FIRST US BANCSHARES, INC. - Quarter Report: 2013 March (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

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, 2013

¨	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		(IRS Employer
Incorporation or Organization)		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 10, 2013
Common Stock, $0.01 par value		6,023,622 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, 2013 (Unaudited) and December 31, 2012		4

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2013 and 2012 (Unaudited)		5

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2013 and 2012 (Unaudited)		6

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 (Unaudited)		7

Notes to Condensed Consolidated Financial Statements (Unaudited)		8

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		34

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		37

ITEM 4. CONTROLS AND PROCEDURES		38

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS		39

ITEM 1A. RISK FACTORS		39

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		40

ITEM 6. EXHIBITS		40

Signature Page		40

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 (as defined in the Private Securities Litigation Reform Act of 1995) concerning its expected future operations and performance and other developments. The words “estimate,” “project,” “intend,” “anticipate,” “expect,” “believe” and similar expressions are indicative of forward-looking statements. Such forward-looking statements are necessarily estimates reflecting the Company’s best judgment based upon current information and involve a number of risks and uncertainties, and various factors could cause results to differ materially from those contemplated by such forward-looking statements. Such factors could include those identified from time to time in the Company’s Securities and Exchange Commission (“SEC”) filings and other public announcements, including the risk factors described in Part I, Item 1A of the Company’s Annual Report on Form 10-K, for the year ended December 31, 2012. Specifically, with respect to statements relating to loan demand, growth and earnings potential and the adequacy of the allowance for loan losses for the Company, these factors include, but are not limited to, the rate of growth (or lack thereof) in the economy, 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,
	2013			2012
	(Unaudited)
ASSETS
Cash and Due from Banks	$	9,364		$	12,181
Interest-Bearing Deposits in Other Banks		59,235			41,945

Total Cash and Cash Equivalents		68,599			54,126
Federal Funds Sold		5,000			5,000
Investment Securities Available-for-Sale, at fair value		92,396			92,614
Investment Securities Held-to-Maturity, at amortized cost		26,166			21,136
Federal Home Loan Bank Stock, at cost		681			936
Loans, net of allowance for loan losses of $16,793 and $19,278, respectively		321,007			337,400
Premises and Equipment, net		8,784			8,903
Cash Surrender Value of Bank-Owned Life Insurance		13,392			13,303
Accrued Interest Receivable		2,701			3,101
Investment in Limited Partnerships		836			836
Other Real Estate Owned		12,382			13,286
Other Assets		12,695			16,492

Total Assets	$	564,639		$	567,133

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	486,782		$	489,034
Accrued Interest Expense		291			413
Other Liabilities		8,165			8,401
Short-Term Borrowings		399			638

Total Liabilities		495,637			498,486

Commitments and Contingencies
Shareholders’ Equity:
Common Stock, par value $0.01 per share, 10,000,000 shares authorized; 7,327,560 shares issued; 6,023,622 shares outstanding		73			73
Surplus		9,284			9,284
Accumulated Other Comprehensive Income, net of tax		2,608			3,139
Retained Earnings		78,173			77,287
Less Treasury Stock: 1,303,938 shares at cost		(21,123	)		(21,123	)
Noncontrolling Interest		(13	)		(13	)

Total Shareholders’ Equity		69,002			68,647

Total Liabilities and Shareholders’ Equity	$	564,639		$	567,133

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,
	2013		2012
	(Unaudited)
INTEREST INCOME:
Interest and Fees on Loans	$	7,910	$	9,083
Interest on Investment Securities		684		927

Total Interest Income		8,594		10,010
INTEREST EXPENSE:
Interest on Deposits		787		1,375
Interest on Borrowings		2		85

Total Interest Expense		789		1,460

NET INTEREST INCOME		7,805		8,550
PROVISION FOR LOAN LOSSES		506		2,215

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		7,299		6,335
NON-INTEREST INCOME:
Service and Other Charges on Deposit Accounts		590		628
Credit Life Insurance Income		110		119
Other Income		923		527

Total Non-Interest Income		1,623		1,274
NON-INTEREST EXPENSE:
Salaries and Employee Benefits		4,012		3,764
Occupancy Expense		461		447
Furniture and Equipment Expense		283		310
Impairment on Other Real Estate		197		2,834
Loss on Sale of Other Real Estate		445		194
Other Expense		2,294		2,279

Total Non-Interest Expense		7,692		9,828

INCOME (LOSS) BEFORE INCOME TAXES		1,230		(2,219	)
PROVISION FOR (BENEFIT FROM) INCOME TAXES		344		(982	)

NET INCOME (LOSS)	$	886	$	(1,237	)

BASIC AND DILUTED NET INCOME (LOSS) PER SHARE	$	0.15	$	(0.21	)

DIVIDENDS PER SHARE	$	—	$	—

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,
	2013			2012
	(Unaudited)
Net income (loss)	$	886		$	(1,237	)

Other comprehensive income (loss):
Change in unrealized holding losses on available-for-sale securities arising during period, net of tax (benefit) of $(319) and $95, respectively		(532	)		(68	)

Other comprehensive loss		(532	)		(68	)

Total comprehensive income (loss)	$	354		$	(1,305	)

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,
	2013			2012
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	886		$	(1,237	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		165			180
Amortization of premiums and discounts, net		271			315
Provision for loan losses		506			2,215
Impairment of OREO		197			2,834
Loss on sale of OREO		445			194
Net other operating activities		4,064			85

Total adjustments		5,648			5,823

Net cash provided by operating activities		6,534			4,586

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and prepayments of investment securities, available-for-sale		10,945			13,091
Proceeds from maturities and prepayments of investment securities, held-to-maturity		8,166			1,170
Proceeds from redemption of FHLB stock		256			—
Proceeds from the sale of other real estate		734			1,256
Purchase of premises and equipment, net		(40	)		(212	)
Purchase of investment securities available-for-sale		(11,851	)		(4,993	)
Purchase of investment securities held-to-maturity		(13,196	)		(5,161	)
Net change in loan portfolio		15,415			10,877

Net cash provided by investing activities		10,429			16,028

CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in customer deposits		(2,251	)		6,587
Decrease in borrowings		(239	)		(10,131	)
Purchase of treasury stock		—			59

Net cash used in financing activities		(2,490	)		(3,485	)

NET INCREASE IN CASH AND CASH EQUIVALENTS		14,473			17,129

CASH AND CASH EQUIVALENTS, beginning of period		54,126			52,797

CASH AND CASH EQUIVALENTS, end of period	$	68,599		$	69,926

SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest	$	1,288		$	1,575
Income Taxes		6			70
NON-CASH TRANSACTIONS:
Other real estate acquired in settlement of loans	$	472		$	2,143

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, 2013. 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, 2012. 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, 2012. 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 December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The amendments in this ASU 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 ASU. 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 adoption of this guidance, which involves disclosure only, did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In February 2013, the FASB issued ASU No. 2013-02, which updated ASC Topic 220, Comprehensive Income, which requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not reclassified in their entirety to net income, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. ASU No. 2013-02 is effective for annual reporting periods beginning on or after December 15, 2012 and interim periods within those annual periods. ASU No. 2013-02 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

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, 2013 and 2012. Diluted net income (loss) per share for the three-month periods ended March 31, 2013 and 2012 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, 2013 or 2012, 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, 2013 and 2012 (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, 2013	$	886			6,023,622	$	0.15
March 31, 2012	$	(1,237	)		6,017,088	$	(0.21	)

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 risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. 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 is a description of the valuation methodologies used for instruments measured at fair value and recognized in the accompanying consolidated statements of financial condition, 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 exchange traded equities. Level 2 securities include U.S. treasury and agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. Level 2 fair values are obtained from quoted prices of securities with similar characteristics. In certain cases, where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

Impaired Loans

Estimates of fair value are determined based on a variety of information, including the use of available appraisals, estimates of market value by licensed appraisers or local real estate brokers and the knowledge and experience of the Bank’s management related to values of properties in the Bank’s market areas. Management takes into consideration the type, location and occupancy of the property as well as current economic conditions in the area the property is located in assessing estimates of fair value. Accordingly, fair value estimates for impaired loans are classified as Level 3.

