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, 2006

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 incorporation or organization)	(IRS Employer Identification No.)

131 West Front Street Post Office Box 249 Thomasville, AL	36784
(Address of principal executive offices)	(Zip Code)

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “larger accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨ Accelerated filer  x Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

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 November 6, 2006
Common Stock, $0.01 par value	6,323,704 shares

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

		PAGE
PART I. FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	4
Condensed Consolidated Statements of Financial Condition at September 30, 2006, (Unaudited) and December 31, 2005		4
Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2006, and 2005 (Unaudited)		5
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2006, and 2005 (Unaudited)		6
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006, and 2005 (Unaudited)		7
Notes to Condensed Consolidated Financial Statements		8
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	12
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	15
ITEM 4.	CONTROLS AND PROCEDURES	16
PART II. OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	16
ITEM 1A.	RISK FACTORS	16
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	17
ITEM 6.	EXHIBITS	17
Signature Page		18

2

FORWARD-LOOKING STATEMENTS

Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). In addition, United Security Bancshares, Inc. (“Bancshares”), through its senior management, from time to time makes forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995) concerning its expected future operations and performance and other developments. Such forward-looking statements are necessarily estimates reflecting Bancshares’ best judgment based upon current information and involve a number of risks and uncertainties, and various factors could cause results to differ materially from those contemplated by such forward-looking statements. Such factors could include those identified from time to time in Bancshares’ Securities and Exchange Commission filings and other public announcements, including the factors described in Bancshares’ Annual Report on Form 10-K for the year ended December 31, 2005. With respect to the adequacy of the allowance for loan losses for Bancshares, these factors include, but are not limited to, the rate of growth in the economy and the relative strength and weakness in the consumer and commercial credit sectors and in the real estate markets. Forward-looking statements speak only as of the date they are made, and Bancshares undertakes no obligation to revise forward-looking statements to reflect circumstances or events that occur after the dates the forward-looking statements are made, except as required by law.

3

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in Thousands)

	September 30, 2006			December 31, 2005
	(Unaudited)
ASSETS
Cash and Due from Banks	$	16,899		$	15,603
Interest-Bearing Deposits in Banks		14,810			5,950
Securities Available-for-Sale		122,554			110,765
Federal Home Loan Bank Stock		5,180			5,203
Loans, net of allowance for loan losses of $7,522 and $7,694, respectively		435,243			431,527
Premises and Equipment, net		18,984			19,425
Cash Surrender Value of Bank-Owned Life Insurance		10,430			10,143
Accrued Interest Receivable		5,406			5,210
Goodwill		4,098			4,098
Investment in Limited Partnerships		2,093			2,234
Other Assets		9,800			11,325
Total Assets	$	645,497		$	621,483
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	450,681		$	426,231
Short-Term Borrowings		6,940			1,248
Long-Term Debt		82,561			89,588
Other Liabilities		15,619			16,707
Total Liabilities	$	555,801		$	533,774
Shareholders’ Equity:
Minority Interest		(549	)		(174	)
Common Stock, par value $0.01 per share, 10,000,000 shares authorized; 7,317,560 shares issued		73			73
Surplus		9,233			9,233
Accumulated Other Comprehensive Loss		(564	)		(385	)
Retained Earnings		95,082			89,839
Less Treasury Stock: 990,376 and 889,711 shares at cost, respectively		(13,579	)		(10,877	)
Total Shareholders’ Equity		89,696			87,709
Total Liabilities and Shareholders’ Equity	$	645,497		$	621,483

