The following discussion and financial information are presented to aid in an understanding of the current financial position and results of operations of United Security Bancshares, Inc. (the "Company"). The Company is the parent holding company of First United Security Bank (the "Bank"). 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 ("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 policies, which significantly affect the determination of financial position, results of operations and cash flows, is set forth in Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2007.

The emphasis of this discussion is a comparison of assets, liabilities, and shareholder's equity as of September 30, 2008, to year-end 2007, while comparing income and expense for the three- and nine-month periods ended September 30, 2008 and 2007.

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 Operation appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2007.

COMPARING THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2008, TO THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2007

Net income during the third quarter of 2008 was $1.4 million, compared to a net loss of $1.9 million for the same period of 2007, resulting in an increase of basic net income (loss) per share from $(0.30) to $0.23. For the nine months, net income increased to $4.8 million, compared to a loss of $1.6 million in 2007, resulting in an increase of basic net income per share to $0.79. Annualized return on assets was 0.96% for the first nine months of 2008, compared to (1.10%) for the same period during 2007. Average return on shareholders' equity increased to 8.10% for the first nine months of 2008, from (2.38%) during the first nine months of 2007. Net income for the quarter-to-date 2007 was reduced by $3.2 million, net of tax, and $8.8 million, net of tax, for the year-to-date 2007, due to losses resulting from the loan irregularities at ALC.

Interest income for the 2008 third quarter decreased $2.2 million, or 14.9%, compared to the third quarter of 2007. The decrease in interest income was primarily due to a decrease in interest earned on loans of $2.5 million, offset somewhat by a $0.3 million increase in interest earned on investment securities. This decrease in interest earned on loans is due to an overall decline in the average yield and volume of loans outstanding. The increase in interest earned on investment securities is due to an increase in the average volume of investment securities. For the 2008 nine-month period, interest income decreased $6.0 million, or 13.3%, over the same period last year. This decrease in interest income was primarily due to a decrease in interest earned on loans of $6.9 million, offset by a $0.9 million increase in interest earned on investment securities. The decrease in interest income on loans is due to both decreases in volume and yield. The increase in investment income was due to an increase in investment securities. Loan volume has declined, as loan demand in our market areas has been affected by the slowing economy. Investment securities have increased as loan volume has decreased.

Interest expense for the 2008 third quarter decreased $1.1 million, or 21.8%, compared to the third quarter of 2007. Interest expense decreased $1.5 million, or 10.5%, to $13.0 million for the first nine months of 2008, compared to $14.6 million for the first nine months of 2007. These decreases, quarter-to-date and year-to-date, were the result of decreased rates paid on interest bearing deposits, offset by increased volume of interest bearing deposits, primarily certificates of deposit, and decreased rates paid on borrowed funds, offset by an increase in borrowed funds.

Net interest income decreased $1.1 million, or 11.4%, for the third quarter of 2008 and decreased $4.5 million, or 14.6%, for the first nine months of 2008, compared to the same periods in 2007, respectively. Asset yields have fallen faster than funding rates as prime adjustable loans have priced down much faster than certificates of deposit. The Federal Reserve lowered short-term interest rates by 2.00% in the first quarter of 2008 and by 0.25% in the second quarter. As interest rates stabilized, we were able to reprice maturing certificates of deposit, and our third quarter net interest margin has improved over the first and second quarter of 2008.

The provision for loan losses was $1.9 million, or 1.9% annualized of average loans, in the third quarter of 2008, compared to $6.8 million, or 6.1% annualized of average loans, in the third quarter of 2007. The provision for loan losses decreased to $5.5 million year-to-date 2008, or 1.7% annualized of average loans, compared to $17.7 million, or 5.2% annualized of average loans, in 2007. $9.1 million of the provision for loan losses in 2007 was related to losses identified in the investigation of loan irregularities at ALC. Charge-offs exceeded recoveries by $6.1 million for the 2008 nine-month period, a decrease of approximately $7.6 million over the same period in the prior year.