Foreclosed Assets

Estimates of fair values are determined based on a variety of information, including the use of available appraisals, estimates of market value by licensed appraisers or local real estate brokers and the knowledge and experience of the Bank’s senior lending officers related to values of properties in the Bank’s market areas. These officers take into consideration the type, location and occupancy of the property as well as current economic conditions in the area the property is located in assessing estimates of fair value. Accordingly, the fair value estimates for foreclosed real estate are classified as Level 3.

Financial assets measured at fair value on a recurring basis at March 31, 2013 and December 31, 2012 is summarized below.


	Fair Value Measurements at March 31, 2013 Using
	Totals At March 31, 2013		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	$	78,284	$	—	$	78,284	$	—
Obligations of states, counties and political subdivisions		14,032		—		14,032		—
U.S. treasury securities		80		—		80		—


	Fair Value Measurements at December 31, 2012 Using
	Totals At December 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	$	77,553	$	—	$	77,553	$	—
Obligations of states, counties and political subdivisions		14,981		—		14,981		—
U.S. treasury securities		80		—		80		—

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.

The Company rarely transfers assets and liabilities measured at fair value between Level 1 and Level 2 measurements. There were no such transfers during the quarter ended March 31, 2013 or the year ended December 31, 2012. Trading account assets and securities available for sale may be periodically transferred to or from Level 3 valuation based on management’s conclusion regarding the best method of pricing for an individual security. Such transfers are accounted for as if they occur at the beginning of a reporting period.

Financial assets measured at fair value on a nonrecurring basis at March 31, 2013 and December 31, 2012 is summarized below.


	Fair Value Measurements at March 31, 2013 Using
	Totals At March 31, 2013		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)
Impaired loans	$	13,578	$	—	$	—	$	13,578
Foreclosed property and other real estate		907		—		—		907


	Fair Value Measurements at December 31, 2012 Using
	Totals At December 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)
Impaired loans	$	14,956	$	—	$	—	$	14,956
Foreclosed property and other real estate		11,368		—		—		11,368

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. When an impaired loan is determined to be collateral dependent, the fair value is determined through the utilization of a third-party appraisal. It is the policy of the Company to update appraisals every 18-24 months. The types of collateral influence the frequency of obtaining updated appraisals. Management knows the market trends of collateral values well and monitors trends in sales and valuations in all of the various categories of collateral. These trends influence how often new appraisals are obtained within the 18-24 month timeframe. For example, a significant number of currently impaired loans are collateralized by residential subdivision lots. The values of this type of collateral have been volatile in recent years, and, therefore, appraisals are generally updated at the lower end of the timeframe (i.e., closer to 18 months), while timberland appraisals would be updated closer to the end of the timeframe (i.e., closer to 24 months), as these values have remained more stable. Any observed trend indicating reduced valuations would require updated appraisals. Based on experience, current appraisals are discounted 9% for estimated costs associated with foreclosures and costs to sell. If a loan is evaluated for impairment under ASC Topic 310-10-35, Accounting by Creditors for Impairment of a Loan, and the appraisal is outdated, a new appraisal is ordered. If the new appraisal is not received in sufficient time to assess any required impairment to meet financial reporting obligations, the old appraisal may be discounted to reflect values observed in similar properties. These discounts have ranged from 20% to 30%. These discounts are based on the most recent valuation/appraisal information available related to that particular type of loan/collateral. After the new appraisal is obtained, the analysis is updated to reflect the new valuation. 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 $13,577,602 and $14,956,079 as of March 31, 2013 and December 31, 2012, respectively. This valuation would be considered Level 3, consisting of appraisals of underlying collateral and discounted cash flow analysis.

During 2013, 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 $472,473 and $2,097,440 (utilizing Level 3 valuation inputs) as of March 31, 2013 and December 31, 2012, 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 $271,298 and $407,043 as of March 31, 2013 and December 31, 2012, respectively. Foreclosed assets totaling $434,642 and $9,270,443 (utilizing Level 3 valuation inputs) were remeasured at fair value at March 31, 2013 and December 31, 2012, respectively, resulting in impairment loss of $197,440 and $3,582,596 on other real estate owned at March 31, 2013 and December 31, 2012, 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, 2013. 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, 2013, are both included. Following the table is a description of the valuation technique and the sensitivity of the technique to changes in the significant unobservable input.


	Level 3 Significant Unobservable Input Assumptions
	Fair Value March 31, 2013		Valuation Technique	Unobservable Input	Quantitative Range of Unobservable Inputs (Weighted- Average)
	(In Thousands of Dollars, except for Percentages)
Nonrecurring fair value measurements:
Impaired loans	$	13,578	Multiple data points, including discount to appraised value of collateral based on recent market activity	Appraisal compatibility adjustment (discount)	9% - 10% (9.5%)
Foreclosed property and other real estate	$	907	Discount to appraised value of property based on recent market activity for sales of similar properties	Appraisal compatibility adjustment (discount)	9% - 10% (9.5%)

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 the appraisal value of the underlying collateral to which a discount is applied. Management establishes this discount or comparability adjustment based on recent sales of similar property types. As liquidity in the market increases or decreases, the comparability adjustment and the resulting asset valuation are impacted.

Foreclosed property and other real estate

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

Financial Instruments

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 (“FHLB”): Based on the redemption provision of the 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 receivable and payable: The carrying amount of accrued interest approximates fair value.

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

Demand and savings deposits: The fair values of demand deposits are equal to the carrying 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, 2013 and December 31, 2012.

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

The estimated fair value and related carrying or notional amounts, as well as the level within the fair value hierarchy, of the Company’s financial instruments at March 31, 2013 and December 31, 2012 were as follows:


	March 31, 2013
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(In Thousands of Dollars)
Assets:
Cash and cash equivalents	$	68,599	$	68,599	$	68,599	$	—	$	—
Investment securities available-for-sale		92,396		92,396		—		92,396		—
Investment securities held-to-maturity		26,166		26,185		—		26,185		—
Federal funds sold		5,000		5,000		5,000		—		—
Federal Home Loan Bank stock		681		681		—		681		—
Loans, net of allowance for loan losses		321,007		323,478		—		—		323,478
Liabilities:
Deposits		486,782		488,438		—		488,438		—
Short-term borrowings		399		399		—		399		—


	December 31, 2012
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(In Thousands of Dollars)
Assets:
Cash and cash equivalents	$	54,126	$	54,126	$	54,126	$	—	$	—
Investment securities available-for-sale		92,614		92,614		—		92,614		—
Investment securities held-to-maturity		21,136		21,136		—		21,136		—
Federal funds sold		5,000		5,000		5,000		—		—
Federal Home Loan Bank stock		936		936		—		936		—
Loans, net of allowance for loan losses		337,400		339,230		—		—		339,230
Liabilities:
Deposits		489,034		490,596		—		490,596		—
Short-term borrowings		638		638		—		638		—

6. INVESTMENT SECURITIES

Details of investment securities available-for-sale and held-to-maturity at March 31, 2013 and December 31, 2012 are as follows:


	Available-for-Sale
	March 31, 2013
	Amortized		Gross Unrealized		Gross Unrealized			Estimated Fair
	Cost		Gains		Losses			Value
	(In Thousands of Dollars)
Mortgage-backed securities	$	75,506	$	2,837	$	(59	)	$	78,284
Obligations of states, counties and political subdivisions		12,639		1,393		—			14,032
U.S. treasury securities		80		—		—			80

Total	$	88,225	$	4,230	$	(59	)	$	92,396


	Held-to-Maturity
	March 31, 2013
	Amortized		Gross Unrealized		Gross Unrealized			Estimated Fair
	Cost		Gains		Losses			Value
	(In Thousands of Dollars)
U.S. agencies	$	26,166	$	23	$	(12	)	$	26,177


	Available-for-Sale
	December 31, 2012
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In Thousands of Dollars)
Mortgage-backed securities	$	74,117	$	3,468	$	(32	)	$	77,553
Obligations of states, counties and political subdivisions		13,395		1,586		—			14,981
U.S. treasury securities		80		—		—			80

Total	$	87,592	$	5,054	$	(32	)	$	92,614


	Held-to-Maturity
	December 31, 2012
	Amortized		Gross Unrealized		Gross Unrealized			Estimated Fair
	Cost		Gains		Losses			Value
	(In Thousands of Dollars)
U.S. agencies	$	21,136	$	56	$	(7	)	$	21,185

The scheduled maturities of investment securities available-for-sale and held-to-maturity at March 31, 2013 are presented in the following table:


	Available-for-Sale				Held-to-Maturity
	Amortized		Estimated Fair		Amortized		Estimated Fair
	Cost		Value		Cost		Value
	(In Thousands of Dollars)
Maturing within one year	$	716	$	726	$	—	$	—
Maturing after one to five years		4,667		4,945		—		—
Maturing after five to ten years		24,961		26,131		16,194		16,204
Maturing after ten years		57,881		60,594		9,972		9,973

Total	$	88,225	$	92,396	$	26,166	$	26,177

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, 2013 and December 31, 2012. 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, 2013 and December 31, 2012, based on the aforementioned considerations, management did not record an other-than-temporary impairment on any security that was in an unrealized loss position.


	Available-for-Sale
	March 31, 2013
	Less than 12 Months					12 Months or More
			Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses
	(In Thousands of Dollars)
Mortgage-backed securities	$	7,564	$	(45	)	$	346	$	(14	)


	Held-to-Maturity
	March 31, 2013
	Less than 12 Months					12 Months or More
			Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses
	(In Thousands of Dollars)
U.S. agencies	$	5,486	$	(12	)	$	—	$	—


	Available-for-Sale
	December 31, 2012
	Less than 12 Months					12 Months or More
			Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses
	(In Thousands of Dollars)
Mortgage-backed securities	$	1,173	$	(3	)	$	5,617	$	(29	)


	Held-to-Maturity
	December 31, 2012
	Less than 12 Months					12 Months or More
			Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses
	(In Thousands of Dollars)
U.S. agencies	$	7,491	$	(7	)	$	—	$	—

As of March 31, 2013, two debt securities had been in a loss position for more than twelve months, and eight 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 issuer 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 $64.2 million and $61.6 million at March 31, 2013 and December 31, 2012, respectively, were pledged to secure public deposits and for other purposes.

There were no gross gains and losses realized on securities available for sale as of March 31, 2013 or December 31, 2012, 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, both as direct investments and 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 $69,845 as of March 31, 2013. 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 $836,163 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 or results of operations.

The Bank had no remaining cash commitments to these partnerships at March 31, 2013.

8. LOANS AND ALLOWANCE FOR LOAN LOSSES

At March 31, 2013 and December 31, 2012, the composition of the loan portfolio by reporting segment and portfolio segment was as follows:


	March 31, 2013
	FUSB		ALC		Total
	(In Thousands of Dollars)
Real estate loans:
Construction, land development and other land loans	$	23,689	$	—	$	23,689
Secured by 1-4 family residential properties		36,595		31,119		67,714
Secured by multi-family residential properties		23,910		—		23,910
Secured by non-farm, non-residential properties		128,744		—		128,744
Other		818		—		818
Commercial and industrial loans		40,452		—		40,452
Consumer loans		12,962		43,909		56,871
Other loans		394		—		394

Total loans		267,564		75,028		342,592
Less: Unearned Interest		180		4,612		4,792
Allowance for loan losses		13,472		3,321		16,793

Net loans	$	253,912	$	67,095	$	321,007


	December 31, 2012
	FUSB		ALC		Total
	(In Thousands of Dollars)
Real estate loans:
Construction, land development and other land loans	$	30,635	$	—	$	30,635
Secured by 1-4 family residential properties		38,450		33,047		71,497
Secured by multi-family residential properties		24,187		—		24,187
Secured by non-farm, non-residential properties		129,235		—		129,235
Other		801		—		801
Commercial and industrial loans		42,902		—		42,902
Consumer loans		14,483		47,001		61,484
Other loans		1,037		—		1,037

Total loans	$	281,730	$	80,048	$	361,778
Less: Unearned Interest		174		4,926		5,100
Allowance for loan losses		15,765		3,513		19,278

Net loans	$	265,791	$	71,609	$	337,400

The Company grants commercial, real estate and installment loans to its customers. Although the Company has a diversified loan portfolio, 71.5% and 70.9% of the portfolio was concentrated in loans secured by real estate as of March 31, 2013 and December 31, 2012, respectively.

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, 2013 and December 31, 2012 were $2,469,642 and $2,468,563, respectively. During the quarter ended March 31, 2013, new loans to these parties totaled $59,113, and repayments by active related parties were $58,034. During the year ended December 31, 2012, new loans to these parties totaled $310,265, and repayments by active related parties were $747,536.

