2012 financial reporting. In January 2012, the FASB issued accounting guidance that indefinitely defers the effective date of certain provisions concerning the presentation of comprehensive income. The guidance indefinitely defers the requirement to present reclassification adjustments by component in both the statement where net income is presented and the statement where other comprehensive income is presented. See the consolidated statements of comprehensive income for further details.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The amendments in this Update affect all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement. The requirements amend the disclosure requirements on offsetting in Section 210-20-50. This information will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this Update. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company is evaluating the impact that adoption will have on its consolidated financial statements.

3. NET INCOME (LOSS)

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average shares during the three-month periods ended March 31, 2012 and 2011. Diluted net income (loss) per share for the three-month periods ended March 31, 2012 and 2011 is computed based on the weighted average shares outstanding during the period plus the dilutive effect of all potentially dilutive instruments outstanding. There were no outstanding potentially dilutive instruments during the periods ended March 31, 2012 or 2011, and, therefore, basic and diluted weighted average shares outstanding were the same.

The following table represents the basic and diluted net income (loss) per share calculations for the three-month periods ended March 31, 2012 and 2011 (in thousands of dollars, except per share data):


For the Three Months Ended:	Net Income (Loss)			Weighted Average Shares Outstanding		Basic and Diluted Net Income (Loss) Per Share
March 31, 2012	$	(1,237	)		6,017,088	$	(0.21	)

March 31, 2011	$	819			6,010,858	$	0.14

4. COMPREHENSIVE INCOME (LOSS)

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

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company follows the provisions of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.

ASC Topic 820 requires disclosure of fair value information about financial instruments, whether or not recognized on the face of the consolidated statements of financial condition, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Company’s financial instruments are detailed below. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather represent a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance.

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

•

Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes equity securities in banks that are publicly traded. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

•

Level 2 — Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.

•

Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

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

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

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

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

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

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

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

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

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

Long-term debt: The fair value of this debt is estimated using discounted cash flows based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements as of March 31, 2012 and December 31, 2011.

Off-balance sheet instruments: The carrying amount of commitments to extend credit and standby letters of credit approximates fair value. The carrying amount of the off-balance sheet financial instruments is based on fees currently charged to enter into such agreements.

Financial assets measured at fair value on a recurring basis at March 31, 2012 and December 31, 2011 is summarized below.


	Fair Value Measurements at March 31, 2012 Using
	Totals at March 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In Thousands of Dollars)
Mortgage-backed securities	$	91,664	$	—	$	91,664	$	—
Obligations of states, counties and political subdivisions		15,394		—		15,394		—
Obligations of U.S. government sponsored agencies		6,504		—		6,504		—
U.S. treasury securities		75		—		75		—
Equity securities		10		10		—		—


	Fair Value Measurements at December 31, 2011 Using
	Totals at December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In Thousands of Dollars)
Mortgage-backed securities	$	99,691	$	—	$	99,691	$	—
Obligations of states, counties and political subdivisions		15,885		—		15,885		—
Obligations of U.S. government sponsored agencies		6,509		—		6,509
U.S. treasury securities		75		—		75		—
Equity securities		10		10		—		—

Assets Measured at Fair Value on a Recurring Basis

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

Available-for-Sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. Level 2 securities include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. Level 2 fair values are obtained from quoted prices of securities with similar characteristics. In certain cases, where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Currently, all of the Company’s available-for-sale securities are considered to be Level 2 securities, except for $10,303 and $10,284 for March 31, 2012 and December 31, 2011, respectively, in equity securities that are considered to be Level 1 securities.

Financial Assets Measured at Fair Value on a Nonrecurring Basis

The Company is required to measure certain assets at fair value on a nonrecurring basis, including impaired loans. Loan impairment is reported when full payment under the loan terms is not expected. Impaired loans are carried at the present value of estimated future cash flows using the loan’s existing rate or the fair value of collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to increase, such increase is reported as a component of the provision for loan losses. Loan losses are charged against the allowance when management believes that the uncollectibility of a loan is confirmed. Loans, net of specific allowances, subject to this evaluation amounted to $14,351,838 and $16,245,779 as of March 31, 2012 and December 31, 2011, respectively. This valuation would be considered Level 3, consisting of appraisals of underlying collateral and discounted cash flow analysis.

Non-Financial Assets and Non-Financial Liabilities Measured at Fair Value

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

During 2012, certain foreclosed assets, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed asset. The fair value of a foreclosed asset, upon initial recognition, is estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. Foreclosed assets measured at fair value upon initial recognition totaled $103,177 and $5,115,994 (utilizing Level 3 valuation inputs) for the periods ended March 31, 2012 and

December 31, 2011, respectively. In connection with the measurement and initial recognition of the foregoing foreclosed assets, the Company has recognized charge-offs of the allowance for possible loan losses totaling approximately $105,582 and $2,514,983 for the periods ended March 31, 2012 and December 31, 2011, respectively. Foreclosed assets totaling $8,475,621 and $14,157,679 were remeasured at fair value at March 31, 2012 and December 31, 2011, respectively, resulting in impairment loss of $2,833,696 and $6,389,774 at March 31, 2012 and December 31, 2011, respectively.

The following table presents detailed information regarding assets and liabilities measured at fair value using significant unobservable inputs (Level 3) as of March 31, 2012. The table includes the valuation techniques and the significant unobservable inputs utilized. The range of each unobservable input as well as the weighted average within the range utilized at March 31, 2012 is included. Following the table is a description of the valuation technique and the sensitivity of the technique to changes in the significant unobservable input.

Level 3 Significant Unobservable Input Assumptions

(Dollars in thousands)

Fair value
March 31,
2012

Valuation Technique

Unobservable Input

Quantitative Range of
Unobservable Inputs and
Weighted-Average

Nonrecurring fair value measurements:

Impaired loans

14,352

Multiple data points, including discount to appraised value of collateral based on recent market activity

Appraisal compatibility adjustment (discount)

6% - 9

Foreclosed property and other real estate

103

Discount to appraised value of property based on recent market activity for sales of similar properties

Appraisal compatibility adjustment (discount)

6% - 9

NON-RECURRING FAIR VALUE MEASUREMENTS USING SIGNIFICANT UNOBSERVABLE INPUTS

Impaired loans

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

Foreclosed property and other real estate

Foreclosed property and other real estate are valued based on offered quotes as available. If no sales contract is pending for a specific property, management establishes a comparability adjustment to the appraised value based on historical activity considering proceeds for properties sold versus the corresponding appraised value. Increases or decreases in realization for properties sold impact the comparability adjustment for similar assets remaining on the balance sheet.

