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

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

The emphasis of this discussion is a comparison of assets, liabilities and shareholders' equity as of June 30, 2012 to year-end 2011, while comparing income and expense for the three- and six-month periods ended June 30, 2012 and 2011.

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

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

COMPARING THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2012 TO THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2011

Net income attributable to USBI in the second quarter of 2012 was $1.4 million, compared to net income attributable to USBI of $904,000 for the second quarter of 2011, resulting in an increase of basic net income per share from $0.15 per share during the second quarter of 2011 to $0.23 per share in the same quarter of 2012.

For the three-month period ended June 30, 2012, the Bank had net income of $868,000, compared to net income of $704,000 for the same quarter of 2011. For the six-month period ended June 30, 2012, the Bank had net loss of $528,000, compared to net income of $1.3 million for the same period in 2011. For the six month period, the decrease in net income for the Bank resulted from higher impairment charges on other real estate owned. These impairments resulted mainly from foreclosed property associated with commercial real estate loans, as real estate values continue to decline and market conditions continue to be depressed. Further declines in market value would require additional impairment charges.

Net income for ALC for the three-month period ended June 30, 2012 was $496,000, compared to $332,000 for the same quarter of 2011. For the six-month period ended June 30, 2012, net income for ALC was $682,000, compared to $638,000 for the same period in 2011. Improvement in both periods for ALC resulted from lower provisions for loan losses.

Interest income for the 2012 second quarter decreased $859,000, or 8.1%, compared to the second quarter of 2011. For the six months ended June 30, 2012, interest income decreased $1.3 million, or 6.1%, compared with the same period in 2011. The decrease in interest income during the periods was primarily due to a decrease in interest earned on loans and investment securities resulting from an overall decrease in the average yield and average volume of loans and investment securities. Interest income at the Bank for the 2012 second quarter decreased $1.2 million, or 16.6%, compared to the same period of 2011. For the six months ended June 30, 2012, interest income decreased $2.0 million, or 13.8%, compared with the same period of 2011. These decreases were due to an overall decrease in the average yield and average volume of loans and investment securities. Loan demand continues to be weak due to continuing difficult economic conditions. Cash flows from loans and investment securities were reinvested at lower rates, resulting in lower interest income. Interest income at ALC increased $63,000 for the second quarter of 2012 compared to the same quarter of 2011. Interest income at ALC increased $140,000 for the six-month period ended June 30, 2012 compared to the same period in 2011. These increases at ALC resulted from an increase in average consumer loans. The increase in yield on these loans offset the loss of interest income on decreased real estate loans at ALC.

Interest expense for USBI in the 2012 second quarter decreased $602,000, or 33.8%, compared to the second quarter of 2011. Interest expense decreased $1.0 million, or 27.7%, to $2.6 million for the first six months of 2012, compared to $3.6 million for the first six months of 2011. These decreases were 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. If the very low rate environment continues, interest expense should continue to decline as compared to the prior year expense.

Net interest income for USBI decreased $257,000, or 2.9%, for the second quarter of 2012, and decreased $284,000, or 1.6%, for the first six months of 2012, compared to the same periods in 2011, respectively. The net interest margin declined from 6.18% for the six months ended June 30, 2011 to 6.09% for the six months ended June 30, 2012, and from 6.17% for the second quarter of 2011 to 6.16% for the second quarter of 2012. Loan and investment yields declined for the three- and six-month periods ended June 30, 2012 compared to the same periods in 2011. The cost of funds declined due to a decline in interest rates paid on interest bearing deposits and borrowed funds. Asset yields and funds costs have stabilized, and the net interest margin is expected to remain near current levels until the Federal Reserve adjusts rates.