Allowance for Loan Losses

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


	FUSB
	March 31, 2013
	Commercial		Commercial Real Estate			Consumer			Residential Real Estate		Other			Unallocated		Total
	(In Thousands of Dollars)
Allowance for loan losses:
Beginning balance	$	977	$	14,216		$	168		$	338	$	66		$	—	$	15,765
Charge-offs		199		2,054			22			114		—			—		2,389
Recoveries		24		2			29			2		1			—		58
Provision		77		(959	)		(22	)		273		(31	)		700		38

Ending balance		879		11,205			153			499		36			700		13,472

Ending balance individually evaluated for impairment		237		8,055			—			—		—			—		8,292

Ending balance collectively evaluated for impairment	$	642	$	3,150		$	153		$	499	$	36		$	700	$	5,180

Loan receivables:
Ending balance		40,452		177,161			12,963			36,594		394			—		267,564

Ending balance individually evaluated for impairment		863		49,542			—			314		—			—		50,719

Ending balance collectively evaluated for impairment	$	39,589	$	127,619		$	12,963		$	36,280	$	394		$	—	$	216,845


	ALC
	March 31, 2013
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other		Unallocated		Total
	(In Thousands of Dollars)
Allowance for loan losses:
Beginning balance	$	—	$	—	$	2,733	$	780	$	—	$	—	$	3,513
Charge-offs		—		—		705		197		—		—		902
Recoveries		—		—		238		4		—		—		242
Provision		—		—		236		232		—		—		468

Ending balance		—		—		2,502		819		—		—		3,321

Ending balance individually evaluated for impairment		—		—		—		—		—		—		—

Ending balance collectively evaluated for impairment	$	—	$	—	$	2,502	$	819	$	—	$	—	$	3,321

Loan receivables:
Ending balance		—		—		43,909		31,119		—		—		75,028

Ending balance individually evaluated for impairment		—		—		—		—		—		—		—

Ending balance collectively evaluated for impairment	$	—	$	—	$	43,909	$	31,119	$	—	$	—	$	75,028


	FUSB & ALC
	March 31, 2013
	Commercial		Commercial Real Estate			Consumer		Residential Real Estate		Other			Unallocated		Total
	(In Thousands of Dollars)
Allowance for loan losses:
Beginning balance	$	977	$	14,216		$	2,901	$	1,118	$	66		$	—	$	19,278
Charge-offs		199		2,054			727		311		—			—		3,291
Recoveries		24		2			267		6		1			—		300
Provision		77		(959	)		214		505		(31	)		700		506

Ending balance		879		11,205			2,655		1,318		36			700		16,793

Ending balance individually evaluated for impairment		237		8,055			—		—		—			—		8,292

Ending balance collectively evaluated for impairment	$	642	$	3,150		$	2,655	$	1,318	$	36		$	700	$	8,501

Loan receivables:
Ending balance		40,452		177,161			56,872		67,713		394			—		342,592

Ending balance individually evaluated for impairment		863		49,542			—		314		—			—		50,719

Ending balance collectively evaluated for impairment	$	39,589	$	127,619		$	56,872	$	67,399	$	394		$	—	$	291,873


	FUSB
	December 31, 2012
	Commercial		Commercial Real Estate		Consumer			Residential Real Estate			Other		Unallocated			Total
	(In Thousands of Dollars)
Allowance for loan losses:
Beginning balance	$	889	$	16,533	$	306		$	684		$	78	$	201		$	18,691
Charge-offs		1,278		3,395		199			199			16		—			5,087
Recoveries		156		606		79			24			2		—			867
Provision		1,210		472		(18	)		(171	)		2		(201	)		1,294

Ending balance		977		14,216		168			338			66		—			15,765

Ending balance individually evaluated for impairment		406		10,818		—			—			—		—			11,224

Ending balance collectively evaluated for impairment	$	571	$	3,398	$	168		$	338		$	66	$	—		$	4,541

Loan receivables:
Ending balance		42,902		184,858		14,483			38,450			1,037		—			281,730

Ending balance individually evaluated for impairment		1,085		52,893		—			325			—		—			54,303

Ending balance collectively evaluated for impairment	$	41,817	$	131,965	$	14,483		$	38,125		$	1,037	$	—		$	227,427


	ALC
	December 31, 2012
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other		Unallocated		Total
	(In Thousands of Dollars)
Allowance for loan losses:
Beginning balance	$	—	$	—	$	2,542	$	1,034	$	—	$	—	$	3,576
Charge-offs		—		—		3,249		713		—		—		3,962
Recoveries		—		—		815		40		—		—		855
Provision		—		—		2,625		419		—		—		3,044

Ending balance		—		—		2,733		780		—		—		3,513

Ending balance individually evaluated for impairment		—		—		—		—		—		—		—

Ending balance collectively evaluated for impairment	$	—	$	—	$	2,733	$	780	$	—	$	—	$	3,513

Loan receivables:
Ending balance		—		—		47,001		33,047		—		—		80,048

Ending balance individually evaluated for impairment		—		—		—		—		—		—		—

Ending balance collectively evaluated for impairment	$	—	$	—	$	47,001	$	33,047	$	—	$	—	$	80,048


	FUSB & ALC
	December 31, 2012
	Commercial		Commercial Real Estate		Consumer		Residential Real Estate		Other		Unallocated			Total
	(In Thousands of Dollars)
Allowance for loan losses:
Beginning balance	$	889	$	16,533	$	2,848	$	1,718	$	78	$	201		$	22,267
Charge-offs		1,278		3,395		3,448		912		16		—			9,049
Recoveries		156		606		894		64		2		—			1,722
Provision		1,210		472		2,607		248		2		(201	)		4,338

Ending balance		977		14,216		2,901		1,118		66		—			19,278

Ending balance individually evaluated for impairment		406		10,818		—		—		—		—			11,224

Ending balance collectively evaluated for impairment	$	571	$	3,398	$	2,901	$	1,118	$	66	$	—		$	8,054

Loan receivables:
Ending balance		42,902		184,858		61,484		71,497		1,037		—			361,778

Ending balance individually evaluated for impairment		1,085		52,893		—		325		—		—			54,303

Ending balance collectively evaluated for impairment	$	41,817	$	131,965	$	61,484	$	71,172	$	1,037	$	—		$	307,475

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. Management has a demonstrated a 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, 2013.


	FUSB
	Pass 1-4		Special Mention 5		Substandard 6		Doubtful 7		Total
	(In Thousands of Dollars)
Loans secured by real estate:
Construction, land development and other land loans	$	7,432	$	1,506	$	14,751	$	—	$	23,689
Secured by 1-4 family residential properties		30,609		1,415		4,571		—		36,595
Secured by multi-family residential properties		13,762		—		10,148		—		23,910
Secured by non-farm, non-residential properties		94,002		6,197		28,545		—		128,744
Other		818		—		—		—		818
Commercial and industrial loans		37,207		602		2,643		—		40,452
Consumer loans		11,972		171		819		—		12,962
Other loans		393		—		1		—		394

Total	$	196,195	$	9,891	$	61,478	$	—	$	267,564


	ALC
	Performing		Nonperforming		Total
	(In Thousands of Dollars)
Loans secured by real estate:
Secured by 1-4 family residential properties	$	30,260	$	859	$	31,119
Consumer loans		42,666		1,243		43,909

Total	$	72,926	$	2,102	$	75,028

The table below illustrates the carrying amount of loans by credit quality indicator at December 31, 2012.


	FUSB
	Pass 1-4		Special Mention 5		Substandard 6		Doubtful 7		Total
	(In Thousands of Dollars)
Loans secured by real estate:
Construction, land development and other land loans	$	12,653	$	1,235	$	16,747	$	—	$	30,635
Secured by 1-4 family residential properties		31,772		1,546		5,132		—		38,450
Secured by multi-family residential properties		10,776		3,132		10,279		—		24,187
Secured by non-farm, non-residential properties		90,139		8,630		30,466		—		129,235
Other		801		—		—		—		801
Commercial and industrial loans		40,606		419		1,877		—		42,902
Consumer loans		13,394		188		901		—		14,483
Other loans		1,036		—		1		—		1,037

Total	$	201,177	$	15,150	$	65,403	$	—	$	281,730


	ALC
	Performing		Nonperforming		Total
	(In Thousands of Dollars)
Loans secured by real estate:
Secured by 1-4 family residential properties	$	32,036	$	1,011	$	33,047
Consumer loans		46,175		826		47,001

Total	$	78,211	$	1,837	$	80,048

The following table provides an aging analysis of past due loans by class at March 31, 2013.