The estimated fair value and related carrying or notional amounts of the Company’s financial instruments at March 31, 2012 and December 31, 2011 were as follows:


	March 31, 2012				December 31, 2011
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(In Thousands of Dollars)
Assets:
Cash and cash equivalents	$	69,926	$	69,926	$	52,797	$	52,797
Investment securities available-for-sale		113,647		113,647		122,170		122,170
Investment securities held-to-maturity		5,161		5,161		1,170		1,170
Federal Home Loan Bank stock		2,861		2,861		2,861		2,861
Accrued interest receivable		3,542		3,542		3,958		3,958
Loans, net of unearned		365,849		368,931		381,085		383,879
Liabilities:
Deposits		533,660		535,715		527,073		528,741
Short-term borrowings		225		225		356		356
Long-term debt		10,000		10,287		20,000		20,383
Accrued interest payable		675		675		790		790

6. INVESTMENT SECURITIES

Details of investment securities available-for-sale and held-to-maturity at March 31, 2012 and December 31, 2011 are as follows:


	Available-for-Sale
	March 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In Thousands of Dollars)
Mortgage-backed securities	$	88,261	$	3,558	$	(155	)	$	91,664
Obligations of states, counties and political subdivisions		14,113		1,281		—			15,394
Obligations of U.S. government sponsored agencies		6,491		13		—			6,504
U.S. treasury securities		75		—		—			75
Equity securities		9		1		—			10

Total	$	108,949	$	4,853	$	(155	)	$	113,647


	Held-to-Maturity
	March 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(In Thousands of Dollars)
Obligations of states, counties and political subdivisions	$	5,161	$	—	$	—	$	5,161


	Available-for-Sale
	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In Thousands of Dollars)
Mortgage-backed securities	$	96,104	$	3,903	$	(316	)	$	99,691
Obligations of states, counties and political subdivisions		14,684		1,201		—			15,885
Obligations of U.S. government sponsored agencies		6,490		19		—			6,509
U.S. treasury securities		75		—		—			75
Equity securities		10		—		—			10

Total	$	117,363	$	5,123	$	(316	)	$	122,170


	Held-to-Maturity
	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(In Thousands of Dollars)
Obligations of states, counties and political subdivisions	$	1,170	$	1	$	—	$	1,171

The scheduled maturities of investment securities available-for-sale and held-to-maturity at March 31, 2012 are presented in the following table:


	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(In Thousands of Dollars)
Maturing within one year	$	390	$	392	$	—	$	—
Maturing after one to five years		5,249		5,449		—		—
Maturing after five to fifteen years		60,632		63,569		5,161		5,161
Maturing after fifteen years		42,669		44,227		—		—
Equity securities and Preferred Stock		9		10		—		—

Total	$	108,949	$	113,647	$	5,161	$	5,161

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

The following table reflects the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2012 and December 31, 2011. Management evaluates securities for other-than-temporary impairment no less frequently than quarterly and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) whether the Company does not intend to sell these securities, and it is not more likely than not that the Company will be required to sell the securities before recovery of their amortized cost bases. At March 31, 2012 and 2011, based on the aforementioned considerations, management did not record other-than-temporary impairment on any security that was in an unrealized loss position.


	Available-for-Sale
	March 31, 2012
	Less than 12 Months					12 Months or More
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In Thousands of Dollars)
Mortgage-backed securities	$	13,084	$	(110	)	$	738	$	(45	)


	Available-for-Sale
	December 31, 2011
	Less than 12 Months					12 Months or More
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In Thousands of Dollars)
Mortgage-backed securities	$	16,318	$	(276	)	$	811	$	(39	)

As of March 31, 2012, four debt securities had been in a loss position for more than twelve months, and five debt securities had been in a loss position for less than twelve months. The losses for all securities are considered to be a direct result of the effect that the current interest rate environment has on the value of debt securities and not related to the creditworthiness of the issuers. Further, the Company has the current intent and ability to retain its investments in the issuers for a period of time sufficient to allow for any anticipated recovery in fair value. Therefore, the Company has not recognized any other-than-temporary impairments.

Investment securities available-for-sale with a carrying value of $72.0 million and $80.0 million at March 31, 2012 and December 31, 2011, respectively, were pledged to secure public deposits and for other purposes.

There were no gross gains and losses realized on securities for March 31, 2012 and 2011, respectively.

7. INVESTMENTS IN LIMITED PARTNERSHIPS

The Company has limited partnership investments in affordable housing projects for which it provides funding as a limited partner and receives tax credits related to its investments in the projects based on its partnership share. The Company has invested in limited partnerships of affordable housing projects as investments in funds that invest solely in affordable housing projects. The Company has determined that these structures require valuation as a variable interest entity (“VIE”) under ASC Topic 810 Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. The Company consolidates one of the funds in which it has a 99.9% limited partnership interest. The resulting financial impact to the Company of the consolidation was a net increase to total assets of approximately $148,510 as of March 31, 2012. The remaining limited partnership investments are unconsolidated and are accounted for under the cost method as allowed under ASC Topic 325 Accounting for Tax Benefits Resulting from Investments in Affordable Housing

Projects. The Company amortizes the excess of carrying value of the investment over its estimated residual value during the period in which tax credits are allocated to the investors. The Company’s maximum exposure to future loss related to these limited partnerships is limited to the $1,496,718 recorded investment.

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

The Bank had no remaining cash commitments to these partnerships at March 31, 2012.

8. LOANS AND ALLOWANCE FOR LOAN LOSSES

At March 31, 2012 and December 31, 2011, the composition of the loan portfolio by reporting segment and portfolio segment was as follows:


	March 31, 2012
	FUSB		ALC		Total
	(In Thousands of Dollars)
Real estate loans:
Construction, land development and other land loans	$	40,361	$	—	$	40,361
Secured by 1-4 family residential properties		42,156		38,490		80,646
Secured by multi-family residential properties		26,302		—		26,302
Secured by non-farm, non-residential properties		142,225		—		142,225
Other		813		—		813
Commercial and industrial loans		37,616		—		37,616
Consumer loans		17,673		45,110		62,783
Other loans		587		—		587

Total loans		307,733		83,600		391,333
Less: Unearned Interest		250		4,463		4,713
Allowance for loan losses		17,243		3,528		20,771

Net loans	$	290,240	$	75,609	$	365,849


	December 31, 2011
	FUSB		ALC		Total
	(In Thousand of Dollars)
Real estate loans:
Construction, land development and other land loans	$	40,311	$	—	$	40,311
Secured by 1-4 family residential properties		43,691		40,532		84,223
Secured by multi-family residential properties		26,722		—		26,722
Secured by non-farm, non-residential properties		147,518		—		147,518
Other		820		—		820
Commercial and industrial loans		43,060		—		43,060
Consumer loans		18,886		45,688		64,574
Other loans		910		—		910

Total loans	$	321,918	$	86,220	$	408,138
Less: Unearned Interest		277		4,509		4,786
Allowance for loan losses		18,691		3,576		22,267

Net loans	$	302,950	$	78,135	$	381,085

The Company grants commercial, real estate and installment loans to its customers. Although the Company has a diversified loan portfolio, 74.2% of the portfolio is concentrated in loans secured by real estate.

Portfolio Segments

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

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

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

Secured by multi-family residential properties – These are mortgage loans secured by apartment buildings.

Secured by non-farm, non-residential properties – Commercial real estate loans include loans secured by commercial and industrial properties, office or mixed-use facilities, strip shopping centers or other commercial property. These loans are generally guaranteed by the principals of the borrower.

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

Commercial and industrial loans – Includes loans to commercial customers for use in normal business to finance working projects. These credits may be loans and lines to financially strong borrowers, secured by inventories, equipment or receivables, and are generally guaranteed by the principals of the borrower.

Consumer loans – Includes a variety of secured and unsecured personal loans, including automobile loans, loans for household and personal purpose and all other direct consumer installment loans.

Other loans – Other loans comprise overdrawn checking accounts reclassified to loans and overdraft lines of credit.

Related Party Loans

In the ordinary course of business, the Bank makes loans to certain officers and directors of the Company, the Bank and ALC, including companies with which they are associated. These loans are made on the same terms as those prevailing for comparable transactions with others. Such loans do not represent more than normal risk of

collectibility, nor do they present other unfavorable features. The amounts of such related party loans and commitments at March 31, 2012, December 31, 2011 and March 31, 2011 were $2,801,019, $3,036,740 and $2,471,909, respectively. During the period ended March 31, 2012, new loans to these parties totaled $13,283, and repayments were $249,004. During the period ended December 31, 2011, new loans to these parties totaled $1,301,901, and repayments were $426,665. During the period ended March 31, 2011, new loans to these parties totaled $402,342, and repayments were $68,963.

