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 Company's Annual Report on Form 10-K for the year ended December 31, 2008.

The emphasis of this discussion is a comparison of assets, liabilities and shareholders' equity as of June 30, 2009 to year-end 2008, while comparing income and expense for the three- and six-month periods ended June 30, 2009 and 2008.

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, 2008.

COMPARING THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2009 TO THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2008

Net income during the second quarter of 2009 was $2.9 million, compared to $1.5 million for the same period in 2008, resulting in an increase of basic net income per share from $0.25 to $0.48. For the six months, net income increased from $3.4 million in 2008 to $4.1 million in 2009, resulting in an increase of basic net income per share to $0.69 from $0.56. Annualized return on assets was 1.23% for the first six months of 2009, compared to 1.02% for the same period during 2008. Average return on shareholders' equity increased to 10.53% for the first six months of 2009, from 8.49% during the first six months of 2008.

Interest income for the 2009 second quarter decreased $1.1 million, or 8.4%, compared to the second quarter of 2008. The decrease in interest income was primarily due to a decrease in interest earned on loans. This decrease is due to an overall decrease in the average yield and volume of loans outstanding. For the 2009 six-month period, interest income decreased $2.7 million, or 10.0%, over the same period last year. This decrease in interest income was primarily due to a decrease in interest earned on loans resulting from an overall decrease in the average yield and a decrease in the volume of loans outstanding.

Interest expense for the 2009 second quarter decreased $1.0 million, or 19.9%, compared to the second quarter of 2008. Interest expense decreased $2.1 million, or 22.5%, to $7.0 million for the first six months of 2009, compared to $9.1 million for the first six months of 2008. These decreases were the result of lower interest rates paid on certificates of deposit and borrowed funds for these periods in 2009.

Net interest income decreased $240,000, or 2.7%, for the second quarter of 2009 and decreased $618,000, or 3.5%, for the first six months of 2009, compared to the same periods in 2008, respectively. Asset yields have fallen faster than funding rates, as prime adjustable loans have priced down much faster than certificates of deposit. As loan yields have somewhat stabilized, the yield on interest-earning assets continues to decline due to the shift from loans to investment securities as loan growth continues to be depressed. The Company's cost of funds continues to decline as longer-term certificates of deposit reprice. However, even though net interest margin improved in the second quarter of 2009 from the first quarter of 2009, it declined during the three- and six-month periods of 2009, compared to the same periods in 2008.

The provision for loan losses was $1.5 million, or 1.4% annualized of average loans, in the second quarter of 2009, compared to $2.2 million, or 2.1% annualized of average loans, in the second quarter of 2008. The provision for loan losses decreased to $3.4 million year-to-date 2009, compared to $3.5 million in 2008. The annualized provision as a percent of average loans was 1.7% for each of the first six months of 2008 and 2009. Charge-offs exceeded recoveries by $3.5 million for the 2009 six-month period, a decrease of approximately $700,000 over the same period in the prior year. See "CREDIT QUALITY."

Total non-interest income increased $2.3 million, or 135.9%, for the second quarter of 2009, and $2.2 million, or 71.6%, for the first six months of 2009. Service charges and fees on deposit accounts decreased $84,000 quarter-to-date and $214,000 year-to-date 2009, compared to the same periods in 2008. Income on bank-owned life insurance increased $3,000 quarter-to-date and $6,000 year-to-date 2009, compared to the same periods in 2008. Commissions on credit insurance increased $86,000 quarter-to-date 2009 and $156,000 year-to-date, compared to the same periods in 2008. Letters of credit and commitment fees decreased $5,000 quarter-to-date and $16,000 year-to-date. Net gains on the sale of other real estate owned amounted to $268,000 in 2008 and have decreased to a net loss of $121,000 year-to-date 2009. All other fees increased as a result of a settlement received in the second quarter of 2009 related to a lawsuit filed against three accounting firms, which resulted in net settlement proceeds to the Company in the amount of $2.7 million. This non-recurring income represents earnings of $0.30 per share for the three- and six-month periods ended June 30, 2009.

Total non-interest expense increased $570,000, or 9.3%, quarter-to-date and increased $561,000, or 4.6%, year-to-date 2009, compared to the same periods in 2008. Salary and employee benefits increased $341,000, when comparing second quarter 2009 to 2008, and $272,000 year-to-date 2009, compared to the same period in 2008. For the three months ended June 30, 2009, advertising expense decreased $27,000, legal and professional fees decreased $80,000 and telephone and data circuit expense increased $7,000, each compared to the same quarter in 2008. On a year-to-date basis, advertising expense decreased $24,000, legal and professional fees increased $153,000 and telephone and data circuit expense increased $16,000, each compared to the same period in 2008. FDIC insurance assessments have increased $210,000 quarter-to-date and $296,000 year-to-date 2009, compared to the same periods in 2008.