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

4

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Thousands, Except Per Share Data)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
	(Unaudited)				(Unaudited)
INTEREST INCOME:
Interest and Fees on Loans	$	13,277	$	11,904	$	38,948	$	34,416
Interest on Investment Securities Available-for- Sale		1,696		1,401		4,778		4,350
Total Interest Income		14,973		13,305		43,726		38,766
INTEREST EXPENSE:
Interest on Deposits		3,117		2,109		8,372		5,885
Interest on Borrowings		1,105		947		3,148		2,698
Total Interest Expense		4,222		3,056		11,520		8,583
NET INTEREST INCOME		10,751		10,249		32,206		30,183
PROVISION FOR LOAN LOSSES		763		947		2,553		2,452
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		9,988		9,302		29,653		27,731
NON-INTEREST INCOME:
Service and Other Charges on Deposit Accounts		819		803		2,344		2,200
Other Income		729		691		1,872		1,817
Investment Securities Gains (Losses), Net		0		2		0		(25	)
Total Non-Interest Income		1,548		1,496		4,216		3,992
NON-INTEREST EXPENSE:
Salaries and Employee Benefits		3,794		3,490		10,904		10,418
Occupancy Expense		484		417		1,279		1,171
Furniture and Equipment Expense		342		320		1,012		983
Other Expense		1,702		1,483		4,810		4,541
Total Non-Interest Expense		6,322		5,710		18,005		17,113
INCOME BEFORE INCOME TAXES		5,214		5,088		15,864		14,610
PROVISION FOR INCOME TAXES		1,759		1,367		5,253		4,010
NET INCOME	$	3,455	$	3,721	$	10,611	$	10,600
BASIC AND DILUTED NET INCOME PER SHARE	$	0.54	$	0.58	$	1.66	$	1.65
DIVIDENDS PER SHARE	$	0.23	$	0.20	$	0.84	$	0.75

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

5

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in Thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
	(Unaudited)						(Unaudited)
Net income	$	3,455		$	3,721		$	10,611		$	10,600
Other comprehensive income (loss):
Change in unrealized holding (losses) gains for derivatives arising during period, net of tax of $0, $40, ($8), and $123, respectively		0			68			(13	)		205
Reclassification adjustment for net gains realized on derivatives in net income, net of taxes of $20, $20, $60, and $40, respectively		(33	)		(34	)		(101	)		(68	)
Change in unrealized holding gains (losses) on available-for-sale securities arising during period, net of tax (benefits) of $649, ($283), ($40), and ($504), respectively		1,082			(472	)		(65	)		(840	)
Reclassification adjustment for net (gains) losses realized on available-for-sale securities realized in net income, net of tax (benefits) of $0, $1, $0, and ($9), respectively		0			(1	)		0			16
Other comprehensive income (loss)		1,049			(439	)		(179	)		(687	)
Comprehensive income	$	4,504		$	3,282		$	10,432		$	9,913

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

6

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

	Nine Months Ended September 30,
	2006			2005
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	10,611		$	10,600
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		717			666
Net amortization of premiums and discounts		40			245
Provision for loan losses		2,553			2,452
Loss on sale of securities, net		0			25
Gain on sale of fixed assets, net		0			(103	)
Changes in assets and liabilities:
Decrease (increase) in other assets		1,273			(2,139	)
(Decrease) increase in other liabilities		(1,487	)		1,460
Total adjustment		3,096			2,606
Net cash provided by operating activities		13,707			13,206
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and prepayments of investment securities available-for-sale		22,396			19,279
Proceeds from sales of securities		0			2,500
Purchase of bank-owned life insurance		0			(950	)
Proceeds from redemption of Federal Home Loan Bank stock		768			0
Purchase of premises and equipment, net		(525	)		(492	)
Purchase of investment securities available-for-sale		(34,331	)		(16,001	)
(Decrease) in cash acquired in consolidation of limited partnership		(14	)		(73	)
Purchase of Federal Home Loan Bank stock		(745	)		0
Net change in loan portfolio		(6,145	)		(26,858	)
Net cash used in investing activities		(18,596	)		(22,595	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in customer deposits		24,450			30,142
Dividends paid		(5,368	)		(4,824	)
(Decrease) increase in borrowings		(1,335	)		537
Purchase of treasury stock		(2,702	)		(78	)
Net cash provided by financing activities		15,045			25,777
NET INCREASE IN CASH AND CASH EQUIVALENTS		10,156			16,388
CASH AND CASH EQUIVALENTS, beginning of period		21,553			13,949
CASH AND CASH EQUIVALENTS, end of period	$	31,709		$	30,337
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest	$	10,772		$	8,277
Income Taxes		5,652			5,442
NON-CASH TRANSACTIONS:
Other real estate acquired in settlement of loans	$	1,165		$	225

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

7

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. GENERAL

The accompanying unaudited condensed consolidated financial statements as of September 30, 2006, and 2005, include the accounts of United Security Bancshares, Inc. and its subsidiaries (the “Company”). All significant intercompany 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, 2006. 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2005. The accounting policies followed by the Company are 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, 2005.