Allowance for Loan Losses

Changes in the allowance for loan losses by reporting segment and portfolio segment were as follows:


	FUSB
	March 31, 2012
	Commercial		Commercial Real Estate		Consumer			Residential Real Estate		Other			Total
	(In Thousands of Dollars)
Beginning balance	$	889	$	16,533	$	306		$	684	$	279		$	18,691
Charge-offs		476		2,434		22			115		2			3,059
Recoveries		81		1		23			2		—			107

Net charge-offs		395		2,433		(1	)		113		2			2,952
Provision		144		1,567		(45	)		114		(276	)		1,504

Ending balance	$	638	$	15,667	$	262		$	685	$	(9	)	$	17,243


	ALC
	March 31, 2012
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other		Total
	(In Thousands of Dollars)
Beginning balance	$	—	$	—	$	2,542	$	1,034	$	—	$	3,576
Charge-offs		—		—		773		238		—		1,011
Recoveries		—		—		232		20		—		252

Net charge-offs		—		—		541		218		—		759
Provision		—		—		491		220		—		711

Ending balance	$	—	$	—	$	2,492	$	1,036	$	—	$	3,528


	FUSB & ALC
	March 31, 2012
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other			Total
	(In Thousands of Dollars)
Beginning balance	$	889	$	16,533	$	2,848	$	1,718	$	279		$	22,267
Charge-offs		476		2,434		795		353		2			4,070
Recoveries		81		1		255		22		—			359

Net charge-offs		395		2,433		540		331		2			3,711
Provision		144		1,567		446		334		(276	)		2,215

Ending balance	$	638	$	15,667	$	2,754	$	1,721	$	(9	)	$	20,771


	FUSB
	December 31, 2011
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other		Total
	(In Thousands of Dollars)
Beginning balance	$	988	$	15,206	$	375	$	359	$	99	$	17,027
Charge-offs		407		12,915		420		973		3		14,718
Recoveries		152		45		120		172		—		489

Net charge-offs		255		12,870		300		801		3		14,229
Provision		156		14,198		230		1,126		183		15,893

Ending balance	$	889	$	16,534	$	305	$	684	$	279	$	18,691


	ALC
	December 31, 2011
			Commercial				Residential
	Commercial		Real Estate		Consumer		Real Estate		Other		Total
	(In Thousands of Dollars)
Beginning balance	$	—	$	—	$	2,663	$	1,246	$	—	$	3,909
Charge-offs		—		—		2,993		1,049		—		4,042
Recoveries		—		—		708		92		—		800

Net charge-offs		—		—		2,285		957		—		3,242
Provision		—		—		2,165		744		—		2,909

Ending balance	$	—	$	—	$	2,543	$	1,033	$	—	$	3,576


	FUSB & ALC
	December 31, 2011
			Commercial				Residential
	Commercial		Real Estate		Consumer		Real Estate		Other		Total
	(In Thousands of Dollars)
Beginning balance	$	988	$	15,206	$	3,038	$	1,605	$	99	$	20,936
Charge-offs		407		12,915		3,413		2,022		3		18,760
Recoveries		152		45		828		264		—		1,289

Net charge-offs		255		12,870		2,585		1,758		3		17,471
Provision		156		14,198		2,395		1,870		183		18,802

Ending balance	$	889	$	16,534	$	2,848	$	1,717	$	279	$	22,267

Impaired Loan Evaluations

The following table details loans individually evaluated for impairment at March 31, 2012 and December 31, 2011.


	March 31, 2012				December 31, 2011
	Loans Evaluated Individually for Impairment				Loans Evaluated Individually for Impairment
	Recorded Investment		Balance in Allowance for Loan Losses		Recorded Investment		Balance in Allowance for Loan Losses
	(In Thousands of Dollars)				(In Thousands of Dollars)
Real estate loans:
Construction, land development and other land loans	$	20,869	$	7,236	$	19,674	$	6,800
Secured by 1-4 family residential properties		186		—		186		—
Secured by multi-family residential properties		2,884		—		2,884		—
Secured by non-farm, non-residential properties		29,331		1,901		37,569		3,775
Other		—		—		—		—
Commercial and industrial loans		1,307		208		1,603		509
Consumer loans		—		—		—		—
Other loans		—		—		—		—

Total loans	$	54,577	$	9,345	$	61,916	$	11,084

The following table details loans collectively evaluated for impairment at March 31, 2012 and December 31, 2011.


	March 31, 2012				December 31, 2011
	Loans Evaluated Collectively for Impairment				Loans Evaluated Collectively for Impairment
	Recorded Investment		Balance in Allowance for Loan Losses		Recorded Investment		Balance in Allowance for Loan Losses
	(In Thousands of Dollars)				(In Thousands of Dollars)
Real estate loans:
Construction, land development and other land loans	$	19,492	$	2,283	$	20,637	$	2,873
Secured by 1-4 family residential properties		79,765		1,721		84,037		113
Secured by multi-family residential properties		23,179		174		23,838		170
Secured by non-farm, non-residential properties		112,895		4,021		109,949		2,965
Other		813		3		820		1,555
Commercial and industrial loans		36,298		430		41,457		380
Consumer loans		59,631		2,754		64,574		2,848
Other loans		381		40		909		279

Total loans	$	332,454	$	11,426	$	346,221	$	11,183

Credit Quality Indicators

The Bank has established a credit risk rating system to assess and manage the risk in the loan portfolio. It establishes a uniform framework and common language for assessing and monitoring risk in the portfolio.

The following is a guide for an 8-grade system of credit risk:

Minimal Risk: Borrowers in this category have the lowest risk of any resulting loss. Borrowers are of the highest quality, presently and prospectively.

Better Than Average Risk: Borrowers in the high end of medium range between borrowers who are definitely sound and those with minor risk characteristics.

Moderate Risk: Borrowers in this category have little chance of resulting in a loss. This category should include the average loan, under average economic conditions.

Acceptable Risk: Borrowers in this category have a limited chance of resulting in a loss.

Special Mention (Potential Weakness): Borrowers in this category exhibit potential credit weaknesses or downward trends deserving bank management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in our credit position at some future date. Special Mention loans are not adversely classified and do not expose our institution to sufficient risk to warrant adverse classification.

Included in Special Mention assets could be workout or turnaround situations, as well as those borrowers previously rated 2-4 who have shown deterioration, for whatever reason, indicating a downgrading from the better grade. The Special Mention rating is designed to identify a specific level of risk and concern about a loan’s and/or borrower’s quality. Although a Special Mention asset has a higher probability of default than previously rated categories, its default is not imminent.

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

Doubtful: Borrowers classified doubtful have all the weaknesses found in substandard borrowers with the added provision that the weaknesses make collection of debt in full, based on currently existing facts, conditions and values, highly questionable and improbable. Serious problems exist to the point where partial loss of principal is likely. The possibility of loss is extremely high, but, because of certain important, reasonably specific pending factors that may work to strengthen the assets, the loans’ classification as estimated losses is deferred until a more exact status may be determined. Pending factors include proposed merger, acquisition or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans. Additional factors include whether management has a demonstrated history of failing to live up to agreements, unethical or dishonest business practices and/or conviction on criminal charges.

Loss: Borrowers deemed incapable of repayment of unsecured debt. Loans to such borrowers are considered uncollectible and of such little value that continuance as active assets of the bank is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off these worthless assets, even though partial recovery may be affected in the future.

The table below illustrates the carrying amount of loans by credit quality indicator at March 31, 2012 (in thousands of dollars).


	FUSB
	Pass 1-4		Special Mention 5		Substandard 6		Doubtful 7		Total
Loans secured by real estate:
Construction, land development and other land loans	$	17,182	$	377	$	22,768	$	34	$	40,361
Secured by 1-4 family residential properties		37,189		424		4,543		—		42,156
Secured by multi-family residential properties		23,418		—		2,884		—		26,302
Secured by non-farm, non-residential properties		103,611		5,291		33,323		—		142,225
Other		813		—		—		—		813
Commercial and industrial loans		34,842		497		2,277		—		37,616
Consumer loans		16,307		195		1,171		—		17,673
Other loans		586		—		1		—		587

Total	$	233,948	$	6,784	$	66,967	$	34	$	307,733


	ALC
	Performing		Nonperforming		Total
Loans secured by real estate:
Secured by 1-4 family residential properties	$	37,034	$	1,456	$	38,490
Consumer loans		43,244		1,866		45,110

Total	$	80,278	$	3,322	$	83,600

The table below illustrates the carrying amount of loans by credit quality indicator at December 31, 2011 (in thousands of dollars).


	FUSB
	Pass 1-4		Special Mention 5		Substandard 6		Doubtful 7		Total
Loans secured by real estate:
Construction, land development and other land loans	$	18,047	$	699	$	21,327	$	238	$	40,311
Secured by 1-4 family residential properties		38,573		627		4,445		46		43,691
Secured by multi-family residential properties		23,838		—		2,884		—		26,722
Secured by non-farm, non-residential properties		105,590		11,579		30,349		—		147,518
Other		820		—		—		—		820
Commercial and industrial loans		39,676		845		2,498		41		43,060
Consumer loans		17,617		383		867		19		18,886
Other loans		909		—		1		—		910

Total	$	245,070	$	14,133	$	62,371	$	344	$	321,918


	ALC
	Performing		Nonperforming		Total
Loans secured by real estate:
Secured by 1-4 family residential properties	$	38,550	$	1,982	$	40,532
Consumer loans		43,675		2,013		45,688

Total	$	82,225	$	3,995	$	86,220

The following table provides an aging analysis of past due loans and nonaccruing loans by class at March 31, 2012 (in thousands of dollars).


	FUSB
	Past Due
			Greater than						Current		Total
	30-89 Days		90 Days		Total		Nonaccrual		Loans		Loans
Loans secured by real estate:
Construction, land development and other land loans	$	3,323	$	—	$	3,323	$	3,105	$	33,933	$	40,361
Secured by 1-4 family residential properties		1,079		—		1,079		742		40,335		42,156
Secured by multi-family residential properties		—		—		—		2,884		23,418		26,302
Secured by non-farm, non-residential properties		5,791		58		5,849		8,908		127,468		142,225
Other		—		—		—		—		813		813
Commercial and industrial loans		1,281		—		1,281		620		35,715		37,616
Consumer loans		482		—		482		174		17,017		17,673
Other loans		10		—		10		—		577		587

Total past due loans	$	11,966	$	58	$	12,024	$	16,433	$	279,276	$	307,733


	ALC
	Past Due
			Greater than						Current		Total
	30-89 Days		90 Days		Total		Nonaccrual		Loans		Loans
Loans secured by real estate:
Secured by 1-4 family residential properties	$	459	$	1,177	$	1,636	$	279	$	36,575	$	38,490
Consumer loans		1,055		633		1,688		1,233		42,189		45,110

Total past due loans	$	1,514	$	1,810	$	3,324	$	1,512	$	78,764	$	83,600

The following table provides an aging analysis of past due loans and nonaccruing loans by class at December 31, 2011 (in thousands of dollars).


	FUSB
	Past Due
			Greater than						Current		Total
	30-89 Days		90 Days		Total		Nonaccrual		Loans		Loans
Loans secured by real estate:
Construction, land development and other land loans	$	3,094	$	—	$	3,094	$	3,087	$	34,130	$	40,311
Secured by 1-4 family residential properties		1,324		38		1,362		879		41,450		43,691
Secured by multi-family residential properties		—		—		—		2,884		23,838		26,722
Secured by non-farm, non- residential properties		1,281		88		1,369		7,563		138,586		147,518
Other		—		—		—		—		820		820
Commercial and industrial loans		1,459		13		1,472		129		41,459		43,060
Consumer loans		670		72		742		74		18,070		18,886
Other loans		3		13		16		—		894		910

Total past due loans	$	7,831	$	224	$	8,055	$	14,616	$	299,247	$	321,918


	ALC
	Past Due
			Greater than						Current		Total
	30-89 Days		90 Days		Total		Nonaccrual		Loans		Loans
Loans secured by real estate:
Secured by 1-4 family residential properties	$	1,135	$	1,462	$	2,597	$	520	$	37,415	$	40,532
Consumer loans		1,310		646		1,956		1,367		42,365		45,688

Total past due loans	$	2,445	$	2,108	$	4,553	$	1,887	$	79,780	$	86,220

Impaired Loans

At March 31, 2012, the carrying amount of impaired loans consisted of the following (in thousands of dollars):


	March 31, 2012
	Carrying Amount		Unpaid Principal Balance		Related Allowances
Impaired loans with no related allowance recorded
Loans secured by real estate
Construction, land development and other land loans	$	6,844	$	6,844	$	—
Secured by 1-4 family residential properties		186		186		—
Secured by multi-family residential properties		2,884		2,884		—
Secured by non-farm, non-residential properties		20,866		20,866		—
Commercial and industrial		100		100		—

Total loans with no related allowance recorded	$	30,880	$	30,880	$	—

Impaired loans with an allowance recorded
Loans secured by real estate
Construction, land development and other land loans	$	14,025	$	14,025	$	7,236
Secured by non-farm, non-residential properties		8,465		8,465		1,901
Commercial and industrial		1,207		1,207		208

Total loans with an allowance recorded	$	23,697	$	23,697	$	9,345

Total impaired loans
Loans secured by real estate
Construction, land development and other land loans	$	20,869	$	20,869	$	7,236
Secured by 1-4 family residential properties		186		186		—
Secured by multi-family residential properties		2,884		2,884		—
Secured by non-farm, non-residential properties		29,331		29,331		1,901
Commercial and industrial		1,307		1,307		208

Total impaired loans	$	54,577	$	54,577	$	9,345

At December 31, 2011, the carrying amount of impaired loans consisted of the following (in thousands of dollars):


	December 31, 2011
	Carrying Amount		Unpaid Principal Balance		Related Allowances
Impaired loans with no related allowance recorded
Loans secured by real estate
Construction, land development and other land loans	$	7,005	$	7,005	$	—
Secured by 1-4 family residential properties		186		186		—
Secured by multi-family residential properties		2,884		2,884		—
Secured by non-farm, non-residential properties		24,411		24,411		—
Commercial and industrial		100		100		—

Total loans with no related allowance recorded	$	34,586	$	34,586	$	—

Impaired loans with an allowance recorded
Loans secured by real estate
Construction, land development and other land loans	$	12,669	$	12,669	$	6,800
Secured by non-farm, non-residential properties		13,159		13,159		3,775
Commercial and industrial		1,502		1,502		509

Total loans with an allowance recorded	$	27,330	$	27,330	$	11,084

Total impaired loans
Loans secured by real estate
Construction, land development and other land loans	$	19,674	$	19,674	$	6,800
Secured by 1-4 family residential properties		186		186		—
Secured by multi-family residential properties		2,884		2,884		—
Secured by non-farm, non-residential properties		37,569		37,569		3,775
Commercial and industrial		1,603		1,603		509

Total impaired loans	$	61,916	$	61,916	$	11,084

The average net investment in impaired loans and interest income recognized and received on impaired loans are as follows (in thousands of dollars):