Income tax expense for the second quarter of 2009 was $1.4 million, compared to $635,000 in 2008. Income tax expense for the first six months of 2009 increased $407,000 over the first six months of 2008. The increase during the first six months of 2009 compared to 2008 resulted from higher levels of taxable income. Management estimates the effective tax rate for the Company to be approximately 31.5% of pre-tax income for the period ending December 31, 2009.

COMPARING THE JUNE 30, 2009 STATEMENT OF FINANCIAL CONDITION TO DECEMBER 31,
2008

In comparing financial condition at December 31, 2008 to June 30, 2009, total assets increased $17.4 million to $685.4 million, while liabilities increased $15.2 million to $604.6 million. Shareholders' equity increased $2.1 million as a result of an increase in other comprehensive income of $307,000 and earnings in excess of dividends of $1.8 million.

Investment securities decreased $4.3 million, or 2.3%, during the first six months of 2009. Investments provide the Company with a stable form of liquidity while maximizing earnings yield. Loans, net of unearned income, increased $289,000, from $408.0 million at December 31, 2008, to $408.3 million at June 30, 2009. While quarter-end net loans have increased slightly over December 31, 2008, average loans have declined $7.2 million from December 31, 2008 and $17.6 million from June 30, 2008. Loan growth has been flat due to the slowdown in construction and real estate development in the trade areas served by the Company. Deposits increased $15.7 million, or 3.2%, during the first six months of 2009.

CREDIT QUALITY

At June 30, 2009, the allowance for loan losses was $8.4 million, or 2.0% of loans net of unearned income, compared to $7.8 million, or 1.9% of loans net of unearned income, at June 30, 2008, and $8.5 million, or 2.1% of loans net of unearned income, at December 31, 2008. The coverage ratio of the allowance for loan losses to non-performing assets decreased to 21.6% at June 30, 2009, compared to 22.6% at December 31, 2008. Loans on non-accrual increased $1.1 million, accruing loans past due 90 days or more declined $3.3 million and real estate acquired in settlement of loans increased $3.3 million, as compared to December 31, 2008.

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

                                                   Six Months Ended
                                                       June 30,
                                                  2009          2008
              Balance at Beginning of Period    $  8,532      $  8,535
              Charge-Offs                         (4,205 )      (5,294 )
              Recoveries                             681         1,065

              Net Loans Charged-Off               (3,524 )      (4,229 )
              Additions Charged to Operations      3,368         3,540

              Balance at End of Period          $  8,376      $  7,846

Net charge-offs for the six months ended June 30, 2009 were $3.5 million, or 1.73% of average loans on an annualized basis, a decrease of $705,000 from the charge-offs of $4.2 million, or 2.0% of average loans on an annualized basis, reported a year earlier. The provision for loan losses for the first six months of 2009 was $3.4 million, compared to $3.5 million in the first six months of 2008.

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

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

                                                  June 30,         December 31,        June 30,
                                                    2009               2008              2008
Loans Accounted for on a Non-Accrual Basis        $  11,337       $       10,258       $   9,887
Accruing Loans Past Due 90 Days or More               6,029                9,323           7,550
Real Estate Acquired in Settlement of Loans          21,421               18,131          16,545

Total                                             $  38,787       $       37,712       $  33,982
Non-Performing Assets as a Percentage of Net
Loans and Other Real Estate                            9.03 %               8.85 %          8.03 %

Non-performing assets as a percentage of net loans and other real estate was 9.0% at June 30, 2009, compared to 8.9% at December 31, 2008. This increase is due to a $1.1 million increase in loans on non-accrual and a $3.3 million increase in real estate acquired in settlement of loans, offset by a $3.3 million decrease in accruing loans past due 90 days or more. Other real estate acquired in settlement of loans as of June 30, 2009 consisted of twenty residential properties and twenty-six commercial properties totaling $14.4 million at the Bank and one hundred forty-eight residential properties totaling $7.0 million at ALC. Management is making every effort to dispose of these properties in a timely manner, but the national recession and the severely depressed real estate market continue to have a negative impact on this process. In spite of the bad economic conditions, management believes that, by closely monitoring these non-performing assets, through aggressive collection and sales efforts, they can be reduced to a more manageable level. Management reviews these loans and reports to the Board of Directors monthly. Loans past due 90 days or more and still accruing are reviewed closely by management and are allowed to continue accruing interest 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 and their asset value downgraded.

Impaired loans totaled $18.6 million, $24.4 million and $11.2 million as of June 30, 2009, December 31, 2008 and June 30, 2008, respectively. Impaired loans at June 30, 2009 consisted mainly of six commercial real estate loans and three residential development loans. Based on management's analysis, these loans are considered impaired based on current collateral values. There was approximately $1.1 million at June 30, 2009 and 2008 and $1.6 million at December 31, 2008 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, 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 $115.3 million in borrowing capacity from the Federal Home Loan Bank and $10.0 million in established federal funds lines.

The Bank is required to maintain certain levels of regulatory capital. At June 30, 2009 and December 31, 2008, 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 8 to Item 1, "Guarantees, Commitments and Contingencies," for a discussion of such claims and legal actions.