The provision for loan losses for USBI was $468,000, or 0.5% annualized of average loans, in the second quarter of 2012, compared to $1.6 million, or 1.6% annualized of average loans, in the second quarter of 2011. The provision for loan losses decreased to $2.7 million for the six months ended June 30, 2012, compared to $2.9 million for the same period in 2011. The annualized provision as a percent of average loans was 1.4% for each of the first six months of 2012 and 2011. The provision for loan losses at the Bank declined to $20,000 for the 2012 second quarter and decreased to $1.5 million for the six months ended June 30, 2012. Net charge-offs decreased $53,000 for the six months ended June 30, 2012 and decreased $1.4 million in the quarter ended June 30, 2012, when compared to the same periods in 2011 at the Bank. The provision for loan losses at ALC decreased to $448,000 for the second quarter of 2012, compared to $724,000 for the same period of 2011. For the six month period ending June 30, 2012 the provision for loan losses decreased $51,000 to $1,160,000 compared to $1,211,000 for the same six month period in 2011. At the Company

level, net charge-offs were $4.8 million for each of the six month periods ended June 30, 2012 and 2011. Net charge-offs year-to-date as of June 30, 2012 were $3.4 million for the Bank and $1.4 million for ALC.

Total non-interest income for USBI decreased $865,000, or 39.4%, for the second quarter of 2012 and decreased $780,000, or 23.0%, for the first six months of 2012. Service charges on deposit accounts decreased $119,000 for the second quarter of 2012, and $207,000 for the six month period ended June 30, 2012, when compared to the same periods in 2011, primarily due to decreased fees generated from customer overdrafts and non-sufficient funds in both quarters of 2012. All other fees decreased $750,000 for the second quarter of 2012, and $574,000 for the first six months of 2012. The 2011 second quarter fees included a $401,000 gain on sale of securities and a $258,000 reimbursement of attorney fees from a previous fidelity bond claim. No similar gains or reimbursements were booked in the second quarter of 2012.

Total non-interest expense decreased $711,000, or 8.7%, for the 2012 second quarter, and increased $1.7 million, or 10.8%, for the six months ended June 30, 2012, compared to the same periods in 2011. Salary and employee benefits decreased $137,000 when comparing second quarter 2012 to the same period in 2011, and increased $58,000 for the six months ended June 30, 2012 compared to the same period in 2011. For the 2012 second quarter, impairment on other real estate decreased $372,000, and realized loss on sale of other real estate owned increased $97,000. For the six months ended June 30, 2012, impairment on other real estate owned increased $2.0 million, and realized loss on sale of other real estate owned decreased $48,000. Appraisals on foreclosed properties, which were updated in the first quarter of 2012, reflected decreased values, primarily on commercial real estate, and required the impairment charges. There remains approximately $2.0 million in foreclosed property that is scheduled to be reappraised in the third quarter of this year. These updated appraisals could result in decreased market values, which would require additional impairment charges. All other non-interest expenses remained fairly consistent for the second quarter and six month periods in 2012 when compared to the same periods in 2011.

Income tax expense for the second quarter of 2012 was $623,000, compared to income tax expense of $361,000 in the second quarter of 2011. Income tax expense of $568,000 for the period ending June 30, 2011 decreased to a tax benefit of $360,000 for the same period in 2012. Management estimates the effective tax rate for the Company to be approximately 31.0% of pre-tax income for the period ended June 30, 2012.

COMPARING THE JUNE 30, 2012 STATEMENTS OF FINANCIAL CONDITION TO DECEMBER 31,
2011

In comparing consolidated financial condition at June 30, 2012 to December 31, 2011, total assets decreased $18.5 million to $603.3 million, while liabilities decreased $19.1 million to $536.5 million. Shareholders' equity increased $534,000 as a result of net income of $133,000, an increase in accumulated other comprehensive income of $343,000 and reissuance of treasury stock of $58,000.

Investment securities for USBI decreased $10.7 million, or 8.7%, during the first six months of 2012. Investments provide the Company with a stable form of liquidity while maximizing earnings yield. Loans, net of unearned income, decreased $27.8 million, from $403.4 million at December 31, 2011 to $375.6 million at June 30, 2012. Deposits increased $174,000, or 0.03%, during the first six months of 2012. Loans, net of unearned income at ALC, decreased $2.8 million, from $81.7 million at December 31, 2011 to $78.9 million at June 30, 2012. Loans, net of unearned income at the Bank, after consolidation eliminations, decreased $24.9 million from $321.6 million at December 31, 2011 to $296.7 million at June 30, 2012. Depressed market conditions and weak loan demand may continue to affect the Company's ability to generate loan growth, and loan volume could continue to decline.