	March 31, 2012
	Average Recorded		Interest Income		Interest Income
	Investment		Recognized		Received
Loans secured by real estate
Construction, land development and other land loans	$	19,819	$	189	$	194
Secured by 1-4 family residential properties		186		—		—
Secured by multi-family residential properties		2,884		—		—
Secured by non-farm, non-residential properties		34,199		314		402
Commercial and industrial		1,435		11		8

Total impaired loans	$	58,523	$	514	$	604


	December 31, 2011
	Average Recorded		Interest Income		Interest Income
	Investment		Recognized		Received
Loans secured by real estate
Construction, land development and other land loans	$	12,173	$	649	$	687
Secured by 1-4 family residential properties		37		—		—
Secured by multi-family residential properties		3,313		—		1,587
Secured by non-farm, non-residential properties		32,572		1,429		—
Commercial and industrial		1,634		140		141

Total impaired loans	$	49,729	$	2,218	$	2,415

Loans on which the accrual of interest has been discontinued amounted to $17,945,045 and $16,502,314 at March 31, 2012 and December 31, 2011, respectively. If interest on those loans had been accrued, such income would have approximated $343,866 and $1,459,843 for March 31, 2012 and December 31, 2011, respectively. Interest income actually recorded on those loans amounted to $5,702 and $35,519 for March 31, 2012 and December 31, 2011, respectively. Accruing loans past due 90 days or more amounted to $1,868,394 and $2,331,718 for March 31, 2012 and December 31, 2011, respectively.

Troubled Debt Restructuring

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 $1,817,336 and $1,821,696 of non-accruing loans that were restructured and remained on nonaccrual status at March 31, 2012 and December 31, 2011, respectively. In addition, the Company had $1,995,002 and $2,488,060 of restructured loans that were restored to accrual status based on a sustained period of repayment performance at March 31, 2012 and December 31, 2011, respectively.

The following table provides the number of loans modified in a troubled debt restructuring by loan portfolio during the periods ended March 31, 2012 and December 31, 2011, and the recorded investment and unpaid principal balance as of March 31, 2012 and December 31, 2011.


	March 31, 2012						December 31, 2011
			Pre-Modification		Post-				Pre-Modification		Post-
			Outstanding		Modification				Outstanding		Modification
	Number		Principal		Principal		Number		Principal		Principal
	of Loans		Balance		Balance		of Loans		Balance		Balance
	(In Thousands of Dollars)
Loans secured by real estate:
Construction, land development and other land loans		9	$	3,182	$	1,995		9	$	3,182	$	2,488
Secured by non-farm, non-residential properties		3		2,583		1,745		3		2,583		1,747
Commercial loans		2		80		72		2		80		75

Total		14	$	5,845	$	3,812		14	$	5,845	$	4,310

Restructured loan modifications may include payment schedule modifications, interest rate concessions, maturity date extensions, modification of note structure, principal reduction or some combination of these concessions. During the periods ended March 31, 2012 and December 31, 2011, restructured loan modifications of loans secured by real estate, commercial and industrial loans primarily included maturity date extensions and payment schedule modifications.

The change in troubled debt restructuring as of March 31, 2012 was as follows:


	March 31, 2012		December 31, 2011		Change
	(In Thousands of Dollars)
Loans secured by real estate:
Construction, land development and other land loans		$1,995	$	2,488	$	(493	)
Secured by non-farm, non-residential properties		1,745		1,747		(2	)
Commercial and industrial loans		72		75		(3	)

Total		$3,812	$	4,310	$	(498	)

All loans $500,000 and over modified in a troubled debt restructuring are evaluated for impairment. The nature and extent of impairment of restructured loans, including those that have experienced a subsequent payment default, is considered in the determination of an appropriate level of allowance for loan losses. This evaluation resulted in an allowance for loan losses for such loans of $414,223 and $494,352 for March 31, 2012 and December 31, 2011, respectively.

9. SHORT-TERM BORROWINGS

Short-term borrowings consist of federal funds purchased and securities sold under repurchase agreements. Federal funds purchased generally mature within one to four days. There were no federal funds purchased outstanding at March 31, 2012 or December 31, 2011. Treasury tax and loan deposits are withdrawal on demand. There were no treasury tax and loan deposits outstanding at March 31, 2012 and December 31, 2011.

Securities sold under repurchase agreements, which are secured borrowings, generally are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities. The Company monitors the fair value of the underlying securities on a daily basis. Securities sold under repurchase agreements at March 31, 2012 and December 31, 2011 were $225,177 and $355,787, respectively.

At March 31, 2012, the Bank had $7.8 million in available federal fund lines from correspondent banks.

10. LONG-TERM DEBT

The Company uses FHLB advances as an alternative to funding sources with similar maturities such as certificates of deposit or other deposit programs. These advances generally offer more attractive rates when compared to other mid-term financing options. They are also flexible, allowing the Company to quickly obtain the necessary maturities and rates that best suit its overall asset/liability strategy. At March 31, 2012 and December 31, 2011, investment securities and mortgage loans amounting to $11,287,179 and $22,564,364, respectively, were pledged to secure these borrowings.

At March 31, 2012, the Bank had $175.2 million in available credit from the FHLB.

11. INCOME TAXES

The Company files a consolidated income tax return with the federal government and the state of Alabama. ALC files a Mississippi state income tax return on its Mississippi branches. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and the states in which it files for the years ended December 31, 2008 through 2011.

As of March 31, 2012, the Company had no unrecognized tax benefits related to Federal or state income tax matters and does not anticipate any material increase or decrease in unrecognized tax benefits relative to any tax positions taken prior to March 31, 2012. As of March 31, 2012, the Company had accrued no interest and no penalties related to uncertain tax positions.

The consolidated tax provision differed from the amount computed by applying the federal statutory income tax rate of 34%, as described in the following table:


	March 31, 2012			March 31, 2011
	(In Thousands of Dollars)
Income tax (benefit) expense at federal statutory rate	$	(755	)	$	348
Increase (decrease) resulting from:
Tax-exempt interest		(84	)		(98	)
State income tax (benefit) expense, net of federal income tax benefit		(103	)		33
Low income housing tax credits		—			—
Other		(40	)		(76	)

Total	$	(982	)	$	207

12. SEGMENT REPORTING

Under ASC Topic 280, Segment Reporting, certain information is disclosed for the two reportable operating segments of the Company. The reportable segments were determined using the internal management reporting system. These segments are composed of the Company’s and the Bank’s significant subsidiaries. The accounting policies for each segment are the same as those described in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the period ended December 31, 2011. The segment results include certain overhead allocations and intercompany transactions that were recorded at current market prices. All intercompany transactions have been eliminated to determine the consolidated balances. The results for the two reportable segments of the Company are included in the following table:


						All
	FUSB			ALC		Other			Eliminations			Consolidated
	(In Thousands of Dollars)
For the three months ended March 31, 2012

Net interest income	$	4,986		$	3,560	$	4		$	—		$	8,550
Provision for loan losses		1,503			712		—			—			2,215
Total non-interest income		1,013			325		(1,321	)		1,257			1,274
Total non-interest expense		6,996			2,866		149			(183	)		9,828

Income (loss) before income taxes		(2,500	)		307		(1,466	)		1,440			(2,219	)
(Benefit from) provision for income taxes		(1,104	)		120		2			—			(982	)

Net income (loss)	$	(1,396	)	$	187	$	(1,468	)	$	1,440		$	(1,237	)