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, 2006, and 2005. 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, 2006, and 2005, is the same as basic net income per share, because there are no potential common shares. Potential common shares consist of stock options and warrants.

The following table represents the earnings per share calculations for the three and nine-month periods ended September 30, 2006, and 2005 (dollars in thousands):

	Net Income		Weighted Average Shares	Net Income Per Share
For the Three Months Ended:
September 30, 2006	$	3,455	6,340,284	$	0.54
September 30, 2005	$	3,721	6,427,908	$	0.58
For the Nine Months Ended:
September 30, 2006	$	10,611	6,383,180	$	1.66
September 30, 2005	$	10,600	6,428,434	$	1.65

3. COMPREHENSIVE INCOME

Total comprehensive income consists of net income, the change in the unrealized gains or losses on the Company’s available-for-sale securities portfolio arising during the period, and the change in the effective portion of cash flow hedges marked to market. In the calculation of comprehensive income, certain reclassification adjustments are made to avoid double counting items that are displayed as part of net income for a period that also had been displayed as part of other comprehensive income in that period or earlier periods.

8

4. 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. The reportable segments were determined using the internal management reporting system. They are composed of the Company’s and First United Security Bank’s (the “Bank”) significant subsidiaries. The accounting policies for each segment are the same as those described in Note 2, Summary of Significant Accounting Policies, in the Company’s Annual Report on Form 10-K for the period ended December 31, 2005. 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:

	First United Security Bank		Acceptance Loan Company		All Other			Eliminations			Consolidated
	(In Thousands of Dollars)
For the three months ended September 30, 2006:
Net interest income	$	6,453	$	4,331	$	(33	)	$	0		$	10,751
Provision for loan losses		65		698		0			0			763
Total non-interest income		1,142		140		3,914			(3,648	)		1,548
Total non-interest expense		4,122		1,973		426			(199	)		6,322
Income before income taxes		3,408		1,800		3,455			(3,449	)		5,214
Provision for income taxes		1,195		559		5			0			1,759
Net income (loss)	$	2,213	$	1,241	$	3,450		$	(3,449	)	$	3,455
For the nine months ended September 30, 2006:
Net interest income	$	19,795	$	12,411	$	0		$	0		$	32,206
Provision for loan losses		526		2,027		0			0			2,553
Total non-interest income		3,448		391		11,586			(11,209	)		4,216
Total non-interest expense		11,933		5,654		831			(413	)		18,005
Income before income taxes		10,784		5,121		10,755			(10,796	)		15,864
Provision for income taxes		3,423		1,817		13			0			5,253
Net income (loss)	$	7,361	$	3,304	$	10,742		$	(10,796	)	$	10,611
Other significant items:
Total assets	$	635,090	$	138,967	$	103,119		$	(231,679	)	$	645,497
Total investment securities		121,914		0		640			0			122,554
Total loans, net		430,540		134,281		0			(129,578	)		435,243
Investment in subsidiaries		1,942		63		89,061			(90,988	)		78
Total interest income from external customers		24,881		18,811		34			0			43,726
Total interest income from affiliates		6,346		0		30			(6,376	)		0