Total non-interest income increased $10,000, or 0.7%, for the third quarter of 2008, and $0.5 million, or 10.9%, for the first nine months of 2008. Service charges and fees on deposit accounts decreased $14,000 quarter-to-date and increased $27,000 year-to-date 2008, compared to the same periods in 2007. Income on bank-owned life insurance increased $5,000 quarter-to-date and $18,000 year-to-date 2008, compared to the same periods in 2007. Commissions on credit insurance increased $109,000 quarter-to-date and $114,000 year-to-date. Letters of credit and commitment fees decreased $500 quarter-to-date and increased $5,000 year-to-date. All other fees and charges decreased $89,000 quarter-to-date and increased $287,000 year-to-date, compared to the same periods in 2007. Net gains from the sale of other real estate owned amounted to $233,000 year-to-date 2008 and is included in other income. During the third quarter of 2008 the Company recognized an other-than-temporary impairment charge of $468,000, related to the investment in 12,000 shares of Freddie Mac preferred stock. This impairment charge is included in net loss on the sale of investment securities of $128,000 year-to-date, and is included in other income.

Total non-interest expense decreased $0.9 million, or 12.1%, quarter-to-date and decreased $0.9 million, or 4.7%, year-to-date 2008, compared to the same periods in 2007. Salary and employee benefits increased $84,000 when comparing the third quarter 2008 to 2007 and decreased $0.6 million year-to-date 2008, compared to the same period in 2007. The decrease year-to-date is due primarily to reduced incentive accruals. The increase quarter-to-date is the result of salary and benefits associated with two new executive officers hired in April and July of 2008. For the three months ending September 30, 2008, advertising expense increased $1,000, legal and professional fees increased $21,000, telephone and data circuit expense decreased $123,000, and impairment losses on limited partnerships increased $82,000, compared to the same quarter in 2007. On a year-to-date basis, advertising expense increased $61,000, legal and professional fees increased $264,000, telephone and data circuit expense decreased $78,000, and impairment losses on limited partnerships increased $42,000, compared to the same period in 2007.

Income tax expense for the third quarter of 2008 was $655,000, compared to a tax benefit of $692,000 in 2007. Income tax expense for the first nine months of 2008 was $2.2 million, compared to a tax benefit of $605,000 in 2007. For both the three-month and nine-month periods in 2007, the tax benefits were based on taxable losses while 2008 expense is based on taxable income. Management estimates the effective tax rate for the Company to be approximately 31% of pre-tax income for the year ending December 31, 2008.

COMPARING THE SEPTEMBER 30, 2008, STATEMENT OF FINANCIAL CONDITION TO DECEMBER
31, 2007

In comparing financial condition at December 31, 2007 to September 30, 2008, total assets increased $10.3 million to $670.2 million, while liabilities increased $11.9 million to $592.3 million. Shareholders' equity decreased $1.6 million due to dividends paid of $4.9 million, net income of $4.8 million, treasury stock increase of $1.0 million, offset by a decrease in other comprehensive income of $0.3 million during the first nine months of 2008.

Investment securities increased $28.0 million, or 19.3%, during the first nine months of 2008. Investments provide the Company with a stable form of liquidity while maximizing earnings yield. Loans, net of unearned income, decreased $28.7 million, from $436.1 million at December 31, 2007, to $407.4 million at September 30, 2008, as a result of a slowdown in the overall economy, especially in construction and real estate development, in the trade areas served by the Company. Deposits increased $9.7 million, or 2.0%, during the first nine months of 2008.

CREDIT QUALITY

At September 30, 2008, the allowance for loan losses was $7.9 million, or 1.9% of loans net of unearned income, compared to $11.6 million, or 2.6% of loans net of unearned income, at September 30, 2007, and $8.5 million, or 2.0% of loans net of unearned income, at December 31, 2007. The coverage ratio of the allowance for loan losses to

non-performing assets decreased to 24.9% at September 30, 2008, compared to 39.4% at December 31, 2007, due to increases in loans on non-accrual and other real estate owned, offset by a small decrease in loans past due 90 days or more.

