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 June 30, 2003 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 6/30/03 Common Stock, $0.01 par value 6,432,274 shares UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION PAGE ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Statements of Financial Condition at June 30, 2003, and December 31, 2002 3 Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2003, and 2002 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003, and 2002 5 Notes to Condensed Consolidated Financial Statements 6 The Condensed Consolidated Financial Statements Furnished Have Not Been Audited by Independent Public Accountants, but Have Been Reviewed by Our Independent Auditor, and Reflect, in the Opinion of Management, all Adjustments Necessary for a Fair Presentation of Financial Condition and the Results of Operations for the Periods Presented ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17 ITEM 4. CONTROLS AND PROCEDURES 17 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 18 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18 SIGNATURE PAGE 19 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in Thousands) ASSETS June 30, December 31, 2003 2002 (Unaudited) Cash and Due from Banks $ 12,599 $ 11,576 Interest-Bearing Deposits in Banks 5,201 5,166 Securities Available for Sale 134,123 134,530 Loans, net of allowances for loan losses of $6,536 and $6,623 respectively 353,997 351,434 Premises and Equipment, net 11,257 10,834 Accrued Interest Receivable		 4,474 4,353 Investment in Limited Partnerships	 3,658 3,874 Other Assets 16,507 13,551 Total Assets $541,816 $535,318 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits $367,608 $353,100 Short-Term Borrowings 2,349 2,391 Long-Term Debt				 95,814 	 105,874 Other Liabilities 6,703 6,921 Total Liabilities $472,474 $468,286 Shareholders' Equity: Common stock, par value $0.01 per share; 10,000,000 shares authorized; 7,317,560 and 7,313,460 issued, respectively 73 73 Surplus 9,233 9,159 Accumulated other comprehensive income 1,369 1,860 Retained Earnings 69,416 66,689 Less Treasury Stock: 885,286 and 885,286 shares, at cost, respectively (10,749) (10,749) Total Shareholders' Equity 69,342 67,032 Total Liabilities and Shareholders' Equity $541,816 $535,318 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 Six Months Ended June 30, June 30, 2003 2002 2003 2002 (Unaudited) (Unaudited) INTEREST INCOME: Interest and Fees on Loans $ 9,844 $ 9,317 $ 19,382 $ 18,462 Interest on Securities 1,562 1,914 3,130 4,010 Total Interest Income 11,406 11,231 22,512 22,472 INTEREST EXPENSE: Interest on Deposits 1,858 2,402 3,823 4,984 Interest on Borrowings 1,020 1,034 2,103 2,087 Total Interest Expense 2,878 3,436 5,926 7,071 NET INTEREST INCOME 8,528 7,795 16,586 15,401 PROVISION FOR LOAN LOSSES 1,007 1,172 1,998 2,008 Net Interest Income After Provision For Loan Losses 7,521 6,623 14,588 13,393 NONINTEREST INCOME: Service and Other Charges on Deposit Accounts 817 684 1,608 1,326 Other Income 564 539 1,016 863 Securities gains (losses), net 3 39 72 130 Total Noninterest Income 1,384 1,262 2,696 2,319 NONINTEREST EXPENSES: Salaries and Employee Benefits 3,192 2,819 6,263 5,835 Occupancy Expense 331 332 671 666 Furniture and Equipment Expense 328 336 665 676 Other Expenses 1,434 1,407 2,770 2,575 Total Noninterest Expense 5,285 4,894 10,369 9,752 INCOME BEFORE INCOME TAXES 3,620 2,991 6,915 5,960 PROVISION FOR INCOME TAXES 1,110 834 2,065 1,674 NET INCOME 2,510 2,157 4,850 4,286 BASIC NET INCOME PER SHARE $0.39 $0.33 $0.75 $0.65 DILUTED NET INCOME PER SHARE $0.39 $0.33 $0.75 $0.65 DIVIDENDS PER SHARE $0.17 $0.15 $0.33 $0.30 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) June 30, 2003 2002 (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 4,850 $ 4,286 Adjustments: Depreciation 464 526 Amortization of Premiums and Discounts, net 554 85 Provision for Losses on Loans 1,998 2,008 Gain on sale of securities, net (72) (130) Changes in Assets and Liabilities: Increase in Other Assets (2,682) (320) Decrease in Other Liabilities (81) (1,238) Total Adjustments 181 931 Net Cash Provided by Operating Activities 5,031 5,217 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from Maturities/Call and Paydowns Of Securities Available for Sale 40,554 35,355 Proceeds from Sales of Securities 16,339 0 Purchase of Insurance (168) 0 Purchase of Property and Equipment, Net (899) (1,081) Purchase of Securities Available for Sale (58,426) (40,384) Redemption of Federal Funds Sold 829 1,000 Net Increase in Loans (4,560) (5,376) Net Cash Used in Investing Activities (6,331) (10,486) CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in Customer Deposits, Net 14,508 (1,561) Exercise of Stock Options 74 164 Dividends Paid (2,123) (1,957) Purchase of Treasury Stock 0 (4,383) Increase in Borrowings, net (10,101) 3,921 Net Cash Provided by (Used in) Financing Activities 2,358 (3,816) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,058 (9,085) CASH AND CASH EQUIVALENTS, beginning of period 16,742 23,973 CASH AND CASH EQUIVALENTS, end of period 17,800 14,888 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 June 30, 2003, and 2002, 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, 2003. 