9

	First United Security Bank		Acceptance Loan Company		All Other			Eliminations			Consolidated
	(In Thousands of Dollars)
For the three months ended September 30, 2005:
Net interest income	$	6,489	$	3,793	$	(33	)	$	0		$	10,249
Provision for loan losses		134		813		0			0			947
Total non-interest income		1,210		124		4,132			(3,970	)		1,496
Total non-interest expense		3,725		1,864		396			(275	)		5,710
Income before income taxes		3,840		1,240		3,703			(3,695	)		5,088
Provision for income taxes		805		557		5			0			1,367
Net income (loss)	$	3,035	$	683	$	3,698		$	(3,695	)	$	3,721
For the nine months ended September 30, 2005:
Net interest income	$	19,094	$	11,085	$	4		$	0		$	30,183
Provision for loan losses		364		2,088		0			0			2,452
Total non-interest income		3,222		429		11,278			(10,937	)		3,992
Total non-interest expense		11,422		5,326		821			(456	)		17,113
Income before income taxes		10,530		4,100		10,461			(10,481	)		14,610
Provision for income taxes		2,498		1,500		12			0			4,010
Net income (loss)	$	8,032	$	2,600	$	10,449		$	(10,481	)	$	10,600
Other significant items:
Total assets	$	612,940	$	130,185	$	99,508		$	(220,066	)	$	622,567
Total investment securities		119,671		0		685			0			120,356
Total loans, net		419,945		126,416		0			(124,919	)		421,442
Investment in subsidiaries		2,307		63		84,159			(86,451	)		78
Total interest income from external customers		21,639		17,096		31			0			38,766
Total interest income from affiliates		5,957		0		34			(5,991	)		0

5. DERIVATIVE FINANCIAL INSTRUMENTS

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and in connection with its interest rate risk management, investing, and trading activities. These financial instruments include commitments to extend credit and standby letters of credit.

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.

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 notional principal amount with at least one stream based on a specified floating-rate index. One interest rate swap was used by the Bank to convert floating-rate debt with a one month Libor rate index to a fixed rate five-year constant maturity treasury index. This swap is classified as a cash-flow hedge. The income derived from this instrument is recorded in net interest expense and resulted in a decrease in interest expense of $19,716 and $35,047 for the periods ended September 30, 2006, and 2005, respectively. This cash flow hedge with a notional value of $7 million at December 31, 2005, expired in the first quarter of 2006.

10

As allowed by SFAS No. 133, this interest rate swap qualified for treatment under the short-cut method of accounting; therefore, fluctuations in the fair value of the interest rate swap were recorded through other comprehensive income. Two cash-flow hedges with a notional amount of $18 million were terminated on March 31, 2005, that resulted in a $592,000 gain which is reported in other comprehensive income. This gain will be reclassified from other comprehensive income to income over the original remaining term of the swaps. During the third quarter of 2006, $53,755 was reclassified into income. The remaining balance not reclassified to income was $269,472 at September 30, 2006.

Two interest rate swaps with a total notional value of $10 million were used to convert fixed-rate brokered certificates of deposit to floating rate. On January 1, 2006, the Company began accounting for these interest rate swaps under hedge accounting. This required the Company to increase the carrying value of the two certificates of deposit by $87,280 during the third quarter of 2006, compared to reductions in the carrying value of $179,000 in the first quarter and $12,000 in the second quarter. Net cash flows from these swaps increased interest expense on certificates of deposit by $40,838 for the quarter ended September 30, 2006.

6. GUARANTEES, COMMITMENTS AND CONTINGENCIES

The Company is a defendant in certain claims and legal actions arising in the normal 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 consolidated financial position or results of operations of the Company.

The Bank’s exposure to credit loss in the event of nonperformance by the other party for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making these commitments as it does for on-balance sheet instruments. For interest rate swap transactions, and commitments to purchase or sell securities for forward delivery, the contract or notional amounts do not represent exposure to credit loss. The Bank controls the credit risk of these derivative instruments through credit approvals, limits, and monitoring procedures. Certain derivative contracts have credit risk for the carrying value plus the amount to replace such contracts in the event of counterparty default. All of the Bank’s financial instruments are held for risk management and not for trading purposes. During the period ending September 30, 2006, there were no credit losses associated with derivative contracts.

In the normal course of business there are outstanding commitments and contingent liabilities, such as commitments to extend credit, letters of credit, and others, which are not included in the consolidated financial statements. The financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the financial statements. A summary of these commitments and contingent liabilities is presented below.

