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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 September 30, 2002

Commission File Number: 0-14549

United Security Bancshares, Inc.
(Exact name of registrant as specified in its charter)

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 o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)

The accompanying notes are an integral part of these consolidated statements.

3

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except per Share Data)

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)

The accompanying notes are an integral part of these Consolidated statements.

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.      GENERAL

The accompanying unaudited condensed consolidated financial statements as of September 30, 2002, and 2001, 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, 2002. 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, 2001, 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, 2001, 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 and nine-month periods ended September 30, 2002, and 2001. Common stock outstanding consists of issued shares less treasury stock. Diluted net income per share for the three and nine-month periods ended September 30, 2002, and 2001, 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.

The following table represents the earnings per share calculations for the three and nine-month periods ended September 30, 2002, and 2001:

3.      COMPREHENSIVE INCOME

Comprehensive income is a measure of all changes in equity of an enterprise that result 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 is to be recorded as an adjustment to a separate component of shareholders’ equity, net of income tax effect. This change in unrealized gain serves to increase or decrease comprehensive income. The following table represents comprehensive income and its changes for the three and nine-month periods ended September 30, 2002, and 2001:

4.      RECENT ACCOUNTING PRONOUNCEMENTS

The Company adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, on January 1, 2001. As part of the adoption of the standard, the Company recorded a net-of-tax cumulative effect adjustment in accumulated other comprehensive income of $24,000 to recognize at fair value all derivatives that are designated as cash-flow hedging instruments, and recorded a cumulative effect adjustment to earnings of $200,000 to recognize at fair value all derivatives, which did not achieve hedge accounting under this standard.

In July 2001, the FASB issued Statement No. 141, “Business Combinations” (SFAS No. 141), and Statement No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after September 30, 2001. SFAS No. 141 also specifies the criteria for intangible assets acquired in a purchase method business combination to be recognized and reported apart from goodwill. SFAS No. 142 requires companies to no longer amortize goodwill and intangible assets with indefinite useful lives, but instead test these assets for impairment at least annually in accordance with the provisions of SFAS No. 142.

The Company adopted the provisions of SFAS No. 142 effective January 1, 2002. As of the date of adoption, The Company had unamortized goodwill in the amount of $4.1 million which was subject to the transition provisions of SFAS No. 142. As part of its adoption of SFAS No. 142, the Company has performed a transitional impairment test on its goodwill assets, which indicated that no impairment charge was required. The Company does not currently have any other indefinite-lived intangible assets recorded in its statement of financial condition. In addition, no material reclassifications or adjustments to the useful lives of finite-lived intangible assets were made as a result of adopting the new guidance. The full impact of adopting SFAS No. 142 is expected to result in an increase in net income of approximately $353,000 or approximately $.11 per share in 2002 as a result of the Company no longer having to amortize goodwill against earnings. Assuming retroactive adoption of SFAS No. 142, net income for the quarter ended September 30, 2001, nine months ended September 30, 2001 and the year ended December 31, 2001 would have been $2.0 million, $5.2 million and $6.9 million, respectively, and diluted earnings per share would have been $.58, $1.46 and $1.98 for the same periods, respectively. The following table sets forth the reconcilement of net income and earnings per share excluding goodwill amortization for the quarter ended September 30, 2001, nine months ended September 30, 2001 and year ended December 31, 2001:

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:

6.      DERIVATIVE FINANCIAL INSTRUMENTS

The Bank’s principal objective 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 forcasted 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 caused 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 five-year constant maturity treasury index.

Pursuant to SFAS No. 133, the Company has accounted for certain interest rate swaps as cash flow hedges, and recognized a cumulative effect transition adjustment (net of tax) to decrease other comprehensive income (“OCI”) of approximately $24,000 on January 1, 2001. The transition adjustment to OCI represents net unrealized losses on derivative instruments. Cumulative gains in future cash flows associated with these interest rate swaps are expected to offset unrealized losses included on OCI. 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 transactions that are probable of not occurring. The maturity of the interest rate swaps varies from one to two years.

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, 2001, consolidated financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 2001.

The emphasis of this discussion is a comparison of Assets, Liabilities, and Capital as of September 30, 2002, to year-end 2001, while comparing income and expense for the three and nine-month periods ended September 30, 2002, and 2001.

All yields and ratios presented and discussed herein are not presented on a tax-equivalent basis.

Interest income increased slightly to $11.9 million for the third quarter of 2002 from $11.8 million for the third quarter of 2001. Interest income decreased $1.8 million, or 5.0% to $34.3 million for the first nine months of 2002 compared to $36.1 million for the first nine months of 2001. The decrease in interest income was due to decreases in interest earned on loans and investments. This decrease is due to an overall decrease in the average yield, which offset an increase in the volume of loans outstanding.

Interest expense decreased $712,000, or 16% to $3.8 million for the third quarter of 2002 from $4.5 million for the third quarter of 2001. Interest expense decreased $3.5 million, or 24% to $10.9 million for the first nine months of 2002 compared to $14.4 million for the first nine months of 2001. 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 primarily in borrowings during the same period.

Net interest income increased $797,000, or 11% for the third quarter of 2002 and $1.7 million, or 7.7% for the first nine months of 2002 as a result of increased net interest margins and net yield on earning assets.