	FUSB
	As of March 31, 2013
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
	(In Thousands of Dollars)
Loans secured by real estate:
Construction, land development and other land loans	$	80	$	—	$	8,930	$	9,010	$	14,679	$	23,689	$	—
Secured by 1-4 family residential properties		723		116		1,474		2,313		34,282		36,595		—
Secured by multi-family residential properties		—		—		2,784		2,784		21,126		23,910		—
Secured by non-farm, non-residential properties		632		7		4,350		4,989		123,755		128,744		—
Other		—		—		—		—		818		818		—
Commercial and industrial loans		855		85		332		1,272		39,180		40,452		—
Consumer loans		367		70		79		516		12,446		12,962		—
Other loans		—		—		—		—		394		394		—

Total	$	2,657	$	278	$	17,949	$	20,884	$	246,680	$	267,564	$	—


	ALC
	As of March 31, 2013
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
	(In Thousands of Dollars)
Loans secured by real estate:
Construction, land development and other land loans	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Secured by 1-4 family residential properties		304		159		814		1,277		29,842		31,119		701
Secured by multi-family residential properties		—		—		—		—		—		—		—
Secured by non-farm, non-residential properties		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		—
Commercial and industrial loans		—		—		—		—		—		—		—
Consumer loans		657		392		1,201		2,250		41,659		43,909		1,162
Other loans		—		—		—		—		—		—		—

Total	$	961	$	551	$	2,015	$	3,527	$	71,501	$	75,028	$	1,863

The following table provides an aging analysis of past due loans by class at December 31, 2012.


	FUSB
	As of December 31, 2012
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
	(In Thousands of Dollars)
Loans secured by real estate:
Construction, land development and other land loans	$	456	$	1,126	$	10,329	$	11,911	$	18,724	$	30,635	$	—
Secured by 1-4 family residential properties		1,027		572		1,106		2,705		35,745		38,450		—
Secured by multi-family residential properties		—		—		2,884		2,884		21,303		24,187		—
Secured by non-farm, non-residential properties		210		32		4,930		5,172		124,063		129,235		—
Other		—		—		—		—		801		801		—
Commercial and industrial loans		429		59		480		968		41,934		42,902		—
Consumer loans		407		89		66		562		13,921		14,483		—
Other loans		—		—		—		—		1,037		1,037		—

Total	$	2,529	$	1,878	$	19,795	$	24,202	$	257,528	$	281,730	$	—


	ALC
	As of December 31, 2012
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
	(In Thousands of Dollars)
Loans secured by real estate:
Construction, land development and other land loans	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Secured by 1-4 family residential properties		348		173		1,075		1,596		31,451		33,047		851
Secured by multi-family residential properties		—		—		—		—		—		—		—
Secured by non-farm, non-residential properties		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		—
Commercial and industrial loans		—		—		—		—		—		—		—
Consumer loans		989		609		1,159		2,757		44,244		47,001		720
Other loans		—		—		—		—		—		—		—

Total	$	1,337	$	782	$	2,234	$	4,353	$	75,695	$	80,048	$	1,571

The following table provides an analysis of nonaccruing loans by class at March 31, 2013 and December 31, 2012.


	Loans on Nonaccrual Status
	March 31, 2013		December 31, 2012
	(In Thousands of Dollars)
Loans resecured by real estate:
Construction, land development and other land loans	$	9,940	$	11,456
Secured by 1-4 family residential properties		2,301		2,441
Secured by multi-family residential properties		2,784		2,884
Secured by non-farm, non-residential properties		5,234		5,809
Commercial and industrial loans		652		822
Consumer loans		203		206

Total loans	$	21,114	$	23,618

Impaired Loans

At March 31, 2013, the carrying amount of impaired loans consisted of the following:


	March 31, 2013
	Carrying Amount		Unpaid Principal Balance		Related Allowances
	(In Thousands of Dollars)
Impaired loans with no related allowance recorded
Loans secured by real estate:
Construction, land development and other land loans	$	3,863	$	3,863	$	—
Secured by 1-4 family residential properties		314		314		—
Secured by multi-family residential properties		3,366		3,366		—
Secured by non-farm, non-residential properties		20,680		20,680		—
Commercial and industrial		626		626		—

Total loans with no related allowance recorded	$	28,849	$	28,849	$	—

Impaired loans with an allowance recorded
Loans secured by real estate:
Construction, land development and other land loans	$	9,472	$	9,472	$	5,009
Secured by multi-family residential properties		6,782		6,782		1,803
Secured by non-farm, non-residential properties		5,379		5,379		1,243
Commercial and industrial		237		237		237

Total loans with an allowance recorded	$	21,870	$	21,870	$	8,292

Total impaired loans
Loans secured by real estate:
Construction, land development and other land loans	$	13,335	$	13,335	$	5,009
Secured by 1-4 family residential properties		314		314		—
Secured by multi-family residential properties		10,148		10,148		1,803
Secured by non-farm, non-residential properties		26,059		26,059		1,243
Commercial and industrial		863		863		237

Total impaired loans	$	50,719	$	50,719	$	8,292

At December 31, 2012, the carrying amount of impaired loans consisted of the following:


	December 31, 2012
	Carrying Amount		Unpaid Principal Balance		Related Allowances
	(In Thousands of Dollars)
Impaired loans with no related allowance recorded
Loans secured by real estate:
Construction, land development and other land loans	$	2,645	$	2,645	$	—
Secured by 1-4 family residential properties		324		324		—
Secured by multi-family residential properties		3,027		3,027		—
Secured by non-farm, non-residential properties		21,470		21,470		—
Commercial and industrial		656		656		—

Total loans with no related allowance recorded	$	28,122	$	28,122	$	—

Impaired loans with an allowance recorded
Loans secured by real estate:
Construction, land development and other land loans	$	12,658	$	12,658	$	7,453
Secured by multi-family residential properties		7,252		7,252		1,865
Secured by non-farm, non-residential properties		5,840		5,840		1,500
Commercial and industrial		430		430		406

Total loans with an allowance recorded	$	26,180	$	26,180	$	11,224

Total impaired loans
Loans secured by real estate:
Construction, land development and other land loans	$	15,303	$	15,303	$	7,453
Secured by 1-4 family residential properties		324		324		—
Secured by multi-family residential properties		10,279		10,279		1,865
Secured by non-farm, non-residential properties		27,310		27,310		1,500
Commercial and industrial		1,086		1,086		406

Total impaired loans	$	54,302	$	54,302	$	11,224

The average net investment in impaired loans and interest income recognized and received on impaired loans at March 31, 2013 and December 31, 2012 were as follows:


	March 31, 2013
	Average Recorded Investment		Interest Income Recognized		Interest Income Received
	(In Thousands of Dollars)
Loans secured by real estate:
Construction, land development and other land loans	$	14,599	$	58	$	47
Secured by 1–4 family residential properties		317		2		2
Secured by multi-family residential properties		10,226		118		111
Secured by non-farm, non-residential properties		26,250		333		282
Commercial and industrial		968		13		13