	September 30, 2006		December 31, 2005
Standby Letters of Credit	$	2,479	$	4,124
Commitments to Extend Credit	$	49,430	$	62,615

Standby letters of credit are contingent commitments issued by the Company generally to guarantee the performance of a customer to a third party. The Company has recourse against the customer for any amount it is required to pay to a third party under a standby letter of credit. Revenues are recognized over the lives of the standby letters of credit. The potential amount of future payments the Company could be required to make under its standby letters of credit at September 30, 2006, is $2,479,000 and represents the Company’s total credit risk.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial properties.

Commitments to purchase securities for delayed delivery require the Bank to purchase a specified security at a specified price for delivery on a specified date. Similarly, commitments to sell securities for delayed delivery require the Bank to sell a specified security at a specified price for delivery on a specified date. Market risk arises from potential movements in security values and interest rates between the commitment and delivery dates. At September 30, 2006, there were no outstanding commitments to purchase and sell securities for delayed delivery.

11

In January of 2006, the Company sold its credit card portfolio in the amount of approximately $575,000. To facilitate this sale, the Company was required to guarantee certain accounts. The current balance of these accounts at September 30, 2006, was $137,700. The maximum exposure under this guaranty, which includes the credit limit on these accounts, amounts to $677,200.

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 the Company. The Company is the parent holding company of the Bank. The Bank operates a finance company, Acceptance Loan Company (“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, 2005.

The emphasis of this discussion is a comparison of assets, liabilities, and shareholder’s equity as of September 30, 2006, to year-end 2005, while comparing income and expense for the three and nine-month periods ended September 30, 2006, and 2005.

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, 2005.

COMPARING THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006, TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005

Net income during the third quarter decreased $266,000, or 7.1%, resulting in a decrease of basic net income per share from $0.58 to $0.54. For the first nine months, net income increased $11,000, or 0.10%, resulting in an increase of basic net income per share to $1.66. Annualized return on assets was 2.24% for the first nine months of 2006, compared to 2.35% for the same period during 2005. Average return on shareholders’ equity decreased to 16.10% for the first nine months of 2006, from 16.79% during the first nine months of 2005.

Interest income for the third quarter increased $1.7 million, or 12.5%, compared to the third quarter of 2005. The increase in interest income was primarily due to an increase in interest earned on loans. This increase is due to an overall increase in the average yield and an increase in the volume of loans outstanding. For the 2006 nine-month period, interest income increased $5.0 million, or 12.8%, over the same period last year. This increase in interest income was primarily due to an increase in interest earned on loans. This increase in loan income is due to both increases in volume and increases in yields.

Interest expense for the third quarter increased $1.2 million, or 38.1%, compared to the third quarter of 2005. Interest expense increased $2.9 million, or 34.2%, to $11.5 million for the first nine months of 2006 compared to $8.6 million for the first nine months of 2005. This increase in interest expense was due to an overall increase in the average rate paid on deposits, along with an increase in these deposits, and increased borrowing costs.

Net interest income increased $502,000, or 4.9%, for the third quarter of 2006 and $2.0 million, or 6.7%, for the first nine months of 2006, as a result of an increase in the yield on loans and securities, which was offset by an increase in interest paid on deposits.

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The provision for loan losses was $763,000, or 0.70%, annualized of average loans in the third quarter of 2006, compared to $947,000, or 0.90%, annualized of average loans in the third quarter of 2005. The provision for loan losses increased to $2,553,000 year-to-date 2006 compared to $2,452,000 in 2005. Charge-offs exceeded recoveries by $1,020,000 for the quarter, an increase of approximately $253,000 over the same period in the prior year.

Total non-interest income (excluding security gains and losses) increased $54,000, or 3.6%, for the third quarter of 2006 and $199,000, or 5.0%, for the first nine months of 2006. This increase is attributable to increases in service charges on deposit accounts.

Total non-interest expense increased $612,000, or 10.7%, in the third quarter of 2006. Total non-interest expense increased $892,000, or 5.2%, for the first nine months of 2006 compared to 2005. This increase year-to-date related primarily to an increase in salaries and employee benefits as a result of normal merit increases and higher benefit costs.

