UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2004 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 Iden- incorporation or organization) tification No.) 131 West Front Street Post Office Box 249 Thomasville, AL 36784 (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (334) 636-5424 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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 		Yes	 X			 No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at 05/05/04 Common Stock, $0.01 par value 6,430,574 shares UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION PAGE ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Statements of Financial Condition at March 31, 2004, and December 31, 2003 4 Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2004, and 2003 5 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004, and 2003 6 Notes to Condensed Consolidated Financial Statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20 ITEM 4. CONTROLS AND PROCEDURES 20 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21 Signature Page 22 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. ("Bancshares"), through its senior management, from time to time makes forward- looking public statements (as defined in the Private Securities Litigation Reform Act of 1995) concerning its expected future operations and performance and other developments. Such forward- looking statements are necessarily estimates reflecting Bancshares' 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 Bancshares' Securities and Exchange Commission filings and other public announcements, including the factors described in Bancshares' Annual Report on Form 10-K for the year ended December 31, 2003. With respect to the adequacy of the allowance for loan losses for Bancshares, these factors include, but are not limited to, the rate of growth in the economy and the relative strength and weakness in the consumer and commercial credit sectors and in the real estate markets. Forward-looking statements speak only as of the date they are made, and Bancshares undertakes no obligation to revise forward-looking statements to reflect circumstances or events that occur after the dates the forward-looking statements are made. PART I.	FINANCIAL INFORMATION ITEM 1.	FINANCIAL STATEMENTS UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in Thousands) ASSETS March 31, December 31, 2004 2003 (Unaudited) Cash and Due from Banks $ 9,884 	$ 12,596 Interest-Bearing Deposits in Banks 2,985 	 48 Securities Available for Sale 141,463 	 139,104 Loans, net of allowances for loan losses of $6,915 and $6,842, respectively 375,744 	 379,736 Premises and Equipment, net 20,303 	 11,363 Cash Surrender Value of Bank Owned Life Insurance 6,911 	 6,840 Accrued Interest Receivable		 4,350 4,972 Investment in Limited Partnerships 2,219 2,980 Other Assets 10,871 9,548 Total Assets $574,730 $567,187 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits $386,147 $387,680 Short-Term Borrowings 598 	 2,587 Long-Term Debt					 99,726 95,755 Other Liabilities 11,876 7,836 Total Liabilities $498,347 $493,858 Shareholders' Equity: Minority Interest				 431 0 Common Stock, par value $0.01 per share; 10,000,000 shares authorized; 7,317,560 and 7,317,560 shares issued, respectively 73 73 Surplus 9,233 9,233 Accumulated other comprehensive income 1,377 977 Retained Earnings 76,065 73,794 Less Treasury Stock: 886,986 and 885,286 shares at cost,respectively (10,796) (10,748) Total Shareholders' Equity 76,383 73,329 Total Liabilities and Shareholders' Equity $574,730 $567,187 The accompanying notes are an integral part of these Consolidated Statements. UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands, Except per Share Data) Three Months Ended March 31, 2004 2003 (Unaudited) INTEREST INCOME: Interest and Fees on Loans $10,545 $ 9,537 Interest on Securities 1,525 1,568 Total Interest Income 12,070 11,105 INTEREST EXPENSE: Interest on Deposits 1,579 1,965 Interest on Borrowings 921 1,083 Total Interest Expense 2,500 3,048 NET INTEREST INCOME 9,570 8,057 PROVISION FOR LOAN LOSSES 661 991 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,909 7,066 NONINTEREST INCOME: Service and Other Charges on Deposit Accounts 809 791 Other Income 535 452 Securities (Losses) Gains, Net (29) 68 Total Noninterest Income 1,315 1,311 NONINTEREST EXPENSES: Salaries and Employee Benefits 3,154 3,071 Occupancy Expense 363 340 Furniture and Equipment Expense 324 337 Other Expenses 1,378 1,335 Total Noninterest Expense 5,219 5,083 INCOME BEFORE INCOME TAXES 5,005 3,294 PROVISION FOR INCOME TAXES 1,576 955 NET INCOME 3,429 2,339 Basic Net Income Per Share $0.53 $0.37 Diluted Net Income Per Share $0.53 $0.37 Dividends Per Share $0.18 $0.17 The accompanying notes are an integral part of these Consolidated Statements. UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) March 31, 2004 2003 (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 3,429 $ 2,339 Adjustments: Depreciation 222 236 Amortization (Accretion) of Premiums and Discounts, Net 133 300 Provision for Loan Losses 661 991 Loss(Gain) on Sale of Securities, Net 29 (68) Changes in Assets and Liabilities: (Increase) in Other Assets 