Total impaired loans	$	52,360	$	524	$	455


	December 31, 2012
	Average Recorded Investment		Interest Income Recognized		Interest Income Received
	(In Thousands of Dollars)
Loans secured by real estate:
Construction, land development and other land loans	$	18,283	$	546	$	598
Secured by 1–4 family residential properties		146		10		10
Secured by multi-family residential properties		4,942		483		455
Secured by non-farm, non-residential properties		29,627		1,452		1,477
Commercial and industrial		1,222		38		42

Total impaired loans	$	54,220	$	2,529	$	2,582

Loans on which the accrual of interest has been discontinued amounted to $21,113,840 and $23,618,330 at March 31, 2013 and December 31, 2012, respectively. If interest on those loans had been accrued, such income would have approximated $264,594 and $1,058,377 for the quarter ended March 31, 2013 and the year ended December 31, 2012, respectively. Interest income actually recorded on those loans amounted to $39,400 and $157,601 for the quarter ended March 31, 2013 and the year ended December 31, 2012, respectively. Accruing loans past due 90 days or more amounted to $1,862,550 and $1,570,548 for the quarter ended March 31, 2013 and the year ended December 31, 2012, respectively.

Troubled Debt Restructurings

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 $10,739,942 and $12,397,049 of non-accruing loans that were restructured and remained on nonaccrual status at March 31, 2013 and December 31, 2012, respectively.

The following table provides the number of loans modified in a troubled debt restructuring by loan portfolio as of March 31, 2013 and December 31, 2012, as well as the recorded investment and unpaid principal balance as of March 31, 2013 and December 31, 2012.


	March 31, 2013						December 31, 2012
	Number of Loans		Pre- Modification Outstanding Principal Balance		Post- Modification Principal Balance		Number of Loans		Pre- Modification Outstanding Principal Balance		Post- Modification Principal Balance
	(In Thousands of Dollars)
Loans secured by real estate:
Construction, land development and other land loans		9	$	10,956	$	8,734		10	$	11,267	$	9,988
Secured by 1-4 family Residential properties		3		399		376		4		596		586
Secured by non-farm, non- residential properties		6		1,752		1,350		6		1,811		1,586
Commercial loans		2		300		280		4		380		356

Total		20	$	13,407	$	10,740		24	$	14,054	$	12,516

The following table provides the number of loans modified in a troubled debt restructuring that have subsequently defaulted, by loan portfolio, as of March 31, 2013 and December 31, 2012.


	March 31, 2013				December 31, 2012
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
	(In Thousands of Dollars)
Troubled debt restructurings that have subsequently defaulted:
Construction, land development and other land loans		6	$	6,887		6	$	7,062
Secured by non-farm, non-residential properties		5		1,210		2		433
Commercial		—		—		2		68

Total		11	$	8,097		10	$	7,563

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 quarter ended March 31, 2013 and the year ended December 31, 2012, 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 from December 31, 2012 to March 31, 2013 was as follows:


	March 31, 2013		December 31, 2012		Change
	(In Thousands of Dollars)
Loans secured by real estate:
Construction, land development and other land loans	$	8,734	$	9,988	$	(1,254	)
Secured by 1-4 family residential properties		376		586		(210	)
Secured by non-farm, non-residential properties		1,350		1,586		(236	)
Commercial and industrial loans		280		356		(76	)

Total	$	10,740	$	12,516	$	(1,776	)

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 which 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 of $5,133,357 and $6,322,593 at March 31, 2013 and December 31, 2012, respectively.

9. OTHER REAL ESTATE OWNED

Other real estate and certain other assets acquired in foreclosure are reported at the lower of the investment in the loan or fair value of the property less estimated costs to sell. The following table summarizes foreclosed property activity for the three months ended March 31, 2013 and 2012.


	March 31, 2013
	FUSB		ALC			Total
	(In Thousands of Dollars)
Beginning balance	$	11,089	$	2,197		$	13,286
Transfers from loans		288		184			472
Sales proceeds		113		621			734

Gross gains		51		21			72
Gross losses		—		(517	)		(517	)

Net gains (losses)		51		(496	)		(445	)
Impairment		56		141			197

Ending balance	$	11,259	$	1,123		$	12,382


	March 31, 2012
	FUSB			ALC			Total
	(In Thousands of Dollars)
Beginning balance	$	12,607		$	4,167		$	16,774
Transfers from loans		1,926			217			2,143
Sales proceeds		614			642			1,256

Gross gains		7			22			29
Gross losses		(12	)		(211	)		(223	)

Net losses		(5	)		(189	)		(194	)
Impairment		2,605			229			2,834

Ending balance	$	11,309		$	3,324		$	14,633

Valuation adjustments are primarily recorded in other non-interest expense; adjustments are also recorded as a charge to the allowance for loan losses if incurred within 60 days after the date of transfer from loans. Valuation adjustments are primarily post-foreclosure write-downs that are a result of continued declining property values based on updated appraisals or other indications of value, such as offers to purchase. Foreclosed property sold represents the net book value of the properties sold.

10. 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 amounts outstanding at March 31, 2013 or December 31, 2012. Treasury tax and loan deposits are withdrawal on demand. There was no balance outstanding at March 31, 2013 or December 31, 2012.

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, 2013 and December 31, 2012 were $399,000 and $638,000, respectively.

At March 31, 2013, the Bank had $17.8 million in available federal fund lines from correspondent banks.

11. 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, 2013 and December 31, 2012, no advances were outstanding, and no assets were pledged.

At March 31, 2013, the Bank had $169.4 million in available credit from the FHLB.

12. 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 related to operations from 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, 2009 through 2012.

As of March 31, 2013, 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, 2013. As of March 31, 2013, the Company had accrued no interest and no penalties related to uncertain tax positions.

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


	March 31, 2013			March 31, 2012
	(In Thousands of Dollars)
Income tax expense (benefit) at federal statutory rate	$	418		$	(755	)
Increase (decrease) resulting from:
Tax-exempt interest		(98	)		(84	)
State income tax expense, net of federal income tax benefit		48			(103	)
Other		(24	)		(40	)

Total	$	344		$	(982	)

The Company’s determination of the realization of the net deferred tax asset is based on its assessment of all available positive and negative evidence. The Company is currently in a three-year cumulative loss position, which represents negative evidence. As of March 31, 2013, of the $8.8 million net deferred tax asset, $6.4 million relates to the provision for loan losses, $2.2 million relates to impairment of OREO and $1.6 million resulted from deferred compensation. As of December 31, 2012, of the $9.5 million net deferred tax asset, $7.3 million relates to the provision for loan losses, $2.3 million relates to impairment of OREO and $1.5 million resulted from deferred compensation.

At March 31, 2013, positive evidence supporting the realization of the deferred tax asset included a strong earnings history, exclusive of loan loss provisions and other real estate write-downs which created the most significant portion of the deferred asset. These provisions and write-downs resulted from one type of loan – real estate development. The Company believes that impaired loans of this type have been identified and adequately reserved. Management has projected taxable income over the next five years, resulting from reduced provisions for loan losses and write-downs of OREO. Except in unusual circumstances, the Company no longer invests in these types of loans.