Income tax expense for the third quarter of 2006 increased $392,000 over the third quarter of 2005. Income tax expense for the first nine months of 2006 increased $1,243,000 over the first nine months of 2005. The increase during the first nine months of 2006 compared to 2005 resulted from higher levels of taxable income, and a decrease in low-income housing tax credits for 2006. Management estimates the effective tax rate for the Company to be approximately 33% of pre-tax income for the remainder of the year.

COMPARING THE SEPTEMBER 30, 2006, STATEMENT OF FINANCIAL CONDITION TO DECEMBER 31, 2005

In comparing financial condition at December 31, 2005, to September 30, 2006, total assets increased $24.0 million to $645.5 million, while liabilities increased $22.0 million to $555.8 million. Shareholders’ equity increased $2.0 million as a result of earnings in excess of dividends and other comprehensive loss as well as an increase in treasury stock during the first nine months of 2006.

Investment securities increased $11.8 million, or 10.6%, during the first nine months of 2006. Investments provide the Company with a stable form of liquidity while maximizing earnings yield. Loans, net of unearned income, increased $3.5 million, from $439.2 million at December 31, 2005, to $442.8 million at September 30, 2006, as a result of continued construction and real estate development in the trade areas served by the Company. Deposits increased $24.5 million, or 5.7%, during the first nine months of 2006.

CREDIT QUALITY

At September 30, 2006, the allowance for loan losses was $7.5 million, or 1.7%, of loans net of unearned income, compared to $7.4 million, or 1.7%, of loans net of unearned income at September 30, 2005, and $7.7 million, or 1.8%, of loans net of unearned income at December 31, 2005. The coverage ratio of the allowance for loan losses to non-performing assets decreased to 71.8% at September 30, 2006, compared to 89.3% at December 31, 2005, due to an increase in non-accrual loans and accruing loans past due 90 days or more, offset somewhat by a decrease in other real estate owned.

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

	Nine Months Ended September 30,
	2006			2005
Balance at Beginning of Period	$	7,694		$	7,061
Charge-Offs		(3,456	)		(2,785	)
Recoveries		731			643
Net Loans Charged-Off		(2,725	)		(2,142	)
Additions Charged to Operations		2,553			2,452
Balance at End of Period	$	7,522		$	7,371

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Net charge-offs for the nine months ended September 30, 2006, were $2.7 million, or 0.82%, of average loans, on an annualized basis, an increase of 27.2%, or $583,000, from the charge-offs of $2.1 million, or 0.69%, of average loans, on an annualized basis, reported a year earlier. The provision for loan losses for the first nine months of 2006 was $2.6 million compared to $2.5 million in the first nine months of 2005.

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.

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

	September 30, 2006			December 31, 2005			September 30, 2005
Loans Accounted for on a Non-Accrual Basis	$	7,657		$	5,662		$	1,556
Accruing Loans Past Due 90 Days or More		1,518			1,203			249
Real Estate Acquired in Settlement of Loans		1,304			1,750			1,610
Total	$	10,479		$	8,615		$	3,415
Non-Performing Assets as a Percentage of Net Loans and Other Real Estate		2.36	%		1.95	%		0.79	%

Loans accounted for on a non-accrual basis increased $6.1 million since September 30, 2005, and $2.0 million since December 31, 2005. Two loans associated with the same customer that totaled approximately $3.4 million accounted for the increase in non-accrual loans since December 31, 2005. Accruing loans past due 90 days or more increased $1.3 million, compared to September 30, 2005, and $315,000 since December 31, 2005. Real estate acquired in settlement of loans decreased $306,000 since September 30, 2005, and $446,000 since December 31, 2005.

Impaired loans totaled $7.7 million and $5.7 million as of September 30, 2006, and December 31, 2005, respectively. There were no impaired loans at September 30, 2005. There was approximately $783,000 and $816,000 in the allowance for loan losses specifically allocated to these impaired loans at September 30, 2006, and December 31, 2005, respectively. In prior years management disclosed only large non-performing loans analyzed on an individual basis as impaired. Starting in December 2005 management decided to disclose all loans on non-accrual status as impaired, which resulted in the large increase in impaired loans when comparing September 2005 to September 2006.