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, 2002, 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, 2002, 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 six-month periods ended June 30, 2003, and 2002. Common stock outstanding consists of issued shares less treasury stock. Diluted net income per share for the three and six-month periods ended June 30, 2003, and 2002, 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 on 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 will receive one additional share for every share currently held. All periods have been presented and restated reflecting the stock split for comparative purposes. The following table represents the earnings per share calculations for the three and six-month periods ended June 30, 2003, and 2002: Net Income Net Per For the Three Months Ended Income Shares Share June 30, 2003(dollars in thousands): Net Income $2,510 Basic Net Income Per Share $2,510 6,432,274 $0.39 Dilutive Securities 0 0 Dilutive Earnings Per Share 2,510 6,432,274 $0.39 June 30, 2002: Net Income $2,157 Basic Net Income Per Share $2,157 6,536,151 $0.33 Dilutive Securities 0 0 Dilutive Earnings Per Share 2,157 6,536,151 $0.33 Net Income Net Per For the Six Months Ended Income Shares Share June 30, 2003(dollars in thousands): Net Income $4,850 Basic Net Income Per Share $4,850 6,431,119 $0.75 Dilutive Securities 0 0 Dilutive Earnings Per Share 4,850 6,431,119 $0.75 June 30, 2002: Net Income $4,286 Basic Net Income Per Share $4,286 6,581,931 $0.65 Dilutive Securities 0 0 Dilutive Earnings Per Share 4,286 6,581,931 $0.65 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 six-month periods ended June 30, 2003, and 2002: Three Months Six Months Ended Ended June 30, June 30, 2003 2002 2003 2002 Net Income $2,510 $2,157 $4,850 $4,286 Other Comprehensive Income, Net of Tax: Change in Unrealized Gain (loss) on Derivative Instruments (Net of Tax of $45, $34, $53, and $103 respectively) (83) 63 (99) 192 Change in Unrealized Gain on securities Available For Sale (Net of Tax of $72, $574, $211, and $440 respectively). (133) 1,066 (392) 818 Comprehensive Income $2,294 $3,286 $4,359 $5,296 4. RECENT ACCOUNTING PRONOUNCEMENTS In April 2002, the Company adopted FASB Statement of Financials Accounting Standards No. 145, "Recission of FASB Statements No. 4,44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections" (Statement 145). Statement 145 rescinds Statement 4, which requires all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. Provisions of Statement 145 related to the recission of Statement 4 were effective for financial statements issued after January 1, 2003. The adoption of the provisions of Statement 145 did not have a material impact on the results of operations, financial position or liquidity of the Company. In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Cost Associated with Exit or Disposal Activities" (Statement 146). Statement 146 requires companies to recognize costs associated with the exit or disposal of activities as they are incurred rather than at the date a plan of disposal or commitment to exit is initiated. Types of costs covered by Statement 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, facility closing, or other exit or disposal activity. Statement 146 will apply to all exit or disposal activities initiated after December 31, 2002. The adoption of the provisions of Statement 146 did not have a material impact on the Company's financial condition or results of operations. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (Interpretation 45). Interpretation 45 requires certain guarantees to be recorded at fair value. In general, Interpretation 45 applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, liability, or an equity security of the guaranteed party. The initial recognition and measurement provisions of Interpretation 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Interpretation 45 also requires new disclosures, even when the likelihood of making any payments under the guarantee is remote. These disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of Interpretation No. 45 did not have a material impact on the Company's financial results. As of June 30, 2003 the Company had standby letters of credit outstanding totaling approximately $852,000 compared to $843,000 at December 31, 2002, and commitments to extend credit of approximately $16 million compared to $22 million at December 31, 2002. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" (Interpretation 46). Interpretation 46 addresses consolidation by business enterprises of variable interest entities which have one or both of the following characteristics: (1) The equity investment at risk is not sufficient to permit the entity to finance its activities without additional support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity. (2) The equity investors lack one or more of the following essential characteristics of a controlling financial interest: (a) the direct or indirect ability to make decisions about the entity's activities through voting rights or similar rights, (b) the obligation to absorb the expected losses of the entity if they occur, which makes it possible for the entity to finance its activities, or (c) the right to receive the expected residual returns of the entity if they occur, which is the compensation for the risk of absorbing expected losses. Interpretation 46 does not require consolidation by transferors to qualifying special purpose entities. Interpretation 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company is currently assessing the impact of Interpretation No. 46 and has identified limited partnership investments in affordable housing projects that are considered variable interest. The company has provided funding as a limited partner and receives tax credit for any losses incurred by the projects based on partnership share. At June 30, 2003, the Company has approximately $3.7 million associated with these investments. The Company adjusts the carrying value of these investments for any losses or impairment incurred by the partnerships through earnings. Although these investments are considered variable interest entities under Interpretation 46, the Company has not yet determined how many of these entities, if any, will need to be consolidated. 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 June 30, 2003: Net Interest Income $ 5,514 $ 2,986 $ 28 $ 0 $ 8,528 Provision for Loan Losses 420 587 0 0 1,007 Total Noninterest Income 1,170 120 2,829 (2,735) 1,384 Total Noninterest Expense 3,405 1,703 279 (102) 5,285 Income(Loss) Before Income Taxes 2,859 816 2,578 (2,633) 3,620 Provision (Benefit) for Income Taxes 853 253 4 0 1,110 Net Income(Loss) $2,006 $ 563 $2,574 $ (2,633) $ 2,510 For the six months ended June 30, 2003: Net Interest Income $ 10,792 $ 5,736 $ 58 $ 0 $ 16,586 Provision for Loan Losses 769 1,229 0 0 1,998 Total Noninterest Income 2,345 219 5,361 (5,229) 2,696 Total Noninterest Expense 6,729 3,355 480 (195) 10,369 Income(Loss) Before Income Taxes 5,639 1,371 4,939 (5,034) 6,915 Provision (Benefit) for Income Taxes 1,646 414 5 0 2,065 Net Income(Loss) $3,993 $ 957 $4,934 $ (5,034) $ 4,850 Other Significant Items: Total Assets $537,938 $99,867 $71,736 $(167,725) $541,816 Total Investment Securities 132,747 0 1,376 0 134,123 Total Loans 354,844 94,232 0 (95,079) 353,997 Investment in Wholly-Owned Subsidiaries 2,718 110 65,886 (68,604) 110 Total Interest Income from External Customers 13,638 8,835 39 0 22,512 Total Interest Income from Affiliates 3,099 0 19 (3,118) 0 All Elimi- Consol- FUSB ALC Other nations idated For the Three Months Ended June 30, 2002: Net Interest Income $ 5,232 $ 2,512 $ 51 $ 0 $ 7,795 Provision for Loan Losses 515 657 0 0 1,172 Total Noninterest Income 993 218 2,452 (2,401) 1,262 Total Noninterest Expense 3,054 1,706 227 (93) 4,894 Income (loss) Before Income Taxes (tax benefit) 2,656 367 2,276 (2,308) 2,991 Provision for Income Taxes (tax benefit) 726 103 5 0 834 Net Income (loss) $ 1,930 $ 264 $ 2,271 $ (2,308) $ 2,157 For the Six Months Ended June 30, 2002: Net Interest Income $ 10,392 $ 4,907 $ 102 $ 0 $ 15,401 Provision for Loan Losses 854 1,154 0 0 2,008 Total Noninterest Income 2,060 185 4,765 (4,691) 2,319 Total Noninterest Expense 6,191 3,321 426 (186) 9,752 Income (loss) Before Income Taxes (tax benefit) 5,407 617 4,441 (4,505) 5,960 Provision for Income Taxes (tax benefit) 1,492 173 9 0 1,674 Net Income (loss) $ 3,915 444 4,432 (4,505) 4,286 Other Significant Items: Total Assets $521,481 $79,703 $66,503 $(144,034)$523,653 Total Investment Securities 142,491 0 2,734 0 145,225 Total Loans 343,480 75,366 0 (82,484) 336,362 Total Interest Income from External Customers 14,574 7,821 77 0 22,472 Total Interest Income from Affiliates 2,914 0 25 (2,939) 0 Investment in Wholly-Owned Subsidiaries (1,874) 0 60,642 (58,768) 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 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 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. 