Activity in the allowance for loan losses is summarized as follows (dollars in thousands):

                                                   Nine Months Ended
                                                     September 30,
                                                   2008         2007
               Balance at Beginning of Period    $  8,535     $   7,664

               Charge-Offs                         (7,577 )     (14,536 )
               Recoveries                           1,491           812

               Net Loans Charged-Off               (6,086 )     (13,724 )

               Additions Charged to Operations      5,467        17,690

               Balance at End of Period          $  7,916     $  11,630

Net charge-offs for the nine months ended September 30, 2008 were $6.1 million, or 1.9% of average loans on an annualized basis, a decrease of 55.7%, or $7.6 million, from the net charge-offs of $13.7 million, or 4.0% of average loans on an annualized basis, reported a year earlier. Net charge-offs at the Bank were $1.3 million as of September 30, 2008, and $0.6 million as of September 30, 2007. ALC had net charge-offs at September 30, 2008 of $4.8 million and $13.1 million at September 30, 2007. The provision for loan losses for the first nine months of 2008 was $5.5 million, compared to $17.7 million in the first nine months of 2007. The large net charge-offs and the provision for loan losses in 2007 are both attributable to losses identified in the investigation of loan irregularities at ALC.

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.

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

                                              September 30,         December 31,         September 30,
                                                  2008                  2007                 2007
Loans Accounted for on a Non-Accrual
Basis                                        $        10,442       $        5,253       $         4,795
Accruing Loans Past Due 90 Days or More                4,215                5,240                 8,096
Real Estate Acquired in Settlement of
Loans                                                 17,126               11,156                 9,551

Total                                        $        31,783       $       21,649       $        22,442

Non-Performing Assets as a Percentage of
Net Loans and Other Real Estate                         7.49 %               4.84 %                4.97 %

Non-performing assets as a percentage of net loans and other real estate was 7.5% at September 30, 2008, compared to 4.8% at December 31, 2007. This increase is due to a $5.2 million increase in loans on non-accrual, a $1.0 million decrease in accruing loans past due 90 days or more, and a $6.0 million increase in real estate acquired in settlement of loans. Loans on non-accrual increased as a result of placing 10 commercial real estate loans totaling $11.2 million on non-accrual status, offset by transferring 3 loans totaling $4.5 million to real estate acquired in settlement of loans. Approximately $6.0 million of these loans were identified at year-end 2007 as impaired but were not on non-accrual status. Other real estate acquired in settlement of loans as of September 30, 2008 consists of 26 residential properties and 13 commercial properties totaling $11.6 million at the Bank and 119 residential

properties and 1 commercial property totaling $5.5 million at ALC. Management is making considerable efforts to dispose of these properties in a timely manner, but the slowdown in the housing market will continue to have a negative impact on these sales. Management has been aggressive in identifying problem loans and will continue to monitor the loan portfolio for any signs of deterioration, especially in the real estate portfolio. Management believes by closely monitoring these non-performing loans, through aggressive collection efforts, non-performing assets can be reduced. Management reviews these loans and reports to the Board of Directors monthly. Loans past due 90 days or more and still accruing interest are reviewed closely by management and are allowed to continue accruing only when underlying collateral values and management's belief in the financial strength of the borrowers are sufficient to protect the Company from loss. If at any time management determines there may be a loss of interest or principal, these loans will be placed on non-accrual status and their asset value downgraded.

Impaired loans totaled $17.9 million, $15.7 million, and $10.6 million as of September 30, 2008, December 31, 2007, and September 30, 2007, respectively. In the first nine months of 2008, impaired loans increased $2.2 million due to the following: $5.7 million was transferred to other real estate owned, $0.7 million was charged off, $9.6 million was added, and $1.0 million was upgraded or paid. There was approximately $1.2 million and $1.6 million in the allowance for loan losses specifically allocated to these impaired loans at September 30, 2008 and December 31, 2007, respectively.

LIQUIDITY AND CAPITAL RESOURCES

The Bank's primary sources of funds are customer deposits, Federal Home Loan Bank 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 $110.7 million in borrowing capacity from the Federal Home Loan Bank and $10 million in established federal fund lines.

The Bank is required to maintain certain levels of regulatory capital. At September 30, 2008 and December 31, 2007, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under regulatory framework for proper corrective action.

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 7 to Item 1, "Guarantees, Commitments, and Contingencies," for a discussion of such claims and legal actions.