Other significant items:
Total assets	$	618,675		$	83,233	$	71,056		$	(155,541	)	$	617,423
Total investment securities		118,733			—		75			—			118,808
Total loans, net		358,930			75,609		—			(68,690	)		365,849
Goodwill		—			—		—			—			—
Investment in subsidiaries		1,306			—		65,492			(66,793	)		5
Fixed asset addition		53			160		—			—			213
Depreciation and amortization expense		141			39		—			—			180
Total interest income from external customers		5,442			4,568		—			—			10,010
Total interest income from affiliates		1,008			—		4			(1,012	)		—


					All
	FUSB		ALC		Other		Eliminations			Consolidated
	(In Thousands of Dollars)
For the three months ended March 31, 2011:

Net interest income	$	5,375	$	3,192	$	10	$	—		$	8,577
Provision for loan losses		819		486		—		—			1,305
Total non-interest income		1,068		175		1,061		(1,115	)		1,189
Total non-interest expense		5,032		2,384		195		(176	)		7,435

Income before income taxes		592		497		876		(939	)		1,026
Provision for income taxes		14		190		3		—			207

Net income	$	578	$	307	$	873	$	(939	)	$	819

Other significant items:
Total assets	$	629,007	$	87,749	$	90,586	$	(167,983	)	$	639,359
Total investment securities		134,047		—		308		—			134,355
Total loans, net		385,173		77,912		—		(78,649	)		384,436
Goodwill		3,111		—		987		—			4,098
Investment in subsidiaries		1,384		13		76,187		(77,566	)		18
Fixed asset addition		—		—		—		—			—
Depreciation and amortization expense		143		32		—		—			175
Total interest income from external customers		5,950		4,492		2		—			10,444
Total interest income from affiliates		1,300		—		9		(1,309	)		—

13. GUARANTEES, COMMITMENTS AND CONTINGENCIES

The Bank’s exposure to credit loss in the event of nonperformance by the other party for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making these commitments as it does for on-balance sheet instruments. For interest rate swap transactions and commitments to purchase or sell securities for forward delivery, the contract or notional amounts do not represent exposure to credit loss. The Bank controls the credit risk of these derivative instruments through credit approvals, limits and monitoring procedures. Certain derivative contracts have credit risk for the carrying value plus the amount to replace such contracts in the event of counterparty default. All of the Bank’s financial instruments are held for risk management and not for trading purposes. During the period ended March 31, 2012, there were no credit losses associated with derivative contracts.

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


	March 31,		December 31,
	2012		2011
	(In Thousands of Dollars)
Standby Letters of Credit	$	1,173		$ 1,172
Commitments to Extend Credit	$	39,694		$45,736

Standby letters of credit are contingent commitments issued by the Bank generally to guarantee the performance of a customer to a third party. The Bank has recourse against the customer for any amount that it is required to pay to a third party under a standby letter of credit. Revenues are recognized over the lives of the standby letters of credit. The potential amount of future payments that the Bank could be required to make under its standby letters of credit at both March 31, 2012 and December 31, 2011 was $1.2 million, representing the Bank’s total credit risk.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each

customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties.

Commitments to purchase securities for delayed delivery require the Bank to purchase a specified security at a specified price for delivery on a specified date. Similarly, commitments to sell securities for delayed delivery require the Bank to sell a specified security at a specified price for delivery on a specified date. Market risk arises from potential movements in security values and interest rates between the commitment and delivery dates. At March 31, 2012 and December 31, 2011 there were no outstanding commitments to purchase and sell securities for delayed delivery.

Litigation

On September 27, 2007, Malcomb Graves Automotive, LLC (“Graves Automotive”), Malcomb Graves and Tina Graves filed a lawsuit in the Circuit Court of Shelby County, Alabama against the Company, the Bank, ALC and their respective directors and officers seeking an unspecified amount of compensatory and punitive damages. A former employee of ALC, Corey Mitchell, was named as a co-defendant, and ALC and the Bank filed a crossclaim against him seeking, among other relief, defense and indemnification for any damages suffered in the underlying lawsuit. The underlying complaint alleged that the defendants committed fraud in misrepresenting to Graves Automotive the amounts that Graves Automotive owed on certain loans and failing to credit Graves Automotive properly for certain loans. The defendants moved to compel arbitration, and the trial court denied the defendants’ motion. The defendants appealed this decision, and, on September 29, 2010, the Alabama Supreme Court affirmed the trial court’s denial of defendants’ motion. Following the return of the case to the active docket, on November 30, 2010, ALC and the Bank moved to dismiss the lawsuit. In response to this motion to dismiss, on June 15, 2011, the Circuit Court dismissed all claims against the Company, the Bank and their respective directors and officers and all claims that were brought by Malcomb Graves and Tina Graves in their individual capacities. The Circuit Court also dismissed Graves Automotive’s claims for conversion and negligent supervision against ALC and ordered Graves Automotive to re-plead its fraud allegations against ALC with more particularity. On September 15, 2011, Graves Automotive filed a third amended complaint in response to the Circuit Court’s June 15, 2011 order. In its third amended complaint, Graves Automotive asserted claims against ALC for breach of contract, fraud, unjust enrichment and conversion. ALC moved to dismiss the third amended complaint on many of the same grounds as set forth in its previous motion to dismiss. On October 13, 2011, the Circuit Court dismissed Graves Automotive’s conversion claim and again ordered Graves Automotive to re-plead its fraud claims with more particularity, this time within 60 days. On December 12, 2011, Graves Automotive filed its fourth amended complaint, this time asserting only two counts, breach of contract and unjust enrichment. Despite removing the fraud claims, the fourth amended complaint still requests punitive damages. On January 11, 2012, ALC filed a motion to dismiss the fourth amended complaint and to strike Graves Automotive’s request for punitive damages. This motion remains pending. ALC continues to deny the allegations against it in the underlying lawsuit and intends to vigorously defend itself in this matter. Given the pendency of ALC’s motion and the lack of discovery conducted, it is too early to assess the likelihood of a resolution of the remaining claims in this matter or the possibility of an unfavorable outcome.

On February 17, 2011, Wayne Allen Russell, Jr. (“Russell”) filed a lawsuit in the Circuit Court of Tuscaloosa County, Alabama against the Bank and Bill Morgan, who currently serves as the Bank’s Business Development Officer. The allegations in the lawsuit relate to a mortgage on a parcel of real estate, executed by Russell in favor of the Bank as security for a loan, and certain related transactions, including foreclosure proceedings executed by the Bank. Additionally, on June 17, 2011, Mr. Russell’s wife, Rebecca Russell, in response to a lawsuit filed against Ms. Russell by the Bank, filed a counterclaim against the Bank seeking compensatory and punitive damages, asserting that she was induced to mortgage a rental dwelling owned by her, the proceeds of which were paid upon certain obligations owed to the Bank by her husband, and that the Bank had orally agreed to refinance her loan as a part of an alleged refinancing promise by the Bank with respect to the obligations of Mr. Russell. The Court granted the motion to strike the jury demand in both cases and has consolidated the matters for a non-jury trial. Once the consolidation order is entered, the Bank intends to seek the dismissal of Mr. Russell’s complaint and Ms. Russell’s counterclaim. Although the defendants intend to vigorously defend themselves in these matters, it is too early to assess the likelihood of a resolution of these matters or the possibility of an unfavorable outcome.

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

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

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

The accounting principles and reporting policies of the Company, and the methods of applying these principles, conform with accounting principles generally accepted in the United States of America (“GAAP”) and general practices within the financial services industry. Critical accounting policies relate to securities, loans, allowance for loan losses, derivatives and hedging. A description of these estimates, which significantly affect the determination of financial position, results of operations and cash flows, is set forth in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

The emphasis of this discussion is a comparison of assets, liabilities and shareholders’ equity as of March 31, 2012 to year-end 2011, while comparing income and expense for the three-month periods ended March 31, 2012 and 2011.