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 June 30, 2012, the allowance for loan losses was $20.2 million, or 5.4% of loans net of unearned income, compared to $22.3 million, or 5.5% of loans net of unearned income, at December 31, 2011. The coverage ratio of the allowance for loan losses to non-performing assets decreased to 58.9% at June 30, 2012, compared to 62.5% at December 31, 2011. At June 30, 2012, loans on non-accrual increased $1.0 million, accruing loans past due 90 days or more decreased $0.6 million, and real estate acquired in settlement of loans decreased $1.8 million, each as compared to December 31, 2011. The balance in the allowance for loan losses related to loans evaluated collectively for impairment declined from $11.2 million at December 31, 2011 to $9.9 million at June 30, 2012. The decline resulted in part from a decline in historical losses for these loans, and from a decline in recorded investments in these loans of $16.0 million, as compared to December 31, 2011. The portion of the allowance for loan losses related to loans evaluated individually for impairment declined from $11.1 million at December 31, 2011 to $10.3 million at June 30, 2012. The recorded investment in these loans declined from $61.9 million at December 31, 2011 to $50.4 million at June 30, 2012.

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

                                                                  Consolidated
                                                June 30,          December 31,         June 30,
                                                  2012                2011               2011
Loans Accounted for on a Non-Accrual Basis      $  17,533        $       16,502        $  28,934
Accruing Loans Past Due 90 Days or More             1,661                 2,332            3,402
Real Estate Acquired in Settlement of Loans        15,005                16,774           25,270

Total                                           $  34,199        $       35,608        $  57,606
Non-Performing Assets as a Percentage of
Net Loans and Other Real Estate                      8.76 %                8.48 %          13.24 %

                                                                      FUSB
                                                June 30,          December 31,         June 30,
                                                  2012                2011               2011
Loans Accounted for on a Non-Accrual Basis      $  16,087        $       14,616        $  27,479
Accruing Loans Past Due 90 Days or More                41                   224            1,168
Real Estate Acquired in Settlement of Loans        12,004                12,606           19,141

Total                                           $  28,132        $       27,446        $  47,788
Non-Performing Assets as a Percentage of
Net Loans and Other Real Estate                      9.11 %                8.21 %          13.76 %

                                                                        ALC
                                                 June 30,          December 31,           June 30,
                                                   2012                2011                 2011
Loans Accounted for on a Non-Accrual Basis      $    1,446         $       1,886         $    1,455
Accruing Loans Past Due 90 Days or More              1,620                 2,108              2,234
Real Estate Acquired in Settlement of
Loans                                                3,001                 4,168              6,129

Total                                           $    6,067         $       8,162         $    9,818
Non-Performing Assets as a Percentage of
Net Loans and Other Real Estate                       7.41 %                9.50 %            11.22 %

Non-performing assets as a percentage of net loans and other real estate was 8.8% at June 30, 2012 and 8.5% at December 31, 2011. Loans on non-accrual status increased $1.0 million, accruing loans past due 90 days or more decreased $671,000 and real estate acquired in settlement of loans decreased $1.8 million from December 31, 2011. Other real estate owned as of June 30, 2012 consisted of six residential properties totaling $263,912 and forty commercial properties totaling $11.7 million at the Bank, and eighty-two residential properties totaling $2.7 million and thirteen commercial properties totaling $311,166 at ALC. Every effort is made to dispose of these properties in a timely manner, but these efforts continue to be hampered by poor economic conditions, and the real estate market remains severely depressed in all of our market areas. Management reviews these non-performing assets and reports to the Board of Directors of the Bank monthly. Loans past due 90 days or more and still accruing are reviewed by management and are allowed to continue accruing only when management believes that underlying collateral values and the financial strength of the borrowers are sufficient to protect the Bank from loss. If at any time management determines that there may be a loss of interest or principal, these loans will be changed to non-accrual status and their asset values downgraded.

LIQUIDITY AND CAPITAL RESOURCES

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

The Bank currently has up to $181.0 million in borrowing capacity from the FHLB and $7.8 million in established federal funds lines.

The Bank is required to maintain certain levels of regulatory capital. At June 30, 2012 and December 31, 2011, the Company and the Bank were in compliance with all regulatory capital requirements.

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