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" or the "Company"). United Security is the parent holding company of First United Security Bank (the "Bank"). The Bank operates a finance company, Acceptance Loan Company ("ALC"). United Security 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, 2002, consolidated financial statements. The emphasis of this discussion is a comparison of Assets, Liabilities, and Stockholders' Equity as of June 30, 2003, to year-end 2002, while comparing income and expense for the three and six-month periods ended June 30, 2003, and 2002. All yields and ratios presented and discussed herein are not presented on a tax-equivalent basis. Interest income increased $175,000, or 1.6% to $11.4 million for the second quarter of 2003 from $11.2 million for the second quarter of 2002. Interest income increased $40,000, or .2% to $22.5 million for the first six months of 2003 compared to $22.5 million for the first six months of 2002. This increase in interest income is due mainly to increases in the volume of loans outstanding offset by both a decrease in the volume of investment securities and also a decrease in yield on these securities. Interest expense decreased $558,000, or 16.2% to $2.9 million for the second quarter of 2003 from $3.4 million for the second quarter of 2002. Interest expense decreased $1.1 million, or 16.2% to $5.9 million for the first six months of 2003 compared to $7.1 million for the first six months of 2002. 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 both deposits and borrowings, during the same period. Net interest income increased $733,000, or 9.4% for the second quarter of 2003 and $1.2 million, or 7.7% for the first six months of 2003 as a result of an improvement of a 35 basis point net yield on earning assets, resulting from a decrease in the cost of interest-bearing deposits and a decrease in the cost of borrowed funds, offset by an increase in the volume of borrowed funds. The provision for loan losses was $1.0 million or 1.13% annualized of average loans in the second quarter of 2003, compared to $1.2 million or 1.37% annualized of average loans in the second quarter of 2002. The loan loss provision decreased slightly compared to the prior year due to the decreased charge- offs at the finance company subsidiary. For the first six months of 2003, the provision for loan losses decreased slightly to $2.0 million or 1.12% annualized of average loans, compared to $2.0 million or 1.50% annualized of average for the first six months of 2002. Total non-interest income increased $122,000, or 9.7% to $1.4 million for the second quarter of 2003 from $1.3 million for the second quarter of 2002. Total non-interest income increased to $2.7 million for the first six months of 2003. This was attributable to an increase in the service charges on deposits. Total non-interest expense increased $391,000, or 8.0% for the second quarter of 2003 to $5.3 million from $4.9 million. Total non-interest expense increased $617,000 for the first six months of 2003 compared to 2002. The increase is a result of higher salaries and benefits costs associated with the opening of a new branch office in the third quarter of 2002, higher benefit costs, and normal merit increases. Income tax expense increased $276,000 or 33% during the second quarter of 2003 as compared to the same period a year ago. Income tax expense increased $391,000 or 23% over the first six months of 2002. The increase during the first six months of 2003 compared to 2002 resulted from higher levels of taxable income. United Security's effective tax rate for the first six months of 2003 and 2002 were 29.9% and 28.1%, respectively as the Company continues to realize tax benefits primarily from tax-exempt securities and low income housing tax credits. For the second quarter, net income increased $353,000, or 16%, resulting in an increase of basic net income per share to $0.39. For the first six months, net income increased $564,000, or 13%, resulting in an increase of basic net income per share to $.75. Annualized return on assets was 1.79% compared to 1.63% for the same period during 2002. Average return on stockholders' equity increased to 14.32% from 13.36%. COMPARING THE JUNE 30, 2003, STATEMENT OF FINANCIAL CONDITION TO DECEMBER 31, 2002 In comparing financial condition at December 31, 2002, to June 30, 2003, total assets increased $6.5 million to $541.8 million, while liabilities increased $4.2 million to $472.5 million. Shareholders' equity increased $2.3 million as a result of earnings in excess of dividends during the first six months of 2003. Investment securities slightly decreased $407,000 during the first six months of 2003. Investments provide United Security with a stable form of liquidity while maximizing earnings yield. Loans, net of unearned income increased $2.6 million, or 1% during the first six months of 2003 as result of continued construction and real estate development in the trade areas served by United Security. Deposits increased 14.5 million or 4% during the first six months of 2003 as result of an increase in both interest and non-interest bearing products. CREDIT QUALITY At June 30, 2003, the allowance for loan losses was $6.5 million, or 1.83% of loans net of unearned income, compared to $6.0 million, or 1.76% of loans net of unearned income at June 30, 2002 and $6.6 million, or 1.85% of loans net of unearned income at December 31, 2002. The coverage ratio of the allowance for loan losses to non-performing assets increased to 82.62% at June 30, 2003, compared to 73.94% at December 31, 2002, primarily as a result of a decrease in non-accrual loans during the first six months of 2003. Activity in the allowance for loan losses is summarized as follows (amounts in thousands): Six Months Ended June 30, 2003 2002 Balance at Beginning of Period $6,623 $6,590 Charge-Offs 2,495 3,030 Recoveries (410) (468) Net Loans Charged-Off 2,085 2,562 Additions Charged to Operations 1,998 2,008 Balance at End of Period $6,536 $6,036 Net charge-offs for the six months ended June 30, 2003, were $2.1 million or 1.17% of average loans, on an annualized basis, a decrease of $477,000 from the $2.6 million or 1.51% annualized of average loans reported a year earlier. The provision for loan losses for the first six months of 2003 was $2.0 million compared to $2.0 million in the first six months of 2002. 