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

This information should be read in conjunction with the Company’s unaudited consolidated financial statements and related notes appearing elsewhere in this report and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

COMPARING THE THREE MONTHS ENDED MARCH 31, 2012 TO THE THREE MONTHS ENDED MARCH 31, 2011

Net loss for USBI in the first quarter of 2012 was $(1.2) million, compared to net income of $819,000 for the first quarter of 2011, resulting in a decrease of basic net income (loss) per share from $0.14 per share during the first quarter of 2011 to $(0.21) in the same quarter of 2012 .

For the three-month period ended March 31, 2012, the Bank had net loss of $(1.4) million, compared to net income of $578,000 for the same quarter of 2011. Decreases in net income for the Bank resulted from higher provisions for loan losses as a result of higher charge-offs and impairment on other real estate owned. These charge-offs and impairments resulted mainly from commercial real estate loans and foreclosed property associated with commercial real estate loans, as real estate values continue to decline and market conditions continue to be depressed.

Net income for ALC in the three-month period ending March 31, 2012 was $187,000, compared to $307,000 for the same quarter of 2011. Net income declined when compared to the same three-month period of 2011, primarily due to increased provision for loan losses of $224,000.

Interest income for USBI in the 2012 first quarter decreased $434,000, or 4.2%, compared to the first quarter of 2011. The decrease in interest income was primarily due to a decrease in interest earned on loans and investment securities resulting from an overall decrease in the average yield and average volume of loans and investment securities. Interest income at the Bank for the 2012 first quarter decreased $511,000, compared to the same period of 2011. These decreases were due to an overall decrease in the average yield and average volume of loans and investment securities. Loan demand continues to be weak due to continuing difficult economic conditions. Cash flows from loans and investment securities were reinvested at lower rates, resulting in lower interest income. Interest income at ALC increased $77,000 for the first quarter of 2012 compared to the same quarter in 2011. This increase at ALC resulted from an increase in average consumer loans. The increase in yield on these loans off-set the loss of interest income on decreased real estate loans.

Interest expense for USBI in the 2012 first quarter decreased $407,000, or 21.8%, compared to the first quarter of 2011. This decrease was the result of lower interest rates paid on certificates of deposit and borrowed funds. As longer term certificates of deposit mature, they reprice at lower rates, as rates on deposits and borrowed funds remain at record lows.

Net interest income for USBI decreased $27,000, or 0.3%, in the first quarter of 2012 compared to the same period of 2011. The net interest margin declined from 6.24% for the first quarter of 2011 to 6.01% for the first quarter of 2012.

Loan and investment yields declined for the quarter ended March 31, 2012 compared to the same quarter in 2011. The cost of funds declined due to a decline in interest rates paid on interest bearing deposits and borrowed funds. Asset yields and funds costs have stabilized, and the net interest margin is expected to remain near current levels until the Federal Reserve adjusts rates.

The provision for loan losses for USBI was $2.2 million, or 3.8% annualized of average loans, in the first quarter of 2012, compared to $1.3 million, or 2.2% annualized of average loans, in the first quarter of 2011. The annualized provision as a percent of average loans was 2.2% for the first quarter of 2012. Charge-offs exceeded recoveries by $3.7 million for the 2012 first quarter, an increase of approximately $1.5 million over the same period in the prior year. The provision for loan losses at the Bank increased to $1.5 million for the three months ended March 31, 2012, compared to $819,000 for the same period in 2011. Due to continued weakness in residential and commercial real estate and high unemployment levels in our market areas, the year-to-date net charge-offs and the provisions for loan losses have increased when compared to the first quarter of 2011. The provision for loan losses at ALC increased to $712,000 for the three months ended March 31, 2012, compared to $486,000 for the same period in 2011. While non-performing loans at ALC declined, net charge-offs, primarily in the consumer portfolio, increased, requiring increased provision for loan losses, when compared to March 31, 2011. At the Company level, net charge-offs were $3.7 million and $2.2 million for March 31, 2012 and March 31, 2011, respectively. Net charge-offs at the Bank were $3.0 million and $700,000 at ALC.

Total non-interest income for USBI increased $85,000, or 7.1%, for the first quarter of 2012, compared to the same period in 2011. Service charges and fees on deposit accounts decreased $88,000 for the 2012 first quarter, compared to the same period in 2011. All other fees increased $176,000 for the three months ended March 31, 2012, compared to the same period of 2011.

Total non-interest expense increased $2.4 million, or 32.2%, for the 2012 first quarter compared to the same period in 2011. Salary and employee benefits increased $194,000, when comparing the first quarter of 2012 to the same period in 2011. For the first quarter of 2012, salary expense increased $136,000, health insurance expense increased $89,000, contributions to the United Security Bancshares, Inc. Employee Stock Ownership Plan (with 401(k) Provisions) decreased $31,000 and all other compensation and benefits costs remained unchanged when compared to the same period in 2011. For the 2012 first quarter, impairment on other real estate increased $2.4 million, and realized loss on the sale of other real estate decreased $145,000.

Income tax benefit for the first quarter of 2012 was $982,000, compared to income tax expense of $207,000 in the first quarter of 2011. Management estimates the effective tax rate for the Company to be approximately 30.0% of pre-tax income for the period ended March 31, 2012.

COMPARING THE MARCH 31, 2012 STATEMENTS OF FINANCIAL CONDITION TO DECEMBER 31, 2011

In comparing consolidated financial condition at March 31, 2012 to December 31, 2011, total assets decreased $4.4 million to $617.4 million, while liabilities decreased $3.1 million to $552.5 million. Shareholders’ equity decreased $1.2 million as a result of a net loss of $1.2 million.

Investment securities for USBI decreased $4.5 million, or 3.7%, during the first three months of 2012. Investments provide the Company with a stable form of liquidity while maximizing earnings yield. Loans, net of unearned income, decreased $16.7 million, from $403.4 million at December 31, 2011, to $386.6 million at March 31, 2012. Deposits increased $6.6 million, or 1.2%, during the first three months of 2012. Loans, net of unearned income at ALC decreased $2.6 million, from $81.7 million at December 31, 2011 to $79.1 million at March 31, 2012. Loans, net of unearned income at the Bank, after consolidation eliminations, decreased $14.1 million from $321.6 million at December 31, 2011 to $307.5 million at March 31, 2012.

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

At March 31, 2012, the allowance for loan losses was $20.7 million, or 5.0% of loans net of unearned income, compared to $22.3 million, or 5.5% of loans net of unearned income, at December 31, 2011. The coverage ratio of the allowance for loan losses to non-performing assets decreased to 60.3% at March 31, 2012, compared to 62.5% at December 31, 2011. At March 31, 2012, loans on non-accrual increased $1.4 million, accruing loans past due 90 days or more decreased $464,000 and real estate acquired in settlement of loans decreased $2.1 million, each as compared to December 31, 2011.

Net charge-offs as of the quarter ended March 31, 2012 were $3.7 million, or 3.8% of average loans on an annualized basis, an increase of 66.3%, or $1.5 million, from the charge-offs of $2.2 million, or 2.2% of average loans on an annualized basis, reported a year earlier. The provision for loan losses for the first three months of 2012 was $2.2 million, compared to $1.3 million at March 31, 2012.