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 $166.5 million in borrowing capacity from the Federal Home Loan Bank and $35.0 million in established federal fund lines.

The Bank is required to maintain certain levels of regulatory capital. At September 30, 2006, and December 31, 2005, the Company and the Bank were in compliance with all regulatory capital requirements.

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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. 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 consolidated financial position or results of operations of the Company.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary function of asset and liability management is to assure adequate liquidity and to maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities. Liquidity management involves the ability to meet day-to-day cash flow requirements of the Bank’s customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs. Without proper liquidity management, the Bank would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the needs of the communities it serves. Interest rate risk management focuses on the maturity structure of assets and liabilities and their repricing characteristics during changes in market interest rates. Effective interest rate sensitivity management ensures that both assets and liabilities respond to changes in interest rates within an acceptable time frame, thereby minimizing the effect of such interest rate movements on the net interest margin.

The asset portion of the balance sheet provides liquidity primarily from loan principal payments and maturities and through sales, maturities, and principal payments from the investment portfolio. Other short-term investments such as federal funds sold are additional sources of liquidity. Loans maturing or repricing in one year or less amounted to $156.5 million at December 31, 2005, and $171.3 million at September 30, 2006.

Investment securities that are forecast to mature or reprice over the next twelve months total $19.0 million, or 15.5% of the investment portfolio as of September 30, 2006.

Although the majority of the securities portfolio has legal final maturities longer than 10 years, the entire portfolio consists of securities that are readily marketable and easily convertible into cash. As of September 30, 2006, the bond portfolio had an expected average maturity of 3.8 years, and approximately 71% of the $123 million in bonds were expected to be repaid within 5 years. However, management does not rely solely upon the investment portfolio to generate cash flows to fund loans, capital expenditures, dividends, debt repayment, and other cash requirements. Instead, these activities are funded by cash flows from operating activities and increases in deposits and short-term borrowings.

The liability portion of the balance sheet provides liquidity through interest bearing and non-interest bearing deposit accounts. Federal funds purchased, Federal Home Loan Bank advances, securities sold under agreements to repurchase, and short-term and long-term borrowings are additional sources of liquidity. Liquidity management involves the continual monitoring of the sources and uses of funds to maintain an acceptable cash position. Long-term liquidity management focuses on considerations related to the total balance sheet structure.

The Bank, at September 30, 2006, had long-term debt and short-term borrowings that, on average, represented 13.7% of total liabilities and equity, compared to 15.0% at year-end 2005.

Interest rate sensitivity is a function of the repricing characteristics of the portfolio of assets and liabilities. These repricing characteristics are the time frames during which the interest-bearing assets and liabilities are subject to changes in interest rates, either at replacement or maturity, during the life of the instruments. Sensitivity is measured as the difference between the volume of assets and the volume of liabilities in the current portfolio that are subject to repricing in future time periods. These differences are known as interest sensitivity gaps and are usually calculated for segments of time and on a cumulative basis.

Measuring Interest Rate Sensitivity: Gap analysis is a technique used to measure interest rate sensitivity at a particular point in time, an example of which is presented below. Assets and liabilities are placed in gap intervals based on their repricing dates. Assets and liabilities for which no specific repricing dates exist are placed in gap intervals based on management’s judgment concerning their most likely repricing behaviors. Interest rate derivatives used in interest rate sensitivity management also are included in the applicable gap intervals.

A net gap for each time period is calculated by subtracting the liabilities repricing in that interval from the assets repricing. A positive gap – more assets repricing than liabilities – will benefit net interest income if rates are rising and will detract from net interest income in a falling rate environment. Conversely, a negative gap – more liabilities repricing than assets – will benefit net interest income in a declining interest rate environment and will detract from net interest income in a rising interest rate environment.

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Gap analysis is the simplest representation of the Bank’s interest rate sensitivity. However, it cannot reveal the impact of factors such as administered rates, pricing strategies on consumer and business deposits, changes in balance sheet mix, or the effect of various options embedded in balance sheet instruments.

On a monthly basis, the Bank simulates how changes in short- and long-term interest rates will impact future profitability as reflected by changes in the Bank’s net interest margin.