Along with the taxable income in 2012 and the first quarter of 2013, the Company has projected future taxable income over the next five tax years, although there can be no assurance that such income will be realized due to unanticipated changes in economic, competitive and other factors. Further positive evidence includes the Company’s strong capital position and history of significant pre-tax earnings, which the Company believes outweighs the negative evidence of recent pre-tax losses. Accordingly, a valuation allowance has not been established at March 31, 2013.

13. 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, 2012. 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:


	FUSB		ALC		All Other		Eliminations			Consolidated
	(In Thousands of Dollars)
For the three months ended March 31, 2013

Net interest income	$	4,335	$	3,468	$	2	$	—		$	7,805
Provision for loan losses		38		468		—		—			506
Total non-interest income		1,397		336		1,074		(1,184	)		1,623
Total non-interest expense		4,619		3,132		162		(221	)		7,692

Income before income taxes		1,075		204		914		(963	)		1,230
Provision for income taxes		262		81		1		—			344

Net income	$	813	$	123	$	913	$	(963	)	$	886

Other significant items:
Total assets	$	566,414	$	71,697	$	75,313	$	(148,785	)	$	564,639
Total investment securities		118,482		—		80		—			118,562
Total loans, net		309,874		67,095		—		(55,962	)		321,007
Investment in subsidiaries		784		—		70,138		(70,917	)		5
Fixed asset addition		29		11		—		—			40
Depreciation and amortization expense		124		41		—		—			165
Total interest income from external customers		4,275		4,319		—		—			8,594
Total interest income from affiliates		851		—		2		(853	)		—


	FUSB			ALC		All 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
Investment in subsidiaries		1,306			—		65,492			(66,793	)		5
Fixed asset addition		53			159		—			—			212
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	)		—

14. 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 quarter ended March 31, 2013 and 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, 2013		December 31, 2012
	(In Thousands of Dollars)
Standby Letters of Credit	$	1,022	$	1,092
Commitments to Extend Credit	$	28,857	$	32,123

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 March 31, 2013 was $1.0 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, 2013, 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 was heard on November 27, 2012, and the Circuit Court struck the punitive damages claim but allowed the breach of contract and unjust enrichment claims to go forward. ALC continues to deny the allegations against it in the underlying lawsuit with respect to the remaining claims and intends to vigorously defend itself in this matter. Given 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 served 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 Mrs. 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. On October 29, 2012, the Court granted summary judgment in favor of the Bank and Mr. Morgan with respect to all claims asserted in the consolidated lawsuits, and a subsequent motion to alter, amend or vacate filed by Mr. and Mrs. Russell was denied by operation of law. On March 25, 2013, Mr. and Mrs. Russell filed a Notice of Appeal to the Supreme Court of Alabama. Although the ultimate outcome of this matter remains unknown, the Bank believes that it should prevail on appeal, that the granting of summary judgment by the lower court will be upheld and that any contrary result would not have a material adverse effect on the Company’s consolidated financial statements or results of operations.

On or about June 1, 2012, a former employee filed a complaint against the Bank with the Occupational Safety and Health Administration (“OSHA”) alleging violations of Section 806 of the Corporate and Criminal Fraud Accountability Act, 18 U.S.C. § 1514A, and Section 1057 of the Consumer Financial Protection Act, 12 U.S.C. § 5567,

in connection with his separation from the Bank in April 2012. Based on its investigation, OSHA concluded it had no reasonable cause to believe the statutes were violated. As was his right, however, the former employee timely requested a hearing before an Administrative Law Judge and filed an amended complaint in that forum. The Bank has filed a motion to dismiss the amended complaint (in lieu of an answer), to which the former employee has recently responded, and the motion remains pending. Although the Bank believes that the complaint is wholly without merit and that it will be able to demonstrate several meritorious defenses, it is too early to assess the likelihood of a resolution of this matter 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 the 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 with general practices within the financial services industry. Critical accounting policies relate to securities, loans, allowance for loan losses, derivatives and hedging. A description of these estimates, which significantly affect the determination of consolidated financial position, results of operations and cash flows, is set forth in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

The emphasis of this discussion is a comparison of assets, liabilities and shareholders’ equity as of March 31, 2013 to year-end 2012, while comparing income and expense for the three-month periods ended March 31, 2013 and 2012.

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, 2012.

COMPARING THE THREE MONTHS ENDED MARCH 31, 2013 TO THE THREE MONTHS ENDED MARCH 31, 2012

Net income for USBI in the first quarter of 2013 was $886,000, compared to net loss for USBI of $(1.2) million in the first quarter of 2012, resulting in an increase of basic net income (loss) per share from $(0.21) per share for the first quarter of 2012 to $0.15 per share for the same quarter of 2013.

For the three-month period ended March 31, 2013, the Bank had net income of $813,000, compared to net loss of $(1.4) million for the same quarter of 2012. The increase in net income for the Bank resulted primarily from lower impairment charges on other real estate owned and lower provisions for loan losses.

Net income for ALC for the three-month period ending March 31, 2013 was $123,000, compared to $187,000 for the same quarter of 2012. Net income decreased when compared to the same three month period in 2012, primarily as a result of increased loss on the sale of OREO, offset somewhat by lower provisions for loan losses.

Interest income for USBI in the 2013 first quarter decreased $1.4 million, or 14.1%, compared to the first quarter of 2012. 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 2013 first quarter decreased $1.2 million, or 21.4%, compared to the same period of 2012. This decrease was 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 in the Bank’s market area.

Cash flows from loans and investment securities were reinvested at lower rates, resulting in lower interest income. Interest income at ALC decreased $250,000 for the first quarter of 2013 compared to the same quarter in 2012, due primarily to a decrease in the average volume of loans. Management expects that difficult economic conditions and fierce competition among lenders for quality loans will continue to affect our ability to grow loans at the Bank and ALC.

Interest expense for USBI in the 2013 first quarter decreased $671,000, or 46.0%, compared to the first quarter of 2012. 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 $745,000, or 8.7%, in the first quarter of 2013 compared to the same period of 2012. The net interest margin increased from 6.01% for the first quarter of 2012 to 6.07% for the first quarter of 2013. Loan and investment yields declined for the quarter ended March 31, 2013 compared to the same quarter in 2012. 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 $506,000, or 0.6% annualized of average loans, in the first quarter of 2013, compared to $2.2 million, or 3.8% annualized of average loans, in the first quarter of 2012. Charge-offs exceeded recoveries by $3.0 million for the 2013 first quarter, a decrease of approximately $719,000 over the same period in the prior year. The provision for loan losses at the Bank decreased to $38,000 for the three months ended March 31, 2013, compared to $1.5 million for the same period in 2012. The provision for loan losses at ALC decreased to $468,000 for the three months ended March 31, 2013, compared to $712,000 for the same period in 2012. Net charge offs at ALC for the first quarter of 2013 were $660,000, compared to $760,000 for the same quarter in 2012. Net charge offs at the Bank were $2.3 million in the first quarter of 2013 compared to $3.0 million in the first quarter of 2012.

Total non-interest income for USBI increased $349,000, or 27.4%, for the first quarter of 2013 compared to the same period in 2012. All other fees increased $396,000 for the three months ended March 31, 2013 compared to the same period of 2012. The increase was due primarily to higher other income that included a $484,000 prepayment penalty from the early payoff of a mortgage-backed pool, partially offset by lower service and other charges on deposit accounts.