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


	Consolidated
	March 31,			December 31,			March 31,
	2012			2011			2011
Loans Accounted for on a Non-Accrual Basis	$	17,945		$	16,502		$	21,580
Accruing Loans Past Due 90 Days or More		1,868			2,332			4,426
Real Estate Acquired in Settlement of Loans		14,633			16,774			25,821

Total	$	34,446		$	35,608		$	51,827
Non-Performing Assets as a Percentage of Net Loans and Other Real Estate		8.58	%		8.48	%		12.05	%


	FUSB
	March 31,			December 31,			March 31,
	2012			2011			2011
Loans Accounted for on a Non-Accrual Basis	$	16,433		$	14,616		$	20,178
Accruing Loans Past Due 90 Days or More		58			224			1,674
Real Estate Acquired in Settlement of Loans		11,309			12,606			19,430

Total	$	27,800		$	27,446		$	41,282
Non-Performing Assets as a Percentage of Net Loans and Other Real Estate		8.72	%		8.21	%		12.06	%


	ALC
	March 31,			December 31,			March 31,
	2012			2011			2011
Loans Accounted for on a Non-Accrual Basis	$	1,512		$	1,886		$	1,402
Accruing Loans Past Due 90 Days or More		1,810			2,108			2,752
Real Estate Acquired in Settlement of Loans		3,324			4,168			6,391

Total	$	6,646		$	8,162		$	10,545
Non-Performing Assets as a Percentage of Net Loans and Other Real Estate		8.06	%		9.50	%		11.97	%

Non-performing assets as a percentage of net loans and other real estate was 8.6% at March 31, 2012 and 8.5% at December 31, 2011. Loans on non-accrual status increased $1.4 million, accruing loans past due 90 days or more decreased $464,000 and real estate acquired in settlement of loans decreased $2.1 million from December 31, 2011. The Company forecasts that adverse economic conditions and the severely depressed real estate market will continue to put downward pressure on real estate collateral values and will impact our ability to reduce non-performing assets. Other real estate owned as of March 31, 2012 consisted of 4 residential properties totaling $71,528 and 40 commercial properties totaling $11.2 million at the Bank and 97 residential properties totaling $2.9 million and 16 commercial properties totaling $330,066 at ALC. Every effort is made to dispose of these properties in a timely manner, but these efforts continue to be hampered by poor economic conditions. Real estate values continue to decline, and the real estate market remains severely depressed in all of our market areas. Management reviews these non-performing assets and reports to the Board of Directors of the Bank monthly. Loans past due 90 days or more and still accruing are reviewed by management and are allowed to continue accruing only when management believes that underlying collateral values and the financial strength of the borrowers are sufficient to protect the Bank from loss. If at any time management determines that there may be a loss of interest or principal, these loans will be changed to non-accrual status and their asset values downgraded.

LIQUIDITY AND CAPITAL RESOURCES

The Bank’s primary sources of funds are customer deposits, FHLB advances, repayments of loan principal and interest from loans and investments. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition, making them less predictable. The Bank manages the pricing of its deposits to maintain a desired deposit balance. In addition, the Bank invests in short-term interest-earning assets, which provide liquidity to meet lending requirements.

The Bank currently has up to $175.2 million in borrowing capacity from the FHLB and $7.8 million in established federal funds lines.

The Bank is required to maintain certain levels of regulatory capital. At March 31, 2012 and December 31, 2011, the Company and the Bank were in compliance with all regulatory capital requirements.

Management is not aware of any condition that currently exists that would have an adverse effect on the liquidity, capital resources or operation of the Company. However, the Company is a defendant in certain claims and legal actions arising in the ordinary course of business. See Note 13 to Item 1, “Guarantees, Commitments and Contingencies,” for a discussion of such claims and legal actions.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary functions of asset and liability management are to (1) assure adequate liquidity, (2) maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities, (3) maximize the profit of the Bank and (4) reduce risks to the Bank’s capital. Liquidity management involves the ability to meet day-to-day cash flow requirements of the Bank’s customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs. Without proper liquidity management, the Bank would not be able to perform 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 $172.3 million at December 31, 2011 and $145.1 million at March 31, 2012.

Investment securities forecasted to mature or reprice over the next twelve months ending March 31, 2013 are estimated to be $7.8 million, or about 6.8%, of the investment portfolio as of March 31, 2012. For comparison, principal payments on investment securities totaled $7.5 million, or 6.6%, of the investment portfolio at March 31, 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 March 31, 2012, the bond portfolio had an expected average maturity of 3.5 years, and approximately 72.8% of the $113.7 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.

The Bank, at March 31, 2012, had long-term debt and short-term borrowings that, on average, represented 2.4% of total liabilities and equity, compared to 3.9% at year-end 2011.

Interest rate sensitivity is a function of the repricing characteristics of the portfolio of assets and liabilities. These repricing characteristics are the time frames during which the interest-bearing assets and liabilities are subject to changes in interest rates, either at replacement or maturity, during the life of the instruments. 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. 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.

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

On a monthly basis, the Bank simulates how changes in short- and long-term interest rates will impact future profitability, as reflected by changes in the Bank’s net interest margin.

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

ITEM 4. CONTROLS AND PROCEDURES

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

The management of the Company carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of March 31, 2012, pursuant to the evaluation of these controls and procedures required by Rule 13a-15 of the Exchange Act. Based upon that evaluation, the Company’s management concluded, as of March 31, 2012, that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed in the Company’s periodic filings with the SEC is recorded, processed, summarized and reported within the time periods specified.

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 13 to Item 1, “Guarantees, Commitments and Contingencies,” for information regarding certain litigation matters relating to the Company and its subsidiaries.

The Company and its subsidiaries also are parties to litigation other than as described in Note 13 to Item 1, and the Company intends to vigorously defend itself in all such litigation. In the opinion of the Company, based on review and consultation with legal counsel, the outcome of such litigation should not have a material adverse effect on the Company’s consolidated financial statements or results of operations.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2011 that could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

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

Issuer Purchases of Equity Securities


Period	Total Number of Shares Purchased			Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs⁽¹⁾		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Programs ⁽¹⁾
January 1 – January 31		7,500	⁽²⁾	$	4.58		—		242,303

February 1 – February 29		3,500	⁽²⁾	$	6.29		—		242,303

March 1 – March 31		—		$	0.00		—		242,303

Total		11,000		$	5.12		—		242,303

(1)

On December 17, 2011, the Board of Directors extended the share repurchase program previously approved by the Board on January 19, 2006. Under the repurchase program, the Company is authorized to repurchase up to 642,785 shares of common stock. The expiration date of the extended repurchase program is December 31, 2012. At March 31, 2012, there was 242,303 shares that may still be purchased under the program.

(2)	Shares were purchased in open-market transactions by an independent trustee for the United Security Bancshares Inc. Employee Stock Ownership Plan (With 401(k) Provisions).

ITEM 6. EXHIBITS

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

SIGNATURES

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

UNITED SECURITY BANCSHARES, INC.

DATE: May 11, 2012

BY: /s/Robert Steen

Robert Steen

Its Vice President, Treasurer and Assistant Secretary, Chief Financial Officer and Principal Accounting Officer

(Duly Authorized Officer and Principal Financial Officer)

INDEX TO EXHIBITS


Exhibit No.		Description

3.1		Certificate of Incorporation of United Security Bancshares, Inc., incorporated herein by reference to the Exhibits to Form 10-Q for the quarter ended September 30, 1999.

3.2		Amended and Restated Bylaws of United Security Bancshares, Inc., incorporated by reference to Exhibit 3(ii) to the Current Report on Form 8-K filed August 29, 2007.

3.2A		First Amendment to the Bylaws of United Security Bancshares, Inc., incorporated by reference to Exhibit 3(ii) to the Current Report on Form 8-K filed on February 24, 2012.

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.

32		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		Interactive Data File.

Large accelerated filer

Accelerated filer

Non-accelerated filer

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Smaller reporting company