213 (1,621) Increase(Decrease) in Other Liabilities 497 (93) Total Adjustments 1,755 (255) Net Cash Provided by Operating Activities 5,184 2,084 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from Maturities/Calls and Paydowns Of Securities Available for Sale 6,140 19,897 Proceeds from Sales of Securities 0 16,339 Purchase of Insurance 0 (83) Purchase of Property and Equipment, Net (131) (400) Purchase of Securities Available for Sale (7,737) (50,593) Net Change in Loan Portfolio (2,618) 1,329 Net Cash Acquired in Consolidation of Limited Partnership					 133	 0 Net Cash Used by Investing Activities (4,213) (13,511) CASH FLOWS FROM FINANCING ACTIVITIES: (Decrease)Increase in Customer Deposits,Net (1,521) 11,802 Exercise of Stock Options 0 74 Dividends Paid (1,158) (1,061) Increase (Decrease)in Borrowings 1,981 (1,774) Purchase of Treasury Stock (48) 0 Net Cash (Used in) Provided by Financing Activities (746) 9,041 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 225 (2,386) CASH AND CASH EQUIVALENTS, beginning of period 12,644 16,742 CASH AND CASH EQUIVALENTS, end of period 12,869 14,356 The accompanying notes are an integral part of these Consolidated Statements. UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 					(Unaudited) 1. GENERAL The accompanying unaudited condensed consolidated financial statements as of March 31, 2004, and 2003, include the accounts of United Security Bancshares, Inc. and its subsidiaries (the "Company"). All significant inter- company transactions and accounts have been eliminated. The interim financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair presentation of financial position and results of operations for such 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, 2004. While certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, management believes that the disclosures herein are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2003, of United Security Bancshares, Inc. and Subsidiaries. The accounting policies followed by United Security Bancshares, Inc. ("USB") are set forth in the summary of significant accounting policies in USB's December 31, 2003, consolidated financial statements. 2. NET INCOME PER SHARE Basic net income per share was computed by dividing net income by the weighted average number of shares of common stock outstanding during the three-month period ended March 31, 2004, and 2003. Common stock outstanding consists of issued shares less treasury stock. Diluted net income per share for the three-month periods ended March 31, 2004, and 2003, were computed by dividing net income by the weighted average number of shares of common stock and the dilutive effects of the shares awarded under the Company's Stock Option Plan, based on the treasury stock method using an average fair market value of the stock during the respective periods. On June 19, 2003, the Board of Directors declared a two-for-one stock split payable July 22, 2003, to shareholders of record at the close of business on June 30, 2003. As a result of the stock split, shareholders of record received one additional share for every share held. For presentation purposes, all prior periods presented have been restated for comparative purposes. The following table represents the earnings per share calculations for the three-month periods ended March 31, 2004, and 2003: Net Income Net Per For the Three Months Ended Income Shares Share March 31, 2004(dollars in thousands): Net Income $3,429 Basic Earnings Per Share 		 3,429	 6,431,620 $0.53 Dilutive Securities 0	 0 Dilutive Earnings Per Share $3,429	 6,431,620 $0.53 March 31, 2003: Net Income				 $2,339 Basic Earnings Per Share 2,339 6,249,950 $0.37 Dilutive Securities 0 0 Dilutive Earnings Per Share $2,339 6,249,950 $0.37 3. COMPREHENSIVE INCOME Comprehensive income is a measure of all changes in equity of an enterprise that results from transactions and other economic events of the period. Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 115, any unrealized gain or loss activity of available for sale securities and derivative instruments is to be recorded as an adjustment to a separate component of shareholders' equity, net of income tax effect. This change in unrealized gain or loss serves to increase or decrease comprehensive income. The following table represents comprehensive income and its changes for the three-month periods ended March 31, 2004, and 2003: Three Months Ended March 31, 2004 2003 Net Income $3,429 $2,339 Other Comprehensive Income, Net of Tax: Change in Unrealized (Loss) on Derivative Instruments (Net of Tax of $96 and $9) (178) (16) Change in Unrealized Gain(Loss)on Securities Available for Sale (Net of Tax of $311 and $140) 578 (259) Comprehensive Income $3,829 $2,064 4. RECENT ACCOUNTING PRONOUNCEMENTS The financial accounting standards board issued a revised version of Interpretation No. 46 "Consolidation of Variable Interest Entities" (Interpretation 46), in December of 2003. This revised interpretation 46 is effective no later than the end of the first interim or annual period ending after December 15, 2003, for entities created after January 31, 2003, and for entities created before February 1, 2003, no