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 June 30, 2003, 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): June 30, Dec. 31, June 30, 2003 2002 2002 Loans Accounted for on a Non-Accrual Basis $ 4,956 $ 6,228 $ 4,072 Accruing Loans Past Due 90 Days or More 461 1,433 1,614 Real Estate Acquired in Settlement of Loans 2,859 1,296 1,600 Total $ 8,276 $ 8,957 $ 7,286 Non-Performing Assets as a Percentage of Net Loans and Other Real Estate 2.28% 2.49% 2.12% Loans accounted for on a non-accrual basis decreased $1.3 million since December 31, 2002. Accruing loans past due 90 days or more decreased $972,000 from December 31, 2002. A significant portion of this decrease resulted from the foreclosure of one large commercial real estate loan and one large commercial loan charged to the allowance for loan losses. A favorable settlement was reached on another non-performing loan which was 100% reserved which reduced the provision for loan losses in the second quarter. Also, credit quality and performance of the loan portfolio at the finance company subsidiary continues to improve due to stricter underwriting standards. Real estate acquired in settlement of loans increased $1.3 million since June 30, 2002 and $1.6 million since December 31, 2002 as a result of the loan foreclosure mentioned above. At June 30, 2003, the recorded investment in loans that were considered impaired was $1,282,333 compared to $3,815,189 at December 31, 2002, all of which were on a non-accrual basis. There was approximately $192,350 and $573,161 at June 30, 2003 and December 31, 2002 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, 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 $120.2 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 June 30, 2003, and December 31, 2002, 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, 2002, is hereby incorporated herein by reference. ITEM 4. CONTROLS AND PROCEDURES As of June 30, 2003, the end of the quarter covered by this report, the Company carried out an evaluation, under the supervision and with the participation of management, including the chief executive officer and the chief financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, the chief executive officer and the chief financial officer concluded that the Company's disclosure controls and procedures were effective in timely alerting them to material information relating to the Company required to be included in the Company's periodic SEC filings. There have been no changes in the Company's internal controls over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal controls 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 13, 2003 the Annual Meeting of Shareholders of the Company was held at which shares of common stock represented at the Annual Meeting were voted in favor of the directors listed below as follows: Director				 For			Against 1. Dan R. Barlow			2,361,226			26,244 2. Linda H. Breedlove		2,351,231 		 36,239 3. Gerald P. Corgill		2,387,470			 0 4. Wayne C. Curtis			2,360,323			27,147 5. John C. Gordon			2,387,470			 0 6. William G. Harrison		2,383,255			 4,215 7. Hardie B. Kimbrough		2,375,970		 11,500 8. Jack W. Meigs			2,386,567			 903 9. R. Terry Phillips		2,371,807			15,663 10. Ray Sheffield			2,361,226			26,244 11. James C. Stanley 	2,387,470			26,244 12. Howard M. Whitted		2,387,470			 0 13. Bruce N. Wilson			2,371,326			16,144 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, filed herewith. Exhibit 31.2: Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. Exhibit 32: Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Created by Section 906 of the Sarbanes- Oxley Act of 2002, filed herewith. (b)	Report on Form 8-K, dated April 18, 2003, was filed on April 23, 2003, relating to the press release announcing financial results for the quarter ended March 31, 2003. Report on Form 8-K, dated June 20, 2003, was filed on June 23, 2003, relating to the press release announcing a 2-for-1 stock split payable to shareholders at close of business June 30, 2003. 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. UNITED SECURITY BANCSHARES, INC. DATE: August 13, 2003 BY: /s/ROBERT STEEN ROBERT STEEN Its Assistant Vice-President, Assistant Treasurer, and Principal Accounting Officer (Duly Authorized Officer and Principal Accounting Officer)