Also on a monthly basis, the Bank calculates how changes in interest rates would impact the market value of its assets and liabilities, as well as changes in long-term profitability. The process is similar to assessing short-term risk but is measured over a five-year time period which allows for a more comprehensive assessment of longer-term repricing and cash flow imbalances that may not be captured by short-term net interest margin simulation. The results of these calculations are representative of long-term interest rate risk, both in terms of changes in the present value of the Bank’s assets and liabilities, as well as long-term changes in core profitability.

As part of the ongoing monitoring of interest-sensitive assets and liabilities, the Bank enters into various interest rate contracts (“interest rate protection contracts”) to help manage the Bank’s interest sensitivity. These contracts generally have a fixed notional principal amount and include interest rate swaps where the Bank typically receives or pays a fixed-rate and a counterparty pays or receives a floating-rate based on a specified index, and interest rate caps and floors purchased where the Bank receives interest if the specified index falls below the floor rate or rises above the cap rate. All interest rate swaps represent end-user activities and are designed as hedges. The interest rate risk factor in these contracts is considered in the overall interest management strategy and the Company’s interest risk management program. The income or expense associated with interest rate swaps, caps, and floors classified as hedges ultimately are reflected as adjustments to interest income or expense. Changes in the estimated market value of interest rate protection contracts are reflected in either the Bank’s income statement or balance sheet.

ITEM 4. CONTROLS AND PROCEDURES

As of September 30, 2006, the end of the period covered by this report, the Company’s management carried out an evaluation, under the supervision and with the participation of its Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) or Rule 15d-15(e). Based upon that evaluation, the Company’s management, including the Chief Executive Officer and Principal 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 Securities and Exchange Commission filings.

There have been no significant changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2006, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is a defendant in certain claims and legal actions arising in the normal 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 consolidated financial position or results of operations of the Company.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect the Company’s business, financial condition, or future results. The risks described in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect the Company’s business, financial condition, and/or operating results.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth purchases made by or on behalf of the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Securities Exchange Act of 1934, of shares of the Company’s common stock.

Issuer Purchases of Equity Securities

Period	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share			(c) Total Number of Shares Purchased as Part of Publicly Announced Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Programs(1)
July 1 – July 31	33,336	(2)	$	27.86	(2)	30,036	551,328
August 1 – August 31	1,900	(3)	$	27.51	(3)	1,900	549,428
September 1 – September 30	5,108	(3)	$	27.44	(3)	5,108	544,320
Total	40,344		$	27.79		37,044	544,320

(1) On January 19, 2006, the Board of Directors approved a share repurchase program. Under the repurchase program, the Company is authorized to repurchase up to 642,785 shares of common stock before December 31, 2007, the expiration date of the repurchase program.

(2) 3,300 shares were purchased in open-market transactions by an independent trustee for the United Security Bancshares Inc. Employee Stock Ownership Plan (With 401(k) Provisions), and 30,036 shares were purchased under the share repurchase program.

(3) The shares were purchased under the share repurchase program.

ITEM 6. EXHIBITS

The exhibits listed in the Index to Exhibits on page 19 are filed herewith and are incorporated herein by reference.

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SIGNATURES

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: November 7, 2006
BY:	/s/ Robert Steen
	Robert Steen
	Its Assistant Vice President, Assistant Treasurer, Principal Financial Officer, and Principal Accounting Officer (Duly Authorized Officer and Principal Financial Officer)

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INDEX TO EXHIBITS

Exhibit No.	Description
3.1	Certificate of Incorporation of United Security Bancshares, Inc., incorporated herein by reference to the Exhibits to Form 10-Q for the quarter ended September 30, 1999.
3.2(a)	Amended and Restated Bylaws of United Security Bancshares, Inc., incorporated herein by reference to the Exhibits to Form 10-Q for the quarter ended June 30, 2006.
3.2(b)	First Amendment to the Amended and Restated Bylaws of United Security Bancshares, Inc., incorporated herein by reference to the Exhibits to Form 10-Q for the quarter ended June 30, 2006.
31.1(a)	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.1(b)	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
32	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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