later than the end of the first interim or annual period ending after March 15, 2004. As required, the Bank adopted the guidance of Interpretation 46 for all entities. The Bank 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 Bank 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 bank has determined that these structures meet the definition of a variable interest entity. The bank has determined that it needs to consolidate one of the funds in which it is the sole limited partner. The Bank has also determined that this fund is required to consolidate one of the affordable housing projects the fund invests in. The resulting financial impact to the consolidation of the Bank is an increase to total assets of approximately $10.0 million, including $9.0 million in premises and equipment. Loans payable by the partnership, payable to the Bank, totaling $6.0 million were eliminated as a result of this consolidation. Unconsolidated investments in these limited partnerships are accounted for under the equity method of accounting. The Bank's maximum exposure to future loss related to these limited partnerships is limited to the $2.2 million recorded investment. In March, 2004, the SEC issued Staff Accounting Bulletin 105 "Application of Accounting Principles to Loan Commitments," (SAB 105) to inform registrants of the Staff's view that the fair value of the recorded loan commitments should not consider the expected future cash flows related to the associated servicing of the future loan. The provisions of SAB 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. The Bank carries all loan commitments at fair value, and does not include the value of its servicing or any of internally developed intangible asset in the valuation of its commitments. Thus, the adoption of SAB 105 did not have an impact on the Bank's financial condition or results of operations. In March 2004, the Emerging Issues Task Force reached a consensus on Issue 03-1, "Meaning of Other Than Temporary Impairment" (Issue 03-1) for debt and equity securities accounted for under Statement of Financial Accounting Standards No. 115 and cost method investments. The basic model developed by the Task Force in evaluating whether an investment within the scope of Issue 03- 1 is other-than-temporarily impaired is as follows: 1) Determine whether the investment is impaired. An investment is impaired if its fair value is less than its cost. 2) Evaluate whether the impairment is other-than-temporary. 3) If the impairment is other-than-temporary, recognize an impairment loss equal to the difference between the investment's cost and its fair value. The model shall be applied prospectively to all current and future investments in interim or annual reporting periods beginning after June 15, 2004. The Bank does not anticipate the adoption of Issue 03-1 will have a material impact on its financial condition or results of operations. 5. SEGMENT REPORTING Under SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, certain information is disclosed for the two reportable operating segments of the Company, First United Security Bank ("FUSB"), and Acceptance Loan Company, Inc. ("ALC"). The reportable segments were determined using the internal management reporting system. They are composed of the Company's significant subsidiaries. The accounting policies for each segment are the same as those used by the Company as described in Note 2 of the Company's annual consolidated financial statements, Summary of Significant Accounting Policies. The segment results include certain overhead allocations and intercompany transactions that were recorded at current market prices. All intercompany transactions have been eliminated to determine the consolidated balances. The results for the two reportable segments of the Company are included in the following table: All Elimi- Consol- FUSB ALC Other nations idated For the three months ended March 31, 2004: Net Interest Income $ 6,104	$ 3,448 $ 18 $ 0 $ 9,570 Provision for Loan Losses 45		616		 0 0	 661 Total Noninterest Income 1,097		145	 3,681 (3,608)	 1,315 Total Noninterest Expense 	 3,454	 1,652	 231 (118) 5,219 Income(Loss) Before Income Taxes 3,702	 1,325	 3,468 (3,490) 5,005 Provision (Benefit) for Income Taxes 1,109	 464		 3		 0 1,576 Net Income (Loss)		$ 2,593	$ 861 $ 3,465 $ (3,490)$ 3,429 Other Significant Items: Total Assets $568,493	$114,032 $ 88,981	$(196,776)	$574,730 Total Investment Securities 140,508	 0	 955	 0	 141,463 Total Loans 	 379,383	 110,431	 0	 (114,070)	 375,744 Investment in Wholly-Owned Subsidiaries 5,391	 127	 73,386	 (78,161) 743 Total Interest Income from External Customers	 6,747	 5,313	 18		 (9) 12,069 Total Interest Income from Affiliates 1,865	 0		 0	 (1,865) 0 All Elimi- Consol- FUSB ALC Other nations idated For the three months ended March 31, 2003: Net Interest Income $ 5,278 $ 2,750 $ 29 $ 0 $ 8,057 Provision for Loan Losses 350 641 0 0 991 Total Noninterest Income 1,175 98 2,532 (2,494) 1,311 Total Noninterest Expense 3,324 1,652 200 (93) 5,083 Income Before Income Taxes 2,779 555 2,361 (2,401) 3,294 Provision (Benefit) for Income Taxes 792 161 2 0 955 Net Income (Loss) $ 1,987 $ 394 $ 2,359 $ (2,401) $ 2,339 Other Significant Items: Total Assets, $544,068 $92,162 $70,461 $(160,500) $546,191 Total Investment Securities 146,585 0 1,655 0 148,240 Total Loans 349,817 88,838 0 (89,541) 349,114 Investment in Wholly-Owned Subsidiary 2,654 110 64,622 (67,276) 110 Total Interest Income from External Customers 6,834 4,249 22 0 11,105 Total Interest Income from Affiliates 1,499 0 7 (1,506) 0 6. DERIVATIVE FINANCIAL INSTRUMENTS The Bank's principal objectives in holding derivative financial instruments is asset/liability management. The operations of the Bank are subject to a risk of interest rate fluctuations to the extent that there is a difference between the amount of the Bank's interest-earning assets and the amount of interest- bearing liabilities that mature or reprice in specified periods. The principal objective of the Bank's asset- liability management activities is to provide maximum levels of net interest income while maintaining acceptable levels of interest rate and liquidity risk and facilitating the funding needs of the Bank. To achieve that objective, the Bank uses a combination of derivative financial instruments, including interest rate swaps and caps. All derivatives are recognized on the balance sheet at their fair value. On the date the derivative contract is entered into, the Company designates the derivative as (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair value" hedge), (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow" hedge), or (3) "hold for trading" ("trading" instruments). Changes in the fair value of a derivative that is highly effective as, and that is designated and qualifies as, a fair value hedge, along with the loss or gain on the hedged asset or liability that is attributable to the hedge risk (including losses or gains on firm commitments), are recorded in current- period earnings. Changes in the fair value of a derivative that is highly effective as, and that is designated and qualified as, a cash flow hedge are recorded in other comprehensive income, until earnings are affected by the variability of cash flows (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings). Changes in the fair value of derivative trading instruments are reported in current-period earnings. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair-value or cash-flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting. An interest rate swap is an agreement in which two parties agree to exchange, at specified intervals, interest payment streams calculated on an agreed-upon principal amount with at least one stream based on a specified floating-rate index. Interest rate swaps are used by the Bank to effectively convert floating-rate debt with a three-month LIBOR rate index to a fixed rate constant maturity treasury index. As required under SFAS No. 133, hedge ineffectiveness of these cash flow hedges will be reclassified into earnings based on the extent to which changes in the value of designated hedge instruments do not effectively offset changes in the value of hedged items. The extent of hedge effectiveness is influenced by a number of factors, including interest rate volatility, hedge performance, and correlation. There were no gains or losses, which were reclassified from OCI to other income or expense as a result of the discontinuance of cash flow hedges related to certain forecasted trans- actions that are probable of not occurring. The maturity of the interest rate swaps varies from one to two years. 7.	GUARANTEES, COMMITMENTS AND CONTINGENCIES In the normal course of business there are outstanding commitments and contingent liabilities, such as commitments to extend credit, letters of credit, and others. The financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the financial statements. A summary of these commitments and contingent liabilities is presented below. 								March 31, December 31, 							 2004	 2003 										 Standby Letters of Credit				$ 901	 $ 523 Commitments to Extend Credit			$25,864	 $25,792 Standby letters of credit are contingent commitments issued by the Company generally to guarantee the performance of a customer to a third party. The Company has recourse against the customer for any amount it is required to pay to a third party under a standby letter of credit. Revenues are recognized over the life of the standby letter of credit. The potential amount of future payments the Company could be required to make under its standby letter of credit at March 31, 2004, is $900,628 and represents the Company's total credit risk. At March 31, 2004, the Company had $707,648 of liabilities and $707,648 of receivables associated with standby letter of credit agreements entered into subsequent to December 31, 2002, as a result of the Company's adoption of Interpretation 45 at January 1, 2003. Standby letter of credit agreements entered into prior to January 1, 2003, have a carrying value of zero. 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 Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counter party. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial properties. ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis are presented to aid in an understanding of the current financial position and results of operations of United Security Bancshares, Inc. ("United Security"). United Security is the parent holding company of First United Security Bank (the "Bank"), and it has no operations of any consequence other than the ownership of its subsidiaries. The accounting principles followed by the Company and the methods of applying these principles conform with generally accepted accounting principles in the United States and with general practices within the banking industry. Critical accounting policies relate to securities, loans, allowance for loan losses, derivatives and hedging. A description of these policies, which significantly affect the determination of financial position, results of operations and cash flows, are set forth in the summary of significant accounting policies in United Security's December 31, 2003, consolidated financial statements. The emphasis of this discussion is a comparison of Assets, Liabilities, and Shareholder's Equity for the three months ended March 31, 2004, to year-end 2003, while comparing income and expense for the three-month period ended March 31, 2004, and 2003. All yields and ratios presented and discussed herein are not presented on a tax-equivalent basis. COMPARING THE THREE MONTHS ENDED MARCH 31, 2004, TO THE THREE MONTHS ENDED MARCH 31, 2003 Net income increased $1,090,000, or 46.6%, resulting in an increase of basic net income per share to $0.53. Annualized return on assets was 2.41% compared to 1.75% for the same period during 2003. Average return on stockholders' equity increased to 18.38% from 14.03%. Interest income for the first quarter increased $965,000 or 8.7% compared to the first quarter of 2003. The increase in interest income was primarily due to an increase in interest earned on loans. This increase is due to an overall increase in the average yield and an increase in the volume of loans and investments outstanding. Interest expense for the first quarter decreased $548,000 or 18.0% compared to the first quarter of 2003. The decrease in interest expense was due to an overall decrease in the average rate paid for both deposits and borrowings, which offset increases in the volume of the net effect of deposits and borrowings, during the same period. Net interest income increased $1,513,000, or 18.8% as a result of an improvement of 79 basis point net yield on earning assets. The provision for loan losses was $661,000 or 0.69% annualized of average loans in the first three months of 2004, compared to $991,000 or 1.12% annualized of average loans in the first three months of 2003. Charge-offs exceeded recoveries by $588,000 for the quarter, a decrease of approximately $111,000 over the same period in the prior year. The decrease in charge-offs was due to the continued improvements in the loan portfolio. Decreases in the first quarter provision are a reflection of this improvement. Total non-interest income (excluding security gains and losses) increased $101,000 or 8.12% compared to the first three months of 2003. This was attributable to an increase in the service charges on deposits and other income. Total non-interest expense increased $136,000, or 2.68% in the first three months of 2004. This increase was related to an increase in salaries and employee related benefits as a result of normal merit increases and higher benefit costs. Income tax expense increased $621,000 or 65.0% over the first three months of 2004. The increase during the first quarter of 2004 compared to 2003 resulted from higher levels of taxable income. United Security's effective tax rate for the first three months of 2004 and 2003 was 31.5% and 29.0%, respectively as the Company continues to realize tax benefits primarily from tax- exempt securities and low-income housing tax credits. COMPARING THE MARCH 31, 2004, STATEMENT OF FINANCIAL CONDITION TO DECEMBER 31, 2003 In comparing financial condition at December 31, 2003, to March 31, 2004, total assets increased $7.5 million to $574.7 million, while liabilities increased $4.4 million to $498.3 million. Shareholders' equity increased $3.1 million as a result of earnings in excess of dividends during the quarter. Investment securities increased $2.4 million, or 1.7% during the first quarter 2004 as a result of deployment of increased liquidity from deposits. Investments provide United Security with a stable form of liquidity while maximizing earnings yield. Loans, net of unearned income decreased $3.9 million from $386,578 at December 31, 2003, to $382,658 at March 31, 2004. This 1.0% decrease is the result of the elimination of $6.0 million in loans eliminated in the consolidation of a variable interest entity. Deposits decreased $1.5 million, or 0.4% during the first quarter of 2004. While deposits have decreased period- end to period-end, average deposits increased $2.2 million or 0.6% for the first quarter of 2004 over the fourth quarter of 2003. CREDIT QUALITY At March 31, 2004, the allowance for loan losses was $6.9 million, or 1.81% of loans net of unearned income, compared to $6.9 million, or 1.94% of loans net of unearned income at March 31, 2003 and $6.8 million, or 1.77% of loans net of unearned income at December 31, 2003. The coverage ratio of the allowance for loan losses to non-performing assets decreased to 94.8% at March 31, 2004, compared to 140.5% at December 31, 2003. Activity in the allowance for loan losses is summarized as follows (amounts in thousands): Three Months Ended March 31, 2004 2003 Balance at Beginning of Period $6,842 $6,623 Charge-Offs 794 919 Recoveries (206) (220) Net Loans Charged-Off 588 699 Additions Charged to Operations 661 991 Balance at End of Period $6,915 $6,915 Net charge-offs for the quarter ended March 31, 2004, were $588,000 or 0.61% of average loans, on an annualized basis, a decrease of 16% or $111,000 from the $699,000 or 0.78% annualized of average loans reported a year earlier. The provision for loan losses for the first quarter of 2004 was $661,000 compared to $991,000 in the first quarter of 2003. United Security 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: (a) management's estimate of future economic conditions, (b) management's estimate of the financial condition and liquidity of certain loan customers, and (c) management's estimate of collateral values of property securing certain loans. Because all of 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. At March 31, 2004, it is management's opinion that the allowance for loan losses is adequate. However, 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. Non-performing assets were as follows (amounts in thousands): Mar. 31, Dec. 31, Mar. 31, 2004 2003 2003 Loans Accounted for on a Non-Accrual Basis $ 1,972 $ 1,879 $ 5,196 Accruing Loans Past Due 90 Days or More 2,765 382 1,067 Real Estate Acquired in Settlement of Loans 2,557 2,608 2,924 Total $ 7,294 $ 4,869 $ 9,187 Non-Performing Assets as a Percentage of Net Loans and Other Real Estate 1.91% 1.26% 2.56% Loans accounted for on a non-accrual basis decreased $3.2 million since March 31, 2003 and increased $0.9 million since December 31, 2003. Accruing loans past due 90 days or more increased $1.7 million, compared to March 31, 2003, and $2.4 million since December 31, 2003. This increase is attributable to two large commercial real estate lines which are in the process of collection. Management is confident adequate collateral values are present to protect the Bank from loss and has allowed interest accrual to continue. If they are not resolved in a timely manner, or if collateral values deteriorate, accrual of interest will be discontinued. Real estate acquired in settlement of loans decreased $367,000 since March 31, 2003 and $51,000 since December 31, 2003. At March 31, 2004, the recorded investment in loans that were considered impaired was $1,405,959 compared to $1,320,822 at December 31, 2003. There was approximately $210,894 and $198,123 at March 31, 2004 and December 31, 2003 respectively, in the allowance for loan losses specifically allocated to these impaired loans. LIQUIDITY AND CAPITAL RESOURCES The Bank's primary sources of funds are customer deposits, the ability to borrow, 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 $129.9 million in borrowing capacity from the Federal Home Loan Bank and $40 million in established Federal Funds Lines. The Bank is required to maintain certain levels of regulatory capital. At March 31, 2004, and December 31, 2003, United Security 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 United Security Bancshares, Inc. However, the Company is a defendant in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the financial position of the Company. ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information set forth under the caption "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Interest Rate Sensitivity Management" included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003, is hereby incorporated herein by reference. ITEM 4.	CONTROLS AND PROCEDURES As of March 31, 2004, the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Principal Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company that is required to be included in the Company's periodic filings with the Securities and Exchange Commission. There were no significant changes in the Company's internal controls over financial reporting during the quarter ended March 31, 2004, 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 The Company is a defendant in other certain claims and legal actions arising in the normal course of business. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on the financial position or results of operations of the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a)	Exhibit 31.1: Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2: Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32: Certification of Chief Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. (b)	Reports on Form 8-K. A report on Form 8-K was filed on February 4, 2004, relating to the press release dated February 4, 2004, announcing financial results for the quarter and twelve months ended December 31, 2003. 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 07, 2004 BY: /s/LARRY M. SELLERS LARRY M. SELLERS Its Vice-President, Secretary, and Treasurer (Duly Authorized Officer and Principal Financial Officer)