Total non-interest expense decreased $2.1 million, or 21.7%, for the 2013 first quarter compared to the same period in 2012. Salary and employee benefits increased $248,000, when comparing the first quarter of 2013 to the same period in 2012. For the 2013 first quarter, impairment on other real estate decreased $2.6 million, and realized loss on the sale of other real estate increased $251,000. Management was able to reduce OREO in 2012 and in the first quarter of 2013, which resulted in lower impairment expense on OREO. If the economy remains weak and real estate values decline, however, further impairment and losses could occur.

Income tax provision for USBI in the first quarter of 2013 was $344,000, compared to income tax benefit of $982,000 in the first quarter of 2012. Management estimates the effective tax rate for the Company to be approximately 30.0% of pre-tax income for the quarter ended March 31, 2013.

COMPARING THE MARCH 31, 2013 STATEMENTS OF FINANCIAL CONDITION TO DECEMBER 31, 2012

In comparing consolidated financial condition at March 31, 2013 to December 31, 2012, total assets decreased $2.5 million to $564.6 million, while liabilities decreased $2.8 million to $495.6 million. Shareholders’ equity increased $355,000 as a result of net income of $886,000, offset somewhat by a $531,000 decrease in accumulated other comprehensive income.

Investment securities increased $4.8 million, or 4.2%, during the first three months of 2013. Investments provide the Company with a stable form of liquidity while maximizing earnings yield. Loans, net of unearned income, decreased $18.9 million, from $356.7 million at December 31, 2012, to $337.8 million at March 31, 2013. Deposits decreased $2.3 million, or 0.5%, during the first three months of 2013. Loans, net of unearned income, at ALC decreased $4.7 million, from $75.1 million at December 31, 2012 to $70.4 million at March 31, 2013. Loans at the Bank, after consolidation eliminations, decreased $14.2 million from $281.6 million at December 31, 2012 to $267.4 million at March 31, 2013.

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, 2013, the allowance for loan losses was $16.8 million, or 5.0% of loans net of unearned income, compared to $19.3 million, or 5.4% of loans net of unearned income, at December 31, 2012. The coverage ratio of the allowance for loan losses to non-performing assets decreased to 47.5% at March 31, 2013, compared to 50.1% at December 31, 2012. At March 31, 2013, loans on non-accrual decreased $2.5 million, accruing loans past due 90 days or more increased $292,000 and real estate acquired in settlement of loans decreased $904,000, each as compared to December 31, 2012.

Net charge-offs as of the quarter ended March 31, 2013 were $3.0 million, or 3.4% of average loans on an annualized basis, a decrease of 19.4%, or $719,000, from the charge-offs of $3.7 million, or 3.8% of average loans on an annualized basis, reported a year earlier. The provision for loan losses for the first three months of 2013 was $506,000, compared to $2.2 million at December 31, 2012.

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


	Consolidated
	March 31,			December 31,			March 31,
	2013			2012			2012
Loans Accounted for on a Non-Accrual Basis	$	21,114		$	23,618		$	17,945
Accruing Loans Past Due 90 Days or More		1,863			1,571			1,868
Real Estate Acquired in Settlement of Loans		12,382			13,286			14,633

Total	$	35,359		$	38,475		$	34,446
Non-Performing Assets as a Percentage of Net Loans and Other Real Estate		10.10	%		10.40	%		8.58	%


	FUSB
	March 31,			December 31,			March 31,
	2013			2012			2012
Loans Accounted for on a Non-Accrual Basis	$	20,875		$	23,351		$	16,433
Accruing Loans Past Due 90 Days or More		—			—			58
Real Estate Acquired in Settlement of Loans		11,259			11,089			11,309

Total	$	32,134		$	34,440		$	27,800
Non-Performing Assets as a Percentage of Net Loans and Other Real Estate		11.53	%		11.77	%		8.72	%


	ALC
	March 31,			December 31,			March 31,
	2013			2012			2012
Loans Accounted for on a Non-Accrual Basis	$	239		$	267		$	1,512
Accruing Loans Past Due 90 Days or More		1,863			1,571			1,810
Real Estate Acquired in Settlement of Loans		1,123			2,197			3,324

Total	$	3,225		$	4,035		$	6,646
Non-Performing Assets as a Percentage of Net Loans and Other Real Estate		4.51	%		5.22	%		8.06	%

Non-performing assets as a percentage of net loans and other real estate was 10.10% at March 31, 2013 and 10.40% at December 31, 2012. Loans on non-accrual status decreased $2.5 million, accruing loans past due 90 days or more increased $292,000 and real estate acquired in settlement of loans decreased $904,000 from December 31, 2012. The Company forecasts that adverse economic conditions and the weakened real estate market in the Company’s market area 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, 2013 consisted of four residential properties totaling $448,748 and thirty-six commercial properties totaling $10.8 million at the Bank and forty residential properties totaling $822,140 and fifteen commercial properties totaling $301,325 at ALC. Every effort is made to dispose of these properties in a timely manner, but these efforts continue to be hampered by difficult economic conditions. Real estate values are depressed, and the real estate market remains weak 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 $169.4 million in borrowing capacity from the FHLB and $17.8 million in established federal funds lines.

The Bank is required to maintain certain levels of regulatory capital. At March 31, 2013 and December 31, 2012, 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 14 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 $155.5 million at December 31, 2012 and $128.0 million at March 31, 2013.

Investment securities forecasted to mature or reprice over the next twelve months ending March 31, 2014 are estimated to be $10.3 million, or approximately 8.7%, of the investment portfolio as of March 31, 2013. For comparison, principal payments on investment securities totaled $10.2 million, or 8.6%, of the investment portfolio at March 31, 2013.

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, 2013, the bond portfolio had an

expected average maturity of 2.8 years, and approximately 74.7% of the $118.6 million in bonds was expected to be repaid within 5 years. However, management does not rely solely upon the investment portfolio to generate cash flows to fund loans, capital expenditures, dividends, debt repayment and other cash requirements. Instead, these activities are funded by cash flows from loan payments, as well as increases in deposits and short-term borrowings.

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

The Bank, at March 31, 2013, had short-term borrowings that, on average, represented 0.09% of total liabilities and equity. At year-end 2012, the Bank had long-term debt and short-term borrowings that, on average, represented 0.93% of total liabilities and equity. The Bank has had no long-term debt outstanding during 2013 to date.

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%, 3% and 4% interest rate shocks. Our estimates have consistently shown that the Bank has very limited, if any, net interest margin and net interest income risk to rising interest rates.

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, 2013, 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, 2013, 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, 2013 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 14 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 14 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, 2012 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		0		$	0.00		0		242,303
February 1 – February 28		0		$	0.00		0		242,303
March 1 – March 31		3,250	⁽²⁾	$	7.96		0		242,303
Total		3,250		$	7.96		0		242,303

(1)

On December 17, 2012, the Board of Directors extended the share repurchase program previously approved by the Board on January 19, 2006. Under the repurchase program, the Company was authorized to repurchase up to 642,785 shares of common stock. The expiration date of the extended repurchase program is December 31, 2013. As of March 31, 2013, there were 242,303 shares that still may be purchased under the program.

(2)	3,250 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 10, 2013

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.