The provision for loan losses was $960,000 or 1.1% annualized of average loans in the third quarter of 2002, compared to $1.14 million or 1.4% annualized of average loans in the third quarter of 2001. The loan loss provision decreased slightly compared to the prior year due to the decreased charge-offs and improved credit quality at the finance company subsidiary. For the first nine months of 2002, the provision for loan losses was $2.97 million or 1.15% annualized of average loans, compared to $3.80 million or 1.59% annualized of average for the first nine months of 2001. The loan loss provision decreased compared to the prior year due primarily to the improved management of the loan portfolio at the finance company subsidiary.

Total non-interest income decreased slightly, $69,000, or 5.2% to $1.25 million for the third quarter of 2002 from $1.32 million for the third quarter of 2001. Total non-interest income was $3.6 million for the first nine months of 2002, which remained basically unchanged from the period a year ago.

Total non-interest expense decreased $54,000, or 1.1% for the third quarter of 2002 to $4.73 million from $4.78 million. The slight decrease is a result of slightly lower salaries and benefits costs, furniture and equipment expense and other non-interest expense, including goodwill amortization. Total non-interest expense decreased slightly for the first nine months of 2002.

Income tax expense increased $233,000 or 31% during the third quarter of 2002 as compared to the same period a year ago. Income tax expense increased $718,000 or 37% over the first nine months of 2001. The increase during the third quarter and first nine months of 2002 compared to 2001 resulted from higher levels of taxable income. United Security’s effective tax rate for the first nine months of 2002 and 2001 were 27.7% and 27.6%, respectively as the Company continues to realize tax benefits primarily from tax-exempt securities and low income housing tax credits.

For the third quarter, net income increased $730,000, or 38%, resulting in an increase of basic net income per share to $0.82.

For the first nine months, net income increased $2.0 million, or 41%, resulting in an increase of basic net income per share to $2.12. Annualized return on assets was 1.75% compared to 1.27% for the same period during 2001. Average return on stockholders’ equity increased to 14.26% from 9.56%. United Security discontinued the amortization of goodwill in accordance with SFAS 142 effective January 1, 2002. As displayed in Note 4, adjusting for this impact, net income for the first nine months of 2001 would have increased $265,000, or $0.08 per share.

COMPARING THE SEPTEMBER 30, 2002, STATEMENT OF FINANCIAL CONDITION TO DECEMBER 31, 2001

In comparing financial condition at December 31, 2001, to September 30, 2002, total assets increased $19.8 million to $542.9 million, while liabilities increased $19.0 million to $476.9 million. Shareholders’ equity increased $756,000 as a result of earnings in excess of dividends during the periods, offset by an additional repurchase of approximately 161,400 shares during the first nine months of 2002 as a part of the stock repurchase plan United Security initiated during May 2001.

Investment securities increased $18.8 million, or 14% during the first nine months of 2002 as a result of deployment of operating cash flows and re-investment of lower cost funds. Investments provide United Security with a stable form of liquidity while maximizing earnings yield. Loans, net of unearned income increased $6.7 million, or 2.0% during the first nine months of 2002 as result of continued construction and real estate development in the trade areas served by United Security. Deposits decreased less than 1% during the first nine months of 2002 as a result of less aggressive pricing of deposits, based on the current asset-liability management strategy of the Company.

CREDIT QUALITY

At September 30, 2002, the allowance for loan losses was $6.3 million, or 1.81% of loans net of unearned income, compared to $6.5 million, or 2.0% of loans net of unearned income at September 30, 2001 and $6.6 million, or 1.94% of loans net of unearned income at December 31, 2001. The coverage ratio of the allowance for loan losses to non-performing assets decreased to 66.79% at September 30, 2002, compared to 104.9% at December 31, 2001, primarily as a result of an addition of two large commercial loans to non-accrual status during 2002.

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

Net charge-offs for the nine months ended September 30, 2002, were $3.3 million or 1.92% of average loans, on an annualized basis, a decrease of $512,000 from the $3.8 million or 2.39% annualized of average loans reported a year earlier. The provision for loan losses for the first nine months of 2002 was $3.0 million compared to $3.8 million in the first nine months of 2001, primarily as a result of improved credit quality at the finance company subsidiary.

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 September 30, 2002, 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):

Loans accounted for on a non-accrual basis increased $4.2 million since September 30, 2001 and $3.6 million since December 31, 2001. This increase is primarily related to two large commercial loans, which the bank has moved to non-accrual status. The bank has evaluated the loans in accordance with SFAS 114 and has determined that no additional specific reserve needs to be provided for at this time. Accruing loans past due 90 days or more decreased $2.7 million, compared to September 30, 2001, and decreased $791,000 since December 31, 2001. This decrease is primarily the result of decreased past dues at the finance company subsidiary as a result of improved management of the loan portfolio. Real estate acquired in settlement of loans increased $420,000 since September 30, 2001 and $278,000 since December 31, 2001 as a result of increased foreclosures.

LIQUIDITY AND CAPITAL RESOURCES

The Bank’s primary sources of funds are customer deposits, 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 $130.0 million in borrowing capacity from the Federal Home Loan Bank and $30 million in established Federal Funds Lines.

The Bank is required to maintain certain levels of regulatory capital. At September 30, 2002, and December 31, 2001, 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.

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, 2001, is hereby incorporated herein by reference.

Within the 90 days prior to this report, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief 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 SEC filings. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date the Company completed its evaluation.

PART II.      OTHER INFORMATION

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.

SIGNATURE PAGE

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.

CEO SECTION 302 CERTIFICATION

I, R. Terry Phillips, certify that:

CFO SECTION 302 CERTIFICATION

I, Robert Steen, certify that: