United States

Securities and Exchange Commission

Washington, D.C. 20549

_______________________________

Form 10-Q

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2012

_________________________

Commission File #0-16640

(Exact name of registrant as specified in its charter)

Michigan	38-2606280
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2723 South State Street, Ann Arbor, MI 48104

(Address of principal executive offices, including Zip Code)

Registrant's telephone number, including area code: (517) 423-8373

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 þNo o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þNo o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated Filer o	Accelerated filer o
Non-accelerated filer o (do not check if a smaller reporting company)	Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes oNo þ

As of October 26, 2012, there were outstanding 12,705,983 shares of the registrant's common stock, no par value.

Page 1

Forward-Looking Statements

This report contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and United Bancorp, Inc. Forward-looking statements are identifiable by words or phrases such as "outlook" or "strategy"; that an event or trend "may", "could", "will", "is likely", or is "probable or projected" to occur or "continue" or "is scheduled" or "on track" or that the Company or its management "anticipates", "believes", "estimates", "plans", "forecasts", "intends", "predicts ", or "expects" a particular result, or is "confident," "optimistic" or has an "opinion" that an event will occur, or other words or phrases such as "ongoing", "future", or "tend" and variations of such words and similar expressions. Such statements are based upon current beliefs and expectations and involve substantial risks and uncertainties which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These statements include, among others, statements related to deployment of liquidity and loan demand, future economic conditions, future investment opportunities, future levels of expenses associated with other real estate owned, real estate valuation, future recognition of income, future levels of nonperforming loans, the rate of asset dispositions, future capital levels, future dividends, market growth potential, future growth and funding sources, future liquidity levels, future capital levels, future profitability levels, future effects of modified or new accounting standards, future impacts of legal proceedings, compliance with our memorandum of understanding, the effects on earnings of changes in interest rates and the future level of other revenue sources. All of the information concerning interest rate sensitivity is forward-looking. All statements referencing future time periods are forward-looking.

Management's determination of the provision and allowance for loan losses, the appropriate carrying value of intangible assets (including mortgage servicing rights and deferred tax assets) and other real estate owned and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) involves judgments that are inherently forward-looking. There can be no assurance that future loan losses will be limited to the amounts estimated or that other real estate owned can be sold for its carrying value or at all. Our ability to fully comply with all of the provisions of our memorandum of understanding, sell other assets owned at their carrying value or at all, successfully implement new programs and initiatives, increase efficiencies, utilize our deferred tax asset, address regulatory issues, respond to declines in collateral values and credit quality, resume payment of dividends, and improve profitability is not entirely within our control and is not assured. The future effect of changes in the financial and credit markets and the national and regional economy on the banking industry, generally, and on United Bancorp, Inc., specifically, are also inherently uncertain. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("risk factors") that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. United Bancorp, Inc. undertakes no obligation to update, clarify or revise forward-looking statements to reflect developments that occur or information obtained after the date of this report.

Risk factors include, but are not limited to, the risk factors described in "Item 1A – Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2011. These and other factors are representative of the risk factors that may emerge and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

Page 2

Cross Reference Table

Item	Description		Page
Part I	Financial Information		4
	Item 1	Financial Statements	4
	(a)	Condensed Consolidated Balance Sheets (unaudited)	4
	(b)	Condensed Consolidated Statements of Operations (unaudited)	5
	(c)	Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited)	6
	(d)	Condensed Consolidated Statements of Shareholders' Equity (unaudited)	6
	(e)	Condensed Consolidated Statements of Cash Flows (unaudited)	7
	(f)	Notes to Condensed Consolidated Financial Statements (unaudited)	8
	Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	34
		Background	34
		Other Developments	35
		Executive Summary	36
		Financial Condition	38
		Results of Operations	46
		Liquidity and Capital Resources	57
		Critical Accounting Policies	59
	Item 3	Quantitative and Qualitative Disclosures about Market Risk	59
	Item 4	Controls and Procedures	59
Part II	Other Information		60
	Item 6	Exhibits	60
Signatures			60
Exhibit Index			61

Page 3

Part I – Financial Information

Item 1 – Financial Statements

(a)Condensed Consolidated Balance Sheets

In thousands of dollars	(unaudited)
	September 30,			December 31,
Assets	2012			2011
Cash and demand balances in other banks	$	16,247		$	15,798
Interest bearing balances with banks		52,029			91,428
Federal funds sold		-			366
Total cash and cash equivalents		68,276			107,592
Securities available for sale		198,069			173,197
FHLB Stock		2,571			2,571
Loans held for sale		11,766			8,290
Portfolio loans		591,808			563,702
Less allowance for loan losses		22,460			20,633
Net portfolio loans		569,348			543,069
Premises and equipment, net		10,793			10,795
Bank-owned life insurance		14,134			13,819
Accrued interest receivable and other assets		23,624			25,676
Total Assets	$	898,581		$	885,009
Liabilities
Deposits
Noninterest bearing deposits	$	159,333		$	139,346
Interest bearing deposits		616,692			625,510
Total deposits		776,025			764,856
FHLB advances payable		21,759			24,035
Accrued interest payable and other liabilities		3,961			2,344
Total Liabilities		801,745			791,235
Commitments and Contingent Liabilities		0			0
Shareholders' Equity
Preferred stock, no par value; 2,000,000 shares authorized, 20,600 shares outstanding; liquidation preference $1,000 per share		20,448			20,364
Common stock and paid in capital, no par value; 30,000,000 shares authorized; 12,705,983, and 12,697,265 shares issued and outstanding, respectively		85,614			85,505
Accumulated deficit		(11,585	)		(13,746	)
Accumulated other comprehensive income, net of tax		2,359			1,651
Total Shareholders' Equity		96,836			93,774
Total Liabilities and Shareholders' Equity	$	898,581		$	885,009
The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 4

(b)Condensed Consolidated Statements of Operations (unaudited)

	Three Months Ended						Nine Months Ended
In thousands of dollars, except per share data	September 30,						September 30,
Interest Income	2012			2011			2012			2011
Interest and fees on loans	$	7,917		$	7,918		$	23,695		$	24,253
Interest on securities
Taxable		618			739			1,988			2,043
Tax exempt		160			186			506			586
Interest on federal funds sold and balances with banks		36			63			133			204
Total interest income		8,731			8,906			26,322			27,086
Interest Expense
Interest on deposits		895			1,250			2,936			3,969
Interest on fed funds and other short term borrowings		-			-			-			11
Interest on FHLB advances		190			219			605			742
Total interest expense		1,085			1,469			3,541			4,722
Net Interest Income		7,646			7,437			22,781			22,364
Provision for loan losses		2,000			6,000			6,650			11,900
Net Interest Income after Provision for Loan Losses		5,646			1,437			16,131			10,464
Noninterest Income
Service charges on deposit accounts		496			486			1,378			1,500
Wealth Management fee income		1,319			1,226			3,855			3,780
Gains on securities transactions		-			-			4			-
Income from loan sales and servicing		2,803			1,610			7,299			4,540
ATM, debit and credit card fee income		517			550			1,583			1,619
Income from bank-owned life insurance		106			108			316			320
Other income		323			276			1,165			817
Total noninterest income		5,564			4,256			15,600			12,576
Noninterest Expense
Salaries and employee benefits		5,464			4,759			15,686			14,101
Occupancy and equipment expense, net		1,350			1,276			3,988			3,819
External data processing		250			392			764			1,041
Advertising and marketing		190			164			567			482
Attorney, accounting and other professional fees		416			476			1,654			1,342
Director fees		98			102			293			305
Expenses relating to ORE property and foreclosed assets		417			815			1,533			1,326
FDIC insurance premiums		292			288			883			1,021
Other expenses		823			812			2,249			2,366
Total noninterest expense		9,300			9,084			27,617			25,803
Income (Loss) Before Federal Income Tax		1,910			(3,391	)		4,114			(2,763	)
Federal income tax (benefit)		520			(1,291	)		1,097			(1,383	)
Net Income (Loss)	$	1,390		$	(2,100	)	$	3,017		$	(1,380	)
Preferred stock dividends and amortization		(285	)		(284	)		(856	)		(852	)
Income (Loss) Available to Common Shareholders	$	1,105		$	(2,384	)	$	2,161		$	(2,232	)
Basic and diluted earnings (loss) per share	$	0.09		$	(0.19	)	$	0.17		$	(0.18	)
Cash dividends declared per share of common stock	$	-		$	-		$	-		$	-
The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 5

(c)Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited)

	Three Months Ended					Nine Months Ended
In thousands of dollars	September 30,					September 30,
	2012		2011			2012			2011
Net income (loss)	$	1,390	$	(2,100	)	$	3,017		$	(1,380	)
Other comprehensive income (loss) net of tax:
Net change in unrealized gains on securities available for sale		576		36			711			1,188
Reclass adjustment for realized gains and related taxes		-		-			(3	)		-
Total comprehensive income (loss)	$	1,966	$	(2,064	)	$	3,725		$	(192	)
The accompanying notes are an integral part of these condensed consolidated financial statements.

(d)Condensed Consolidated Statements of Shareholders' Equity (unaudited)

	Three Months Ended						Nine Months Ended
In thousands of dollars	September 30,						September 30,
Total Shareholders' Equity	2012			2011			2012			2011
Balance at beginning of period	$	95,113		$	94,064		$	93,774		$	92,704
Net income (loss)		1,390			(2,100	)		3,017			(1,380	)
Other comprehensive income		576			36			708			1,188
Cash dividends paid on preferred shares		(258	)		(258	)		(772	)		(772	)
Other common stock transactions		15			64			109			66
Balance at end of period	$	96,836		$	91,806		$	96,836		$	91,806
The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 6

(e)Condensed Consolidated Statements of Cash Flows (unaudited)

	Nine Months Ended
In thousands of dollars	September 30,
	2012			2011
Cash Flows from Operating Activities
Net income (loss)	$	3,017		$	(1,380	)
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
Depreciation and amortization		4,070			2,756
Provision for loan losses		6,650			11,900
Gain on sale of loans		(6,945	)		(3,725	)
Proceeds from sales of loans originated for sale		271,598			155,182
Loans originated for sale		(268,129	)		(148,877	)
Gains on securities transactions		(4	)		-
Change in deferred income taxes		737			(33	)
Stock based compensation expense		112			101
Increase in cash surrender value of bank-owned life insurance		(316	)		(320	)
Change in investment in limited partnership		(224	)		(128	)
Change in accrued interest receivable and other assets		3,332			2,162
Change in accrued interest payable and other liabilities		1,791			(248	)
Net cash from operating activities		15,689			17,390
Cash Flows from Investing Activities
Securities available for sale
Purchases		(80,231	)		(62,208	)
Sales		2,847			-
Maturities and calls		25,870			10,472
Principal payments		24,601			11,486
Sale or retirement of FHLB stock		-			217
Net change in portfolio loans		(35,464	)		(1,232	)
Premises and equipment expenditures		(769	)		(274	)
Net cash from investing activities		(63,146	)		(41,539	)
Cash Flows from Financing Activities
Net change in deposits		11,169			41,531
Net change in fed funds sold and short term borrowings		-			(1,234	)
Principal payments on FHLB advances		(2,276	)		(6,267	)
Other common stock transactions		20			(17	)
Cash dividends paid on preferred shares		(772	)		(772	)
Net cash from financing activities		8,141			33,241
Net change in cash and cash equivalents		(39,316	)		9,092
Cash and cash equivalents at beginning of year		107,592			106,222
Cash and cash equivalents at end of period	$	68,276		$	115,314
Supplemental Disclosure of Cash Flow Information:
Interest paid	$	3,629		$	4,853
Loans transferred to other real estate		2,535			2,911
The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 7

(f)Notes to Condensed Consolidated Financial Statements (unaudited)

Note 1 - Basis of Presentation

The unaudited condensed consolidated financial statements of United Bancorp, Inc. (the "Company" or "United") have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) believed necessary for a fair presentation have been included. The condensed consolidated balance sheet of the Company as of December 31, 2011 has been derived from the audited consolidated balance sheet of the Company as of that date. Operating results for the nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information, refer to the consolidated financial statements and related footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

Note 2 - Securities

Securities classified as available for sale consist of bonds and notes that might be sold prior to maturity. Securities classified as available for sale are reported at their fair values and the related net unrealized holding gain or loss is reported in other comprehensive income. Premiums and discounts on securities are recognized in interest income using the interest method over the period to maturity. Realized gains or losses are based upon the amortized cost of the specific securities sold.

Balances of securities by category are shown below at September 30, 2012 and December 31, 2011. All securities are classified as available for sale.

At September 30, 2012, in thousands of dollars	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. Treasury and agency securities	$	25,162	$	177	$	-			25,339
Mortgage-backed agency securities		150,588		2,770		(178	)		153,180
Obligations of states and political subdivisions		18,594		807		(4	)		19,397
Corporate, asset backed and other debt securities		126		-		-			126
Equity securities		26		1		-			27
Total	$	194,496	$	3,755	$	(182	)	$	198,069
At December 31, 2011, in thousands of dollars
U.S. Treasury and agency securities	$	48,999	$	385	$	(18	)	$	49,366
Mortgage-backed agency securities		101,855		1,321		(479	)		102,697
Obligations of states and political subdivisions		19,690		1,287		-			20,977
Corporate, asset backed and other debt securities		126		-		-			126
Equity securities		26		5		-			31
Total	$	170,696	$	2,998	$	(497	)	$	173,197

Page 8

The following tables show fair value and the gross unrealized losses of the Company's investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2012 and December 31, 2011.

At September 30, 2012	Less than 12 Months					12 Months or Longer					Total
In thousands of dollars	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
Mortgage-backed agency securities		29,714		(178	)		-		-			29,714		(178	)
Obligations of states and political subdivisions		938		(4	)		-		-			938		(4	)
Total	$	30,652	$	(182	)	$	-	$	-		$	30,652	$	(182	)
At December 31, 2011
In thousands of dollars
U.S. Treasury and agency securities	$	5,101	$	(18	)	$	-	$	-		$	5,101	$	(18	)
Mortgage-backed agency securities		36,420		(424	)		5,764		(55	)		42,184		(479	)
Total	$	41,521	$	(442	)	$	5,764	$	(55	)	$	47,285	$	(497	)

Unrealized losses within the investment portfolio are determined to be temporary. The Company has performed an evaluation of its investments for other than temporary impairment, and no losses were recognized during the first nine months of 2012 or 2011.

The unrealized losses on the Company's investment in residential mortgage-backed securities were caused by interest rate changes. The Company expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2012 or December 31, 2011.

The entire investment portfolio is classified as available for sale. However, management has no specific intent to sell any securities, and management believes that it is more likely than not that the Company will not have to sell any security before recovery of its cost basis. Sales activity for securities for the three and nine month periods ended September 30, 2012 and 2011 is shown in the following table. All sales were of securities identified as available for sale.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
In thousands of dollars	2012		2011		2012			2011
Sales proceeds	$	-	$	-	$	2,847		$	-
Gross gains on sales		-		-		30			-
Gross loss on sales		-		-		(26	)		-

Page 9

The fair value and amortized cost of securities available for sale by contractual maturity as of September 30, 2012 is shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized
In thousands of dollars	Cost		Fair Value
Due in one year or less	$	26,354	$	26,558
Due after one year through five years		15,922		16,528
Due after five years through ten years		1,577		1,744
Due after ten years		30		32
Mortgage-backed agency securities		150,587		153,180
Equity securities		26		27
Total securities	$	194,496	$	198,069

Securities carried at $1.1 million as of September 30, 2012 were pledged to secure deposits of public funds, funds borrowed, repurchase agreements, and for other purposes as required by law.

Note 3 – Loans

The following table shows the balances of the various categories of loans of the Company, and the percentage composition of the portfolio by type at September 30, 2012 and December 31, 2011.

	September 30, 2012					December 31, 2011
In thousands of dollars	Balance		% of total			Balance		% of total
Personal	$	111,181		18.8	%	$	103,405		18.3	%
Business, including commercial mortgages		343,734		58.1	%		335,133		59.5	%
Tax exempt		1,737		0.3	%		2,045		0.4	%
Residential mortgage		86,811		14.7	%		83,072		14.7	%
Construction and development		48,136		8.1	%		39,721		7.0	%
Deferred loan fees and costs		209		0.0	%		326		0.1	%
Total portfolio loans	$	591,808		100.0	%	$	563,702		100.0	%

Note 4 – Allowance for Loan Losses and Credit Risk

The allowance for loan losses ("allowance") is maintained at a level believed adequate by management to absorb probable incurred credit losses in the loan portfolio. The allowance is increased by provisions for loan losses charged to income. Loan losses are charged against the allowance when management believes a loan is uncollectible. Subsequent recoveries, if any, are credited to the allowance. This policy applies to each of the Company's portfolio segments.

The Company's established methodology for evaluating the adequacy of the allowance for loan losses considers both components of the allowance: (1) specific allowances allocated to loans evaluated individually for impairment under the Accounting Standards Codification ("ASC") Section 310-10-35 of the Financial Accounting Standards Board ("FASB"), and (2) allowances calculated for pools of loans evaluated collectively for impairment under FASB ASC Subtopic

Page 10

450-20. Until the third quarter of 2011, the Company's past loan loss experience was determined by evaluating the average charge-offs over the most recent eight quarters.

For the quarter ended September 30, 2011, the Company changed its methodology for evaluating the adequacy of the allowance for loan losses by revising and enhancing the methodology for loans evaluated collectively for impairment. Under this methodology, the Company revised and further disaggregated its pools of loans evaluated collectively for impairment. Similar to the prior methodology, pools were analyzed by general loan types, and further analyzed by collateral types, where appropriate. However, under the new methodology, pools were further disaggregated by internal credit risk ratings for commercial loans, commercial mortgages and construction loans and by delinquency status for residential mortgages, consumer loans and all other loan types. As of September 30, 2011, the allowance for loan losses for loans evaluated collectively for impairment decreased from $15.6 million under the Company's prior methodology to $11.9 million under the new methodology.

Effective with the first quarter of 2012, the Company expanded the number of categories evaluated for allocation of the allowance for loan losses, from four to six. In order to be consistent with the migration analysis that is performed quarterly, allocations for Owner-Occupied Commercial Real Estate, Other Commercial Real Estate, and Commercial and Industrial loans were broken out beginning March 31, 2012. This change in allocation methodology had no material quantitative effect on the allocations.

Allowance allocations for each pool are determined through a migration analysis based on activity for the period beginning March, 2008. The analysis computes loss rates based on a probability of default ("PD") and loss given default ("LGD"). Allowance allocations prior to the third quarter of 2011 were computed based on weighted average charge-off rates as opposed to the use of credit migration matrices, which compute PDs and LGDs based on historical losses as loans migrate through the various risk rating or delinquency categories. The March, 2008 date was selected in an effort to capture sufficient data points to provide a meaningful migration analysis using available data in comparable formats.

Under both the current and previous methodologies, loss rates are adjusted to consider qualitative factors such as economic conditions and trends, among others. However, under the methodologies adopted beginning with the third quarter of 2011, the Company applies a more detailed analysis of qualitative factors that are assessed on a quarterly basis based upon gradings specific to the Company, as well as regional economic metrics.

Loan impairment is reported when full payment under the loan terms is not expected. Impaired loans are carried at the present value of estimated future cash flows using the loan's existing rate, or the fair value of collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations require an increase in the allowance for loan losses, that increase is recorded as a component of the provision for loan losses. Loans are evaluated for impairment when payments are delayed or when the internal grading system indicates a substandard or doubtful classification. This policy applies to each class of the Company's loan portfolio.

Page 11

Impairment is evaluated in total for smaller-balance loans of similar nature, such as residential mortgage, consumer, home equity and second mortgage loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When credit analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower's business are not adequate to meet its debt service requirements, including loans to the borrower by United Bank & Trust (the "Bank"), the loan is evaluated for impairment. Often this is associated with a delay or shortfall of payments of thirty days or more. Loans are generally moved to nonaccrual status when ninety days or more past due or in bankruptcy. These loans are often also considered impaired. Impaired loans are charged off, in part or in full, when deemed uncollectible. This typically occurs when the loan is 120 or more days past due, unless the loan is both well-secured and in the process of collection. This policy applies to each class of the Company's loan portfolio.

An analysis of the allowance for loan losses for the three and nine month periods ended September 30, 2012 and 2011 and balances as of December 31, 2011 follows:

	Three Months Ended September 30, 2012
Thousands of dollars	CLD (1)			Owner- Occupied CRE (2)			OtherCRE (2)			Commercial & Industrial			Residential Mortgage			Personal Loans			Total
Allowance for Loan Losses:
Balance, June 30	$	4,587		$	4,778		$	4,845		$	4,355		$	1,808		$	1,724		$	22,097
Provision charged to expense		496			1,007			97			202			206			(8	)		2,000
Losses charged off		(110	)		(1,009	)		(239	)		(719	)		(216	)		(87	)		(2,380	)
Recoveries		80			5			174			335			80			69			743
Balance, September 30	$	5,053		$	4,781		$	4,877		$	4,173		$	1,878		$	1,698		$	22,460
	Nine Months Ended September 30, 2012
Allowance for Loan Losses:
Balance, January 1	$	3,676		$	3,875		$	4,721		$	4,741		$	1,931		$	1,689		$	20,633
Provision charged to expense		1,945			1,942			1,940			11			659			153			6,650
Losses charged off		(868	)		(1,067	)		(2,056	)		(1,419	)		(855	)		(578	)		(6,843	)
Recoveries		300			31			272			840			143			434			2,020
Balance, September 30	$	5,053		$	4,781		$	4,877		$	4,173		$	1,878		$	1,698		$	22,460
Ending balance:
Individually evaluated for impairment	$	3,259		$	2,680		$	1,097		$	465		$	711		$	55		$	8,267
Collectively evaluated for impairment	$	1,794		$	2,101		$	3,780		$	3,708		$	1,167		$	1,643		$	14,193
Total Loans:
Ending balance	$	48,136		$	101,891		$	138,428		$	94,203		$	95,421		$	113,729		$	591,808
Ending balance:
Individually evaluated for impairment	$	11,401		$	9,222		$	9,104		$	2,421		$	5,621		$	401		$	38,170
Collectively evaluated for impairment	$	36,735		$	92,669		$	129,324		$	91,782		$	89,800		$	113,328		$	553,638

Page 12

	Three Months Ended September 30, 2011
Thousands of dollars	Business & Commercial Mortgages			CLD (1)			Residential Mortgage			Personal Loans			Total
Allowance for Loan Losses, at June 30, 2011	$	17,264		$	2,604		$	3,121		$	2,381		$	25,370
Provision charged to expense		5,766			3,289			6			653			9,714
Amounts related to change in allocation methodology		(2,246	)		49			(990	)		(527	)		(3,714	)
Net provision after amounts related to change in allocation methodology		3,520			3,338			(984	)		126			6,000
Losses charged off		(5,408	)		(776	)		(324	)		(785	)		(7,293	)
Recoveries		176			2			54			48			280
Balance, September 30	$	15,552		$	5,168		$	1,867		$	1,770		$	24,357
	Nine Months Ended September 30, 2011
Allowance for Loan Losses, at January 1, 2011	$	16,672		$	3,248		$	2,661		$	2,582		$	25,163
Provision charged to expense		9,088			4,031			1,294			1,201			15,614
Amounts related to change in allocation methodology		(2,246	)		49			(990	)		(527	)		(3,714	)
Net provision after amounts related to change in allocation methodology		6,842			4,080			304			674			11,900
Losses charged off		(8,643	)		(2,328	)		(1,164	)		(1,668	)		(13,803	)
Recoveries		681			168			66			182			1,097
Balance, September 30	$	15,552		$	5,168		$	1,867		$	1,770		$	24,357

	Balances at December 31, 2011
Thousands of dollars	Business & Commercial Mortgages		CLD (1)		Residential Mortgage		Personal Loans		Total
Allowance for Loan Losses:
Ending balance:
Individually evaluated for impairment	$	5,213	$	2,907	$	871	$	40	$	9,031
Collectively evaluated for impairment		8,124		646		1,060		1,772		11,602
Total Allowance for Loan Losses	$	13,337	$	3,553	$	1,931	$	1,812	$	20,633
Total Loans:
Ending balance:
Individually evaluated for impairment	$	31,225	$	14,486	$	5,241	$	183	$	51,135
Collectively evaluated for impairment		302,754		25,237		80,788		103,788		512,567
Total Loans	$	333,979	$	39,723	$	86,029	$	103,971	$	563,702
(1) Construction and Land Development loans
(2) Commercial Real Estate loans

Credit Exposure and Quality Indicators

The Company categorizes commercial and tax-exempt loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, management capacity, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed during the loan

Page 13

approval process and is updated as circumstances warrant. The risk characteristics of each loan portfolio segment are as follows:

Construction and Land Development. Construction and Land Development ("CLD") loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. CLD loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. CLD loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

Commercial Real Estate. Commercial Real Estate ("CRE") consists of two segments – owner-occupied real estate loans and other commercial real estate loans. CRE loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company's commercial real estate portfolio are diverse, but have geographic location almost entirely in the Company's market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

Commercial & Industrial Loans. Commercial and industrial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Consumer. Consumer loans consist of two segments – residential mortgage loans and personal loans. For residential mortgage loans that are secured by 1-4 family residences and are generally owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and personal loans are secured by personal assets, such as automobiles or recreational vehicles. Some personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their

Page 14

market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Internal Risk Categories

Commercial and tax-exempt loans that are analyzed individually are assigned one of eight internal risk categories. Categories 1-4 are considered to be Pass-rated loans. Other risk category definitions for individually-analyzed commercial and tax-exempt loans are as follows:

5	Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Bank's credit position at some future date.
6	Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral securing the loans, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
7	Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the additional characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
8	Loss. Loans classified as loss are regarded as uncollectible and should be charged off.

Consumer loans are not rated on the above-listed risk categories, but are classified by their payment activity, either as performing, accruing restructured, delinquent less than 90 days, or nonperforming.

Quality indicators for portfolio loans as of September 30, 2012 and December 31, 2011 based on the Bank's internal risk categories are detailed in the following tables.

In thousands of dollars		At September 30, 2012
Commercial & Tax-exempt Loans		CLD		Owner-Occupied CRE		Other CRE		Commercial & Industrial		Total Commercial
Credit Risk Profile by Internally Assigned Rating
1-4	Pass	$	11,031	$	77,948	$	92,710	$	84,891	$	266,580
5	Special Mention		11,071		10,569		17,143		7,595		46,378
6	Substandard		10,914		9,387		11,444		7,329		39,074
7	Doubtful		480		-		-		347		827
8	Loss		-		-		-		-		-
Total		$	33,496	$	97,904	$	121,297	$	100,162	$	352,859

Page 15

Consumer Loans	Residential Mortgage		Consumer Construction		Home Equity		Other Consumer		Total Consumer
Credit risk profile based on payment activity
Performing	$	104,082	$	14,640	$	74,086	$	31,807	$	224,615
Accruing restructured		3,276		-		171		-		3,447
Delinquent less than 90 days		1,509		-		66		81		1,656
Nonperforming		2,789		-		99		141		3,029
Total	$	111,656	$	14,640	$	74,422	$	32,029	$	232,747
Subtotal									$	585,606
Deferred loan fees and costs, overdrafts, in-process accounts										6,202
Total Portfolio Loans									$	591,808

In thousands of dollars		At December 31, 2011
Commercial & Tax-exempt Loans		CLD		Owner-Occupied CRE		Other CRE		Commercial & Industrial		Total Commercial
Credit Risk Profile by Internally Assigned Rating
1-4	Pass	$	11,940	$	77,447	$	96,864	$	63,466	$	249,717
5	Special Mention		2,920		15,526		15,897		17,212		51,555
6	Substandard		14,020		5,803		17,818		8,799		46,440
7	Doubtful		827		72		-		625		1,524
8	Loss		-		-		-		-		-
Total		$	29,707	$	98,848	$	130,579	$	90,102	$	349,236

Consumer Loans	Residential Mortgage		Consumer Construction		Home Equity		Other Consumer		Total Consumer
Credit risk profile based on payment activity
Performing	$	95,045	$	10,016	$	74,387	$	22,394	$	201,842
Accruing restructured		3,078		-		171		-		3,249
Delinquent less than 90 days		3,072		-		239		70		3,381
Nonperforming		3,404		-		118		107		3,629
Total	$	104,599	$	10,016	$	74,915	$	22,571	$	212,101
Subtotal									$	561,337
Deferred loan fees and costs, overdrafts, in-process accounts										2,365
Total Portfolio Loans									$	563,702

Loan totals in the classifications above are based on categories of loans as classified within the Bank's regulatory reporting. As a result, they may differ from totals of similar classifications in Note 3 and in the tables above.

Page 16

Loan Portfolio Aging Analysis

The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Schedules detailing the loan portfolio aging analysis as of September 30, 2012 and December 31, 2011 follow.

Thousands of dollars	Delinquent Loans
As of September 30, 2012	30-89 Days Past Due		90 Days and Over (a) (1)		Total PastDue (b)		Current(c-b-d)		Total Portfolio Loans (c)		Nonaccrual Loans (d)		Total Non-performing (a+d)
Commercial
Commercial CLD	$	-	$	-	$	-	$	26,700	$	33,496	$	6,796	$	6,796
Owner-Occupied CRE		147		-		147		94,005		97,904		3,752		3,752
Other CRE		426		-		426		116,296		121,297		4,575		4,575
Commercial & Industrial		578		-		578		96,944		100,162		2,640		2,640
Consumer
Residential Mortgage		1,509		392		1,901		107,358		111,656		2,397		2,789
Consumer Construction		-		-		-		14,640		14,640		-		-
Home Equity		66		14		80		74,257		74,422		85		99
Other Consumer		81		-		81		31,807		32,029		141		141
Subtotal	$	2,807	$	406	$	3,213	$	562,007	$	585,606	$	20,386	$	20,792
Deferred loan fees and costs, overdrafts, in-process accounts										6,202
Total Portfolio Loans									$	591,808

Thousands of dollars	Delinquent Loans
As of December 31, 2011	30-89 Days Past Due		90 Days and Over (a) (1)		Total PastDue (b)		Current(c-b-d)		Total Portfolio Loans (c)		Nonaccrual Loans (d)		Total Non-performing (a+d)
Commercial
Commercial CLD	$	426	$	-	$	426	$	23,277	$	29,707	$	6,004	$	6,004
Owner-Occupied CRE		1,511		-		1,511		92,828		98,848		4,509		4,509
Other CRE		703		-		703		122,672		130,579		7,204		7,204
Commercial & Industrial		447		-		447		85,216		90,102		4,439		4,439
Consumer
Residential Mortgage		3,072		-		3,072		98,123		104,599		3,404		3,404
Consumer Construction		-		-		-		10,016		10,016		-		-
Home Equity		239		31		270		74,558		74,915		87		118
Other Consumer		70		-		70		22,394		22,571		107		107
Subtotal	$	6,468	$	31	$	6,499	$	529,084	$	561,337	$	25,754	$	25,785
Deferred loan fees and costs, overdrafts, in-process accounts										2,365
Total Portfolio Loans									$	563,702
(1) All are accruing.

Page 17

Impaired Loans

Information regarding impaired loans as of September 30, 2012 and December 31, 2011 follows.

	September 30, 2012						December 31, 2011
Thousands of dollars	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Recorded Balance		Unpaid Principal Balance		Specific Allowance
Loans without a specific valuation allowance
Commercial
Commercial CLD	$	3,537	$	6,070	$	-	$	5,977	$	15,366	$	-
Owner-Occupied CRE		2,436		3,661		-		1,622		2,502		-
Other CRE		5,684		8,056		-		4,922		8,031		-
Commercial & Industrial		1,710		2,041		-		1,696		3,774		-
Consumer						-
Residential Mortgage		2,128		2,128		-		1,042		1,778		-
Consumer Construction		-		-		-		-		-		-
Home Equity		211		211		-		43		43		-
Other Consumer		107		107		-		189		189		-
Subtotal	$	15,813	$	22,274	$	-	$	15,491	$	31,683	$	-

Loans with a specific valuation allowance
Commercial
Commercial CLD	$	7,864	$	8,375	$	3,259	$	8,509	$	8,594	$	2,907
Owner-Occupied CRE		6,786		8,089		2,680		6,391		7,925		2,344
Other CRE		3,420		3,420		1,097		15,259		17,205		2,085
Commercial & Industrial		711		791		465		1,335		2,372		785
Consumer
Residential Mortgage		3,493		4,085		711		4,792		5,998		870
Consumer Construction		-		-		-		-		-		-
Home Equity		-		-		-		171		171		35
Other Consumer		83		84		55		5		5		5
Subtotal	$	22,357	$	24,844	$	8,267	$	36,462	$	42,270	$	9,031

Total Impaired Loans
Commercial
Commercial CLD	$	11,401	$	14,445	$	3,259	$	14,486	$	23,960	$	2,907
Owner-Occupied CRE		9,222		11,750		2,680		8,013		10,427		2,344
Other CRE		9,104		11,476		1,097		20,181		25,236		2,085
Commercial & Industrial		2,421		2,832		465		3,031		6,146		785
Consumer
Residential Mortgage		5,621		6,213		711		5,834		7,776		870
Consumer Construction		-		-		-		-		-		-
Home Equity		211		211		-		214		214		35
Other Consumer		190		191		55		194		194		5
Total Impaired Loans	$	38,170	$	47,118	$	8,267	$	51,953	$	73,953	$	9,031

Page 18

Information regarding average investment in impaired loans and interest income recognized on those loans for the three and nine month periods ended September 30, 2012 and 2011 is shown below.

Periods ended September 30,	2012								2011
Thousands of dollars	Three Months				Year to Date				Three Months				Year to Date
	Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
Loans without a specific valuation allowance
Commercial
Commercial CLD	$	3,538	$	-	$	4,323		-	$	5,752	$	-	$	6,655		-
Owner-Occupied CRE		2,438		12		2,777		51		5,466		7		3,313		33
Other CRE		5,215		6		9,672		124		2,242		16		2,483		38
Commercial & Industrial		1,715		9		1,839		29		1,315		1		817		2
Consumer
Residential Mortgage		1,312		6		1,274		17		1,155		-		777		-
Consumer Construction		-		-		-		-		-		-		-		-
Home Equity		25		1		25		4		227		-		337		-
Other Consumer		122		-		155		-		176		-		424		-
Subtotal	$	14,365	$	34	$	20,065	$	225	$	16,333	$	24	$	14,806	$	73
Loans with a specific valuation allowance
Commercial
Commercial CLD	$	8,285	$	89	$	8,443	$	298	$	9,678	$	110	$	7,422	$	227
Owner-Occupied CRE		6,803		47		6,668		114		2,201		16		3,993		96
Other CRE		3,432		36		4,331		140		19,367		174		16,384		522
Commercial & Industrial		712		8		888		34		783		3		1,993		26
Consumer
Residential Mortgage		4,555		32		4,099		96		6,449		49		5,764		113
Consumer Construction		-		-		-		-		-		-		-		-
Home Equity		-		-		-		-		172		1		189		4
Other Consumer		78		-		56		2		5		-		5		1
Subtotal	$	23,865	$	212	$	24,485	$	684	$	38,655	$	353	$	35,750	$	989
Total Impaired Loans
Commercial
Commercial CLD	$	11,823	$	89	$	12,766	$	298	$	15,430	$	110	$	14,077	$	227
Owner-Occupied CRE		9,241		59		9,445		165		7,667		23		7,306		129
Other CRE		8,647		42		14,003		264		21,609		190		18,867		560
Commercial & Industrial		2,427		17		2,727		63		2,098		4		2,810		28
Consumer
Residential Mortgage		5,867		38		5,373		113		7,604		49		6,541		113
Consumer Construction		-		-		-		-		-		-		-		-
Home Equity		25		1		25		4		399		1		526		4
Other Consumer		200		-		211		2		181		-		429		1
Total Impaired Loans	$	38,230	$	246	$	44,550	$	909	$	54,988	$	377	$	50,556	$	1,062

Interest payments received on impaired loans are recorded as interest income unless collection of the remaining recorded investment is doubtful, at which time payments received are recorded as reductions to principal. Subsequent payments on nonaccrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Nonaccrual loans are returned to accrual status when, in the judgment of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory

Page 19

performance of not less than six months before returning a nonaccrual loan to accrual status. These policies apply to each class of the Company's loan portfolio.

Troubled Debt Restructurings

In the course of working with borrowers, the Bank may choose to restructure the contractual terms of certain loans. In this scenario, the Bank attempts to work out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified are reviewed by the Bank to identify if a troubled debt restructuring ("TDR") has occurred, which is when, for economic or legal reasons related to a borrower's financial difficulties, the Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with the borrower's current financial status and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two.

If such efforts by the Bank do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time foreclosure proceedings are initiated. At any time prior to a sale of the property at foreclosure, the Bank may terminate foreclosure proceedings if the borrower is able to work out a satisfactory payment plan.

It is the Bank's policy to have any restructured loans which are on nonaccrual status prior to being restructured, remain on nonaccrual status until six months of satisfactory borrower performance, at which time management would consider its return to accrual status. The balance of nonaccrual restructured loans, which is included in nonaccrual loans, was $15.0 million at September 30, 2012 and $10.7 million at December 31, 2011. If a restructured loan is on accrual status prior to being restructured, it is reviewed to determine if the restructured loan should remain on accrual status. The balance of accruing restructured loans was $16.3 million at September 30, 2012 and $21.8 million at December 31, 2011.

All TDRs are considered impaired by the Company. Loans that are considered TDRs are classified as performing unless they are on nonaccrual status or greater than 90 days delinquent as of the end of the most recent quarter.  Under Company policy, a loan may be removed from TDR status when it is determined that the loan has performed according to its modified terms for a sustained period of repayment performance (generally not less than six months and not during the calendar year in which the restructuring took place), and the restructuring agreement specified an interest rate greater than or equal to an acceptable rate for a comparable new loan. On a quarterly basis, the Company individually reviews all TDR loans to determine if a loan meets these criteria.

Accruing restructured loans at September 30, 2012 are comprised of two categories of loans on which interest is being accrued under their restructured terms, and the loans are current or less than ninety days past due. The first category consists of commercial loans, primarily comprised of business loans that have been temporarily modified as interest-only loans, generally for a period of up to one year, without a sufficient corresponding increase in the interest rate.

Within this category are CLD loans that have been renewed as interest only, generally for a period of up to one year, to assist the borrower. The Bank does not generally forgive principal or interest on restructured loans. However, when a loan is restructured, principal is generally

Page 20

received on a delayed basis as compared to the original repayment schedule. CLD loans that are restructured are generally modified to require interest-only for a period of time. The Bank does not generally reduce interest rates on restructured commercial loans.

The second category included in accruing restructured loans consists of residential mortgage and home equity loans whose terms have been restructured at less than market terms and include rate modifications, extension of maturity, and forbearance.

The table below provides a breakdown of accruing restructured loans by type at September 30, 2012. The table also includes the average yield on restructured loans and the yield for the entire portfolio, for commercial loans and the residential mortgage and home equity line portfolio, for the third quarter of 2012.

	September 30, 2012				Third Quarter
Dollars in thousands	Number of Loans		Recorded Balance		Avg. Yield			Portfolio Yield
CLD Loans		7	$	5,017
Other Commercial Loans		18		7,819
Total Commercial Loans		25		12,836		5.17	%		5.31	%
Residential Mortgage & Home Equity Loans		17		3,447		3.80	%		5.34	%
Total accruing restructured loans		42	$	16,283

The Company has no personal loans other than the loans described above that are classified as troubled debt restructurings.

With regard to determination of the amount of the allowance for loan losses, all restructured loans are considered to be impaired. As a result, the determination of the amount of impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed previously.

The following tables present information regarding newly-classified troubled debt restructurings for the three and nine month periods ended September 30, 2012 and 2011.

	Periods ended September 30, 2012
	Three Months						Nine Months
Dollars in thousands	Total Number of Loans		Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance		Total Number of Loans		Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
Commercial
Commercial CLD		-	$	-	$	-		2	$	400	$	400
Owner-Occupied CRE		1		645		645		6		1,271		1,271
Other CRE		-		-		-		4		2,304		2,304
Commercial & Industrial		-		-		-		1		190		190
Consumer
Residential Mortgage		-		-		-		2		224		224
Total		1	$	645	$	645		15	$	4,389	$	4,389

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	Periods ended September 30, 2011
	Three Months						Nine Months
	Total Number of Loans		Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance		Total Number of Loans		Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
Commercial
Commercial CLD		3	$	3,507	$	3,507		4	$	3,858	$	3,858
Owner-Occupied CRE		1		405		405		1		405		405
Other CRE		2		511		511		4		3,177		3,177
Commercial & Industrial		1		113		113		1		113		113
Consumer
Residential Mortgage		2		1,078		1,078		3		1,199		1,199
Total		9	$	5,614	$	5,614		13	$	8,752	$	8,752

A loan is considered to be in payment default generally once it is 90 days contractually past due under the modified terms. Information regarding troubled debt restructurings that subsequently defaulted is shown below.

	Periods ended September 30, 2012
	Three Months				Nine Months
Dollars in thousands	Number of Loans		Recorded Balance		Number of Loans		Recorded Balance
Commercial
Commercial CLD		1	$	1,892		4	$	3,423
Owner-Occupied CRE		-		-		2		239
Total		1		1,892		6		3,662

	Periods ended September 30, 2011
Commercial
Commercial CLD		1	$	119	1	$	119
Other CRE		-		-	2		277
Consumer
Residential Mortgage		2		1,175	2		1,175
Total		3	$	1,294	5	$	1,571

Since the Company treats accruing TDR's as impaired loans and evaluates individually for impairment, the allowance for loan losses is not generally affected by a subsequent default.  Charge-offs of TDR's that subsequently defaulted as described above were $0.2 million for the three months, and $0.4 million for the nine months ended September 30, 2012.

Note 5 - Stock Based Compensation

The Company has stock based compensation plans as described below. The Company recorded $37,500 and $37,725, respectively, in compensation expense related to stock based compensation plans for the three month periods and $112,500 and $100,800, respectively, for the nine month

Page 22

periods ended September 30, 2012 and 2011. The Company has a policy of issuing authorized but unissued shares to satisfy exercises of stock options or stock only stock appreciation rights.

Stock Incentive Plan

The Company's Stock Incentive Plan of 2010 (the "Incentive Plan") permits the grant and award of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards and other stock-based and stock-related awards (collectively referred to as "incentive awards") to directors, consultative board members, officers and other key employees of the Company and its subsidiaries.

The following table shows activity for the nine months ended September 30, 2012 for the Company's Incentive Plan:

	SOSARs (1)					RSU (2)					Restricted Stock
	Awards Outstanding			Weighted Avg. Exercise Price		Awards Outstanding			Grant Date Fair Value		Awards Outstanding			Grant Date Fair Value
Balance at January 1		85,750		$	3.35		16,856		$	3.35		25,000		$	3.35
Awards granted		83,500			3.30		32,750			3.30		-			-
Awards forfeited		(2,000	)		3.35		(2,027	)		3.31		(2,375	)		3.35
Balance at Sep. 30		167,250		$	3.33		47,579		$	3.32		22,625		$	3.35
(1) Stock Only Stock Appreciation Rights
(2) Restricted Stock Units

As of September 30, 2012, unrecognized compensation expense related to the Incentive Plan totaled $236,200. Compensation expense for SOSARs is recognized over approximately three years. Compensation expense for RSUs is based on an expected level of achievement of performance targets as determined at the time of each grant, and is expected to be recognized over three years. Compensation expense for restricted stock grants is recognized over two years.

The fair value of restricted stock grants is considered to be the market price of Company stock at the grant date. The fair value of RSU grants is considered to be the market price of Company stock at the grant date, adjusted for an estimated probability of achieving performance targets. The Company has established three performance targets for 2012 grants. Those targets are based on the Company's pre-tax, pre-provision return on average assets, return on average assets, and classified assets coverage ratio¹. Each target is weighted equally, and target levels are based on United's 2012 financial plan.

¹ Adversely classified assets as a percent of tier one capital plus allowance for loan losses.

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The fair value of each SOSAR grant is estimated on the grant date using the Black-Scholes option pricing model. Grants were awarded in March of 2012 and 2011. Fair value of grants in 2012 and 2011 is based on the weighted-average assumptions shown in the following table.

	2012			2011
Dividend yield		0.0	%		0.0	%
Expected life in years		5			5
Expected volatility		37	%		35	%
Risk-free interest rate		0.84	%		2.16	%
Fair value	$	1.105		$	1.136

At September 30, 2012, the aggregate intrinsic value of SOSARs outstanding was $146,338. Intrinsic value was determined by calculating the difference between the Company's closing stock price on September 30, 2012 and the exercise price of the SOSARs, multiplied by the number of in-the-money SOSARs held by each holder, assuming all holders had exercised their SOSARs on September 30, 2012. The weighted–average period over which nonvested SOSARs are expected to be recognized is 1.22 years.

Stock Option Plan

Through December 31, 2009, the Company granted stock options under its 2005 Stock Option Plan (the "2005 Plan"), which is a non-qualified stock option plan as defined under Internal Revenue Service regulations. The shares of stock that are subject to options are the authorized and unissued shares of common stock of the Company. Under the 2005 Plan, directors and management of the Company and subsidiaries were given the right to purchase stock of the Company at the then-current market price at the time the option was granted. The options have a three-year vesting period, and with certain exceptions, expire at the end of ten years, three years after retirement or ninety days after other separation from the Company. The 2005 Plan expired effective January 1, 2010, and no additional options may be granted under the plan.

The following summarizes year to date option activity for the 2005 Plan:

Stock Options	Options Outstanding			Weighted  Average Exercise Price
Balance at January 1, 2012		381,743		$	21.19
Options expired		(11,453	)		20.11
Options forfeited		(9,789	)		17.42
Balance at September 30, 2012		360,501		$	21.32

The table below provides information regarding stock options outstanding under the 2005 Plan at September 30, 2012.

	Options Outstanding							Options Exercisable
Range of Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life			Weighted Avg. Exercise Price		Number Outstanding		Weighted Avg. Exercise Price
$6.00 to $32.14		360,501		3.84	Years	$	21.32		359,799	$	21.35

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As of the end of the third quarter of 2012, there was no unrecognized compensation expense related to the stock options granted under the 2005 Plan.

At September 30, 2012, the total outstanding stock options granted under the 2005 Plan had no intrinsic value. Intrinsic value was determined by calculating the difference between the Company's closing stock price on September 30, 2012 and the exercise price of each option, multiplied by the number of in-the-money stock options held by each holder, assuming all holders had exercised their stock options on September 30, 2012.

Note 6 - Loan Servicing

Loans serviced for others are not included in the accompanying consolidated financial statements. The balance of loans serviced for others related to servicing rights that have been capitalized and the unpaid principal balance of loans serviced for others at September 30, 2012 and December 31, 2011 were as follows:

In thousands of dollars	9/30/12		12/31/11		Change		Percent
Loans serviced with service rights	$	810,361	$	732,590	$	77,771		10.6	%
Total loans serviced	$	816,285	$	735,108	$	81,177		11.0	%

Unamortized cost of loan servicing rights included in accrued interest receivable and other assets on the consolidated balance sheet, for the three and nine month periods ended September 30, 2012 and 2011, are shown below.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
In thousands of dollars	2012			2011			2012			2011
Balance at beginning of period	$	5,855		$	5,178		$	5,405		$	4,763
Amount capitalized		780			342			2,029			1,125
Amount amortized		(509	)		(286	)		(1,308	)		(654	)
Balance at September 30	$	6,126		$	5,234		$	6,126		$	5,234

The fair value of servicing rights was as follows:

In thousands of dollars	9/30/12		9/30/11
Fair value, January 1	$	7,331	$	5,806
Fair value, end of period	$	7,848	$	7,169

Note 7 - Common Stock and Earnings Per Share

Basic earnings per common share is determined by dividing net income available to common shareholders by the weighted average number of common shares outstanding plus contingently issuable shares during the period. Diluted earnings per share further assumes the dilutive effect of additional common shares issuable under stock incentive plans and warrants.

Page 25

A reconciliation of basic and diluted earnings per share follows.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
In thousands, except per-share data	2012			2011			2012			2011
Net income	$	1,390		$	(2,100	)	$	3,017		$	(1,380	)
Less:
Accretion of discount on preferred stock		(27	)		(26	)		(83	)		(80	)
Dividends on preferred stock		(258	)		(258	)		(773	)		(772	)
Income available to common shareholders	$	1,105		$	(2,384	)	$	2,161		$	(2,232	)
Weighted avg. common shares outstanding		12,683.4			12,670.7			12,677.7			12,668.2
Weighted avg. contingently issuable shares		114.5			84.3			113.5			77.6
Total weighted avg. shares outstanding		12,797.9			12,755.0			12,791.2			12,745.8
Basic and diluted income per share	$	0.09		$	(0.19	)	$	0.17		$	(0.18	)

A total of 527,751 and 384,295 shares, respectively, for the three and nine month periods ended September 30, 2012 and 2011, subject to stock options, restricted stock, RSU and SOSAR grants, and 311,492 shares subject to warrants as of September 30, 2011 are not considered in computing diluted earnings per share because they were not dilutive. The company had no warrants outstanding at September 30, 2012.

Note 8 – Other Comprehensive Income

Other comprehensive income components and related taxes for the three and nine month periods ended September 30, 2012 and 2011 were as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
In thousands of dollars	2012			2011			2012			2011
Net unrealized gain on securities available for sale	$	872		$	56		$	1,072		$	1,801
Tax expense		(296	)		(20	)		(364	)		(613	)
Other comprehensive income	$	576		$	36		$	708		$	1,188

The components of accumulated other comprehensive income included in shareholders' equity at September 30, 2012 and December 31, 2011 were as follows:

In thousands of dollars	9/30/12			12/31/11
Net unrealized gains on securities available for sale	$	3,573		$	2,501
Tax expense		(1,214	)		(850	)
Accumulated other comprehensive income	$	2,359		$	1,651

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Note 9 - Disclosures About Fair Value of Assets and Liabilities

Fair Value Measurements. The Fair Value Measurements Topic of the FASB Accounting Standards Codification ("FASB ASC") defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FASB ASC Topic 820-10-20 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820-10-55 establishes a fair value hierarchy that emphasizes use of observable inputs and minimizes use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1	Quoted prices in active markets for identical assets or liabilities
Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Except as described below under "Impaired Loans (Collateral Dependent)", calculation of fair values is performed by the Financial Accounting Department, based on the inputs and methodologies described within each category below. The major inputs and methodologies are reviewed by the Chief Financial Officer ("CFO") for approval as part of the quarterly closing process.

Recurring Measurements

The following table presents the fair value measurements of assets recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements were classified at September 30, 2012 and December 31, 2011, in thousands of dollars:

Thousands of dollars			Fair Value Measurements Using
September 30, 2012	Fair Value		Level 1		Level 2		Level 3
Available for sale securities:
U.S. Treasury and agency securities	$	25,339	$	-	$	25,339	$	-
Mortgage-backed agency securities		153,180		-		153,180		-
Obligations of states and political subdivisions		19,397		-		19,397		-
Corporate, asset backed and other debt securities		126		-		126		-
Equity securities		27		27		-		-
Total available for sale securities	$	198,069	$	27	$	198,042	$	-

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			Fair Value Measurements Using
December 31, 2011	Fair Value		Level 1		Level 2		Level 3
Available for sale securities:
U.S. Treasury and agency securities	$	49,366	$	-	$	49,366	$	-
Mortgage-backed agency securities		102,697		-		102,697		-
Obligations of states and political subdivisions		20,977		-		20,977		-
Corporate, asset backed and other debt securities		126		-		126		-
Equity securities		31		31		-		-
Total available for sale securities	$	173,197	$	31	$	173,166	$	-

Following is a description of the inputs and valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of those instruments under the valuation hierarchy.

Available-for-sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Level 2 securities include U.S. Government agency securities, mortgage-backed securities, obligations of states and municipalities, and certain corporate securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities, but rather, relying on the investment securities' relationship to other benchmark quoted investment securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The Company has no Level 3 securities.

Transfers between Levels

There were no transfers between Levels 1, 2 and 3 in the quarter ended September 30, 2012 of assets recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis.

Nonrecurring Measurements

The following table presents the fair value measurements of assets recognized in the accompanying condensed consolidated balance sheets measured at fair value on a non-recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at September 30, 2012 and December 31, 2011:

In thousands of dollars			Fair Value Measurements Using
Impaired Loans (Collateral Dependent):	Fair Value		Level 1		Level 2		Level 3
September 30, 2012	$	25,916	$	-	$	-	$	25,916
December 31, 2011		39,438		-		-		39,438

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Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements.

As of September 30, 2012, in thousands of dollars	Fair Value		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Impaired Loans (Collateral Dependent):	$	25,916	Market comparable properties	Marketability discount		6.5%–39.5% (13.2%)

Significant Unobservable Inputs

The following is a discussion of the significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement and of how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.

Impaired Loans (Collateral Dependent)

Loans for which it is believed to be probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans, based on current appraisals. If the impaired loan is identified as collateral dependent, the fair value of collateral method of measuring the amount of impairment is utilized.

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. The Company's practice is to obtain new or updated appraisals on the loans subject to the initial impairment review and then to generally update on an annual basis thereafter. The Company discounts the appraisal amount as necessary for selling costs and past due real estate taxes. If a new or updated appraisal is not available at the time of a loan's impairment review, the Company typically applies a discount to the value of an old appraisal to reflect the property's current estimated value if there is believed to be deterioration in either (i) the physical or economic aspects of the subject property or (ii) any market conditions. These discounts and estimates are developed by the Credit Department, and are reviewed by the Chief Credit Officer and the CFO. The results of the impairment review results in an increase in the allowance for loan loss or in a partial charge-off of the loan, if warranted. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method based on current appraisals.

Page 29

Fair Value of Financial Instruments

The carrying amounts and estimated fair value of principal financial assets and liabilities, in thousands of dollars, at September 30, 2012 and December 31, 2011, were as follows:

				Fair Value Measurements Using
September 30, 2012	Carrying Amount			Level 1		Level 2			Level 3
Financial Assets
Cash and cash equivalents	$	68,276		$	68,276	$	-		$	-
Securities available for sale		198,069			27		198,042			-
FHLB Stock		2,571			-		2,571			-
Loans held for sale		11,766			-		11,766			-
Net portfolio loans		569,348			-		-			578,532
Accrued interest receivable		2,891			-		2,891			-
Financial Liabilities
Total deposits	$	(776,025	)	$	-	$	(778,905	)	$	-
FHLB advances		(21,759	)		-		(22,870	)		-
Accrued interest payable		(403	)		-		(403	)		-

December 31, 2011	Carrying Amount			Fair Value
Financial Assets
Cash and cash equivalents	$	107,592		$	107,592
Securities available for sale		173,197			173,197
FHLB Stock		2,571			2,571
Loans held for sale		8,290			8,290
Net portfolio loans		543,069			551,616
Accrued interest receivable		2,772			2,772
Financial Liabilities
Total deposits	$	(764,856	)	$	(768,783	)
FHLB advances		(24,035	)		(25,475	)
Accrued interest payable		(491	)		(491	)

Estimated fair values require subjective judgments and are approximate. The above estimates of fair value are not necessarily representative of amounts that could be realized in actual market transactions, or of the underlying value of the Company. Changes in the following methodologies and assumptions could significantly affect the estimated fair value:

Cash and cash equivalents, FHLB stock, loans held for sale, accrued interest receivable and accrued interest payable – The carrying amounts are reasonable estimates of the fair values of these instruments at the respective balance sheet dates.

Net portfolio loans – The carrying amount is a reasonable estimate of fair value for personal loans for which rates adjust quarterly or more frequently, and for business and tax-exempt loans that are prime related and for which rates adjust immediately or quarterly. The fair value of all other loans is estimated by discounting future cash flows using current rates for loans with similar characteristics and maturities. The Bank's current loan rates are comparable with rates offered by other financial institutions. The allowance

Page 30

for loan losses is considered to be a reasonable estimate of discount for credit quality concerns.

Total deposits – With the exception of certificates of deposit, the carrying value is deemed to be the fair value due to the demand nature of the deposits. The fair value of fixed maturity certificates of deposit is estimated by discounting future cash flows using the current rates paid on certificates of deposit with similar maturities. The Bank's current deposit rates are comparable with rates offered by other financial institutions.

FHLB advances – The fair value is estimated by discounting future cash flows using current rates on advances with similar maturities.

Off-balance-sheet financial instruments – Commitments to extend credit, standby letters of credit and undisbursed loans are deemed to have no material fair value as such commitments are generally fulfilled at current market rates.

Note 10 – Accounting Developments

Accounting Standards Update No. 2011-11—Balance Sheet (Topic 210). In December 2011, FASB issued ASU 2011-11. The objective of this Update is to provide enhanced disclosures that will enable users of financial statements to evaluate the effect or potential effect of netting arrangements on an entity's financial position. This includes the effect or potential effect of rights of setoff associated with an entity's recognized assets and recognized liabilities within the scope of this Update. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either Section 210-20-45 or Section 815-10-45.

An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

Note 11 – Legal Proceedings

A class action lawsuit was filed against the Bank in early 2011 that alleges the Bank violated the Electronic Funds Transfer Act ("EFTA"), 15 U.S.C. §1693 et seq., by allegedly failing to provide adequate notice of automated teller machines ("ATMs") fees at the Bank's ATMs. The plaintiff is seeking class certification of the lawsuit, statutory damages, payment of costs of the lawsuit and payment of reasonable attorneys' fees. In the third quarter of 2012, the class was certified by the court. The Company is unable to determine potential liability in this case. Although the Bank intends to continue to vigorously defend the lawsuit, the likelihood of an unfavorable outcome is neither probable nor remote, and as such, no conclusion can be made at this time. The Bank believes this lawsuit is a routine legal proceeding occurring in the ordinary course of its business

Page 31

as an operator of ATMs. The Company believes that this lawsuit is without merit, but that disclosure of the potential liability is prudent.

Other than the above-referenced matter, the Company is involved in routine legal proceedings occurring in the ordinary course of its business, which, in the aggregate, are believed to be immaterial to the financial condition of the Company.

Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations

This discussion provides information about the consolidated financial condition and results of operations forUnited Bancorp, Inc. (the "Company" or "United") and its subsidiary bank, United Bank & Trust ("UBT" or the "Bank"), for the three and nine month periods ended September 30, 2012 and 2011. The discussion should be reviewed in conjunction with the Company's consolidated financial statements and related notes.

Background

United is a Michigan corporation headquartered in Ann Arbor, Michigan and is the holding company for UBT, a Michigan-chartered bank organized over 115 years ago. We are registered as a bank holding company under the Bank Holding Company Act of 1956. At September 30, 2012, we had total assets of $898.6 million, deposits of $776.0 million, and total shareholders' equity of $96.8 million. Our common stock is quoted on the OTCQB under the symbol "UBMI."

We have four primary lines of business under one operating segment of commercial banking: banking services, residential mortgage, wealth management and structured finance. We believe that these four lines of business provide us with a diverse and strong core revenue stream. During the nine months ended September 30, 2012, our noninterest income equaled 40.6% of our combined net interest income and noninterest income. For each of the last five years ended December 31, 2011, noninterest income approximated 33.7% of our combined net interest income and noninterest income.

This diverse revenue stream has enabled us to recognize a pre-tax, pre-provision return on average assets of 1.74% for the three months and 1.61% for the nine months ended September 30, 2012. Pre-tax, pre-provision return on average assets is not consistent with, or intended to replace, presentation under generally accepted accounting principles. For additional information about our pre-tax, pre-provision income and return on average assets, please see "Pre-Tax, Pre-provision Income and Return on Average Assets" under "Results of Operations" below.

Our bank offers a full range of services to individuals, corporations, fiduciaries and other institutions. Banking services include checking accounts, NOW accounts, savings accounts, time deposit accounts, money market deposit accounts, safe deposit facilities and money transfers. Lending operations provide real estate loans, secured and unsecured business and personal loans, consumer installment loans, credit card and check-credit loans, home equity loans, accounts receivable and inventory financing, and construction financing.

Our mortgage group, United Mortgage Company, offers our customers a full array of conventional residential mortgage products, including purchase, refinance and construction loans.

Page 32

Due to our local decision making and fully-functional back office, we believe we have consistently been the most active originator of residential mortgage loans in our market area. Our mortgage group generated 36.5% of our noninterest income for the nine months ended September 30, 2012.

Our Wealth Management group is a key focus of our growth and diversification strategy and offers a variety of investment services to individuals, corporations and governmental entities. Our Wealth Management group generated 24.7% of our noninterest income for the nine months ended September 30, 2012.

Our structured finance group, United Structured Finance Company, offers simple, effective financing solutions to small businesses and commercial property owners, primarily by utilizing various government guaranteed loan programs and other off-balance sheet finance solutions through secondary market sources.

Other Developments

Memorandum of Understanding

On January 15, 2010, UBT entered into a Memorandum of Understanding with the Federal Deposit Insurance Corporation ("FDIC") and the Michigan Office of Financial and Insurance Regulation ("OFIR"). On January 11, 2011, we entered into a revised Memorandum of Understanding ("MOU") with substantially the same requirements as the MOU dated January 15, 2010. The MOU is not a "written agreement" for purposes of Section 8 of the Federal Deposit Insurance Act. The MOU documents an understanding among UBT, the FDIC and OFIR, that, among other things, (i) UBT will not declare or pay any dividend to the Company without the prior consent of the FDIC and OFIR; and (ii) UBT will have and maintain its Tier 1 capital ratio at a minimum of 9% for the duration of the MOU, and will maintain its ratio of total capital to risk-weighted assets at a minimum of 12% for the duration of the MOU. For additional information about the capital ratios of UBT, see the information under the heading "Capital Management" below, which information is incorporated here by reference.

Board Resolution

At the direction of the Federal Reserve Bank of Chicago ("FRB"), on April 22, 2010, the Company's Board of Directors adopted a resolution requiring the Company to obtain written approval from the FRB prior to any of the following: (i) declaration or payment of common or preferred stock dividends; (ii) any increase in debt or issuance of trust preferred obligations; or (iii) the redemption of Company stock.

The Company has requested and received FRB approval to declare and pay as required, and has declared and paid, all accrued dividends on its 20,600 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, Liquidation Preference Amount $1,000 per share (the "Preferred Shares") to the date of this report. 

The Company is not required to seek prior approval of future payments of dividends on the Preferred Shares if certain conditions are met, including: (i) maintenance of a cash balance at the holding company of at least $3.3 million; (ii) payment of dividends will not significantly impact

Page 33

the Bank's capital levels; and (iii) neither the Company nor the Bank experiences any significant change to its financial condition or regulatory classification or standing. If these conditions are satisfied, then we may pay dividends on the Preferred Shares without prior regulatory approval. Our cash balance at the holding company was $3.6 million at September 30, 2012.

Capital Management

In December, 2010, the Company closed its public offering of 7,583,800 shares of common stock. The net proceeds to the Company, after deducting underwriting discounts and commissions and offering expenses, were approximately $17.1 million. The Company has contributed $12.0 million of the net proceeds of the offering to the capital of the Bank to increase the Bank's capital and regulatory capital ratios. As a result of the additional capital, the Bank was in compliance with the capital requirements of its MOU with the FDIC and OFIR at December 31, 2010 and 2011, and September 30, 2012. At September 30, 2012 the Bank's Tier 1 capital ratio was 9.63%, and its ratio of total capital to risk-weighted assets was 15.61%. At September 30, 2012, the Bank was categorized as well-capitalized under applicable regulatory guidelines.

Exit from TARP Capital Purchase Program

On June 19, 2012, the United States Department of the Treasury sold all 20,600 Preferred Shares in a modified dutch auction. The Company did not receive any proceeds from the sale of the Preferred Shares. The sale of the Preferred Shares did not result in any accounting entries on the books of the Company and did not change the Company's capital position. The Company incurred $299,000 of legal and accounting costs related to the sale of the Preferred Shares in the second quarter of 2012. The Company issued the Preferred Shares to Treasury on January 16, 2009 as part of Treasury's Troubled Asset Relief Program Capital Purchase Program in a private placement exempt from the registration requirements of federal and state securities laws.

On July 18, 2012, the Company repurchased from Treasury for $38,000 a Warrant to purchase 311,492 shares of Company common stock. The Warrant was issued to Treasury in connection with the Company's participation in the TARP Capital Purchase Program.

As a result of these transactions, the Company no longer has any obligation to Treasury in connection with the TARP Capital Purchase Program and the Company is no longer subject to certain requirements of the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009, leaving the Company with greater flexibility to manage its business and affairs and eliminating the management time and expenses which were required to comply with these provisions.

Executive Summary

The Company's consolidated net income was $1.4 million in the third quarter of 2012 and $3.0 million for the nine months ended September 30, 2012, compared to losses of $2.1 million and $1.4 million, respectively, for the same periods of 2011. Net income per common share for the three and nine months ended September 30, 2012 was $0.09 and $0.17, respectively, up from losses of $0.19 and $0.18, respectively, for comparable periods of 2011. Return on average assets ("ROA") was 0.62% and 0.45%, respectively, for the third quarter and first nine months of 2012, compared to -0.95% and -0.21%, respectively, for the comparable periods of 2011. Return on average shareholders' equity ("ROE") was 5.79% and 4.26%, respectively, for the third quarter

Page 34

and first nine months of 2012, compared to -8.85% and -1.97%, respectively, for the same periods of 2011.

The Company's combined net interest income and noninterest income was up 13.0% in the third quarter and 9.8% in the first nine months of 2012 compared to the same periods of 2011. While some categories of noninterest income decreased in the third quarter and first nine months of 2012 compared to the same periods of 2011, large increases in income from loan sales and servicing offset the decreases. Total noninterest income for the quarter and nine month periods ended September 30, 2012 was up 30.7% and 24.0%, respectively, compared to the same periods of 2011.

United's noninterest expenses for the three and nine month periods ended September 30, 2012 also increased from the comparable periods of 2011, with the largest dollar increases in compensation expense. Several categories of noninterest expense declined in the third quarter of 2012 compared to the same period of 2011. Among those were external data processing, attorney, accounting and other professional fees, and expenses related to other real estate owned ("ORE") and other foreclosed properties. Total noninterest expenses were up 2.4% and 7.0%, respectively, in the third quarter and first nine months of 2012, compared to the same periods of 2011.

The Company's provision for loan losses for the third quarter and first nine months of 2012 was $2.0 million and $6.7 million, respectively, down from $6.0 million and $11.9 million, respectively, for the same periods of 2011. The reduced level of provision for losses is a direct result of United's improvement in its credit quality measures.

Total consolidated assets of the Company were $898.6 million at September 30, 2012, compared to $885.0 million at December 31, 2011 and $894.4 million at September 30, 2011. Total portfolio loans of $591.8 million increased by $28.1 million in the first nine months of 2012, and by $14.2 million since September 30, 2011. The Company generally sells its fixed rate long-term residential mortgages on the secondary market, and retains adjustable rate mortgages in its loan portfolio.

The Company's total portfolio loans have increased by $14.2 million, or 2.5%, since September 30, 2011, and the balance of loans serviced for others has increased by $99.7 million, or 13.9%, during the same time period. While the Company continues to hold elevated levels of investments, federal funds sold and cash equivalents in order to protect the balance sheet during this prolonged period of economic uncertainty, those balances have declined in recent quarters. United's balances in federal funds sold and other short-term investments were $52.0 million at September 30, 2012, compared to $91.8 million at December 31, 2011 and $99.4 million at September 30, 2011. Securities available for sale of $198.1 million at September 30, 2012 were up $24.8 million from December 31, 2011 levels and have increased by $33.1 million since September 30, 2011.

Total deposits of $776.0 million at September 30, 2012 were up $11.2 million from $764.9 million at December 31, 2011, with all of the growth in non-interest bearing deposit balances. The majority of the Bank's deposits are derived from core client sources, relating to long-term relationships with local individual, business and public clients. Public clients include local government and municipal bodies, hospitals, universities and other educational institutions. As a result of its strong core funding, the Company's cost of interest-bearing deposits was 0.59% and

Page 35

0.64% for the third quarter and first nine months of 2012, respectively, down from 0.81% and 0.86%, respectively, for the same periods of 2011.

The Company's ratio of allowance for loan losses to total loans was 3.80% and the ratio of allowance for loan losses to nonperforming loans was 108.0% at September 30, 2012, compared to 3.66% and 80.0%, respectively, at December 31, 2011 and 4.22% and 81.8%, respectively, at September 30, 2011. The Company's allowance for loan losses increased by $1.8 million from December 31, 2011 to September 30, 2012, as provision for loan losses expense has exceeded net charge-offs in each of the quarters of 2012. Net charge-offs have averaged approximately $1.6 million per quarter for 2012, representing the lowest level since the second quarter of 2008.

Within the Company's loan portfolio, $20.8 million of loans were considered nonperforming at September 30, 2012, compared to $25.8 million at December 31, 2011 and $29.8 million at September 30, 2011. Total nonperforming loans as a percent of total portfolio loans decreased from 4.57% at the end of 2011 and 5.16% at September 30, 2011 to 3.51% at September 30, 2012. For purposes of this presentation, nonperforming loans consist of nonaccrual loans and accruing loans that are past due 90 days or more, and exclude accruing restructured loans. Balances of accruing restructured loans at September 30, 2012, December 31, 2011 and September 30, 2011 were $16.3 million, $21.8 million and $21.4 million, respectively.

Financial Condition

Securities

Balances in the securities portfolio have increased in recent periods, generally reflecting deposit growth in excess of loan growth. The makeup of the Company's investment portfolio evolves with the changing price and risk structure, and liquidity needs of the Company. The table below reflects the carrying value of various categories of investment securities of the Company, along with the percentage composition of the portfolio by type as of September 30, 2012 and December 31, 2011.

	September 30, 2012					December 31, 2011
In thousands of dollars	Balance		% of total			Balance		% of total
U.S. Treasury and agency securities	$	25,339		12.8	%	$	49,366		28.5	%
Mortgage-backed agency securities		153,180		77.3	%		102,697		59.3	%
Obligations of states and political subdivisions		19,397		9.8	%		20,977		12.1	%
Corporate, asset backed, and other debt securities		126		0.1	%		126		0.1	%
Equity securities		27		0.0	%		31		0.0	%
Total Investment Securities	$	198,069		100.0	%	$	173,197		100.0	%

Investments in U.S. Treasury and agency securities are considered to possess low credit risk. Obligations of U.S. government agency mortgage-backed securities possess a somewhat higher interest rate risk due to certain prepayment risks. The municipal portfolio contains a small level of geographic risk, as approximately 1.5% of the investment portfolio is issued by political subdivisions located within Lenawee County, Michigan, 1.8% in Monroe County, Michigan, and 2.2% in Washtenaw County, Michigan. The Bank's investment in local municipal issues also reflects our commitment to the development of the local area through support of its local political subdivisions.

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Management believes that the unrealized losses within the investment portfolio are temporary, since they are a result of interest rate changes, rather than a reflection of credit quality. Management has no specific intent to sell any securities, although the entire investment portfolio is classified as available for sale. The following chart summarizes net unrealized gains in each category of the portfolio at September 30, 2012 and December 31, 2011.

Unrealized gains in thousands of dollars	9/30/12		12/31/11		Change
U.S. Treasury and agency securities	$	177	$	367	$	(190	)
Mortgage-backed agency securities		2,592		842		1,750
Obligations of states and political subdivisions		803		1,287		(484	)
Equity securities		1		5		(4	)
Total Investment Securities	$	3,573	$	2,501	$	1,072

FHLB Stock

The Bank is a member of the Federal Home Loan Bank of Indianapolis ("FHLBI") and holds a $2.6 million investment in stock of the FHLBI. The investment is carried at par value, as there is not an active market for FHLBI stock. The FHLBI reported a profit of $33.2 million for the second quarter of 2012, and continues to pay dividends on its stock.² The Company regularly reviews the credit quality of FHLBI stock for impairment, and determined that no impairment of FHLBI stock was necessary as of September 30, 2012.

Loans

The following table shows the dollar and percent change in each category of loans for the periods reported. All loans are domestic and contain no significant concentrations by industry or client.

	This Quarter						Year to Date						Twelve-Month
In thousands of dollars	Change			Percent			Change			Percent			Change			Percent
Personal	$	2,625			2.4	%	$	7,776			7.5	%	$	4,974			4.7	%
Business, including commercial mortgages		(643	)		-0.2	%		8,601			2.6	%		(2,084	)		-0.6	%
Tax exempt		(21	)		-1.2	%		(308	)		-15.1	%		(343	)		-16.5	%
Residential mortgage		3,367			4.0	%		3,739			4.5	%		5,077			6.2	%
Construction and development		9,480			24.5	%		8,415			21.2	%		6,658			16.1	%
Deferred loan fees and costs		(279	)		-57.2	%		(117	)		-35.9	%		(74	)		-26.1	%
Total portfolio loans	$	14,529			2.5	%	$	28,106			5.0	%	$	14,208			2.5	%

Total portfolio loan balances increased by $28.1 million, or 5.0%, from December 31, 2011 and $14.2 million, or 2.5%, from September 30, 2011. Personal loans on the Company's balance sheet included home equity lines of credit, direct and indirect loans for automobiles, boats, recreational vehicles and other items for personal use. Personal loan balances increased by $2.6 million, or 2.4% in the third quarter of 2012, and grew by 4.7% in the twelve months ended September 30, 2012. Business loan balances decreased by $0.6 million, or 0.2%, in the third quarter of 2012, and $2.1 million, or 0.6%, over the twelve months ended September 30, 2012,

² Federal Home Loan Bank of Indianapolis, Form 10-Q Quarterly Report for the period ended June 30, 2012.

Page 37

but have increased by $8.6 million since December 31, 2011. Growth of business loans in the first nine months of 2012 reflects a modest improvement in loan demand, net of write-downs, charge-offs and payoffs.

The Bank's loan portfolio includes $3.8 million of purchased participations in business loans originated by other institutions. These participations represent 0.6% of total loans. Of those participation loans, 91.6% of the outstanding balances are the result of participations purchased from other Michigan community banks.

The Bank generally sells its production of fixed-rate residential mortgages on the secondary market, and retains high credit quality residential mortgage loans that are not otherwise eligible to be sold on the secondary market and shorter-term adjustable rate residential mortgages in its portfolio. As a result, the mix of residential mortgage production for any given year will have an impact on the amount of residential mortgages held in the portfolio of the Bank. Portfolio balances of residential mortgages increased by 3.9% in the third quarter of 2012 and 6.2% in the twelve months ended September 30, 2012.

Outstanding balances of loans for construction and development have increased by $9.5 million in the third quarter of 2012 and $6.7 million since September 30, 2011. The increase in the third quarter of 2012 consisted of approximately $4.8 million of commercial construction (primarily owner-occupied) loans, and a similar amount of consumer residential construction loans. Over the twelve months ended September 30, 2012, nearly 75% of the increase in construction and development loans was in consumer residential construction loans. Residential construction loans generally convert to residential mortgages to be retained in the Bank's portfolio or to be sold in the secondary market, while commercial construction loans generally will be converted to commercial mortgages.

Credit Quality

The Bank's credit quality measures have continued to show improvement in recent quarters, and substantial improvement in credit quality measures occurred in the third quarter of 2012.

Nonperforming Assets. The Company actively monitors delinquencies, nonperforming assets and potential problem loans. The accrual of interest income is discontinued when a loan becomes ninety days past due unless the loan is both well secured and in the process of collection, or the borrower's capacity to repay the loan and the collateral value appears sufficient.

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The chart below shows the amount of nonperforming assets by category for the past five quarters.

In thousands of dollars	9/30/12			6/30/12			3/31/12			12/31/11			9/30/11
Nonaccrual loans	$	20,386		$	25,634		$	25,958		$	25,754		$	29,392
Accruing loans past due 90 days or more		406			242			13			31			386
Total nonperforming loans		20,792			25,876			25,971			25,785			29,778
Nonperforming loans % of total portfolio loans		3.51	%		4.48	%		4.51	%		4.57	%		5.16	%
Allowance coverage of nonperforming loans		108.0	%		85.4	%		81.0	%		80.0	%		81.8	%
Other assets owned		2,179			3,392			3,484			3,669			4,301
Total nonperforming assets	$	22,971		$	29,268		$	29,455		$	29,454		$	34,079
Nonperforming assets % of total assets		2.56	%		3.31	%		3.22	%		3.33	%		3.81	%
Loans delinquent 30-89 days	$	2,807		$	2,070		$	3,729		$	6,468		$	3,613
Accruing restructured loans
Business, including commercial mortgages	$	7,819		$	8,641		$	9,137		$	10,404		$	10,301
Construction and development		5,017			6,840			7,825			8,186			8,231
Residential mortgage		3,276			3,284			3,293			3,078			2,569
Home Equity		171			171			171			171			300
Total accruing restructured loans	$	16,283		$	18,936		$	20,426		$	21,839		$	21,401

Total nonaccrual loans have decreased by $5.2 million since June 30, 2012, while accruing loans past due 90 days or more have increased by $164,000 for the same period. A significant portion of the decline in nonperforming assets in the third quarter of 2012 was the result of payoffs of three loans totaling $4.5 million that were carried on nonaccrual status.

Interest payments received on impaired loans are recorded as interest income unless collection of the remaining recorded investment is doubtful, at which time payments received are recorded as reductions to principal. Subsequent payments on nonaccrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Nonaccrual loans are returned to accrual status when, in the judgment of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.

Total nonperforming loans have declined by $5.0 million since December 31, 2011, and have declined by $9.0 million since September 30, 2011. Total nonperforming loans as a percent of total portfolio loans were 3.51% at September 30, 2012, down from 4.57% and 5.16% at December 31 and September 30, 2011, respectively, while the ratio of allowance for loan losses to nonperforming loans improved from 81.8% and 80.0%, respectively, at September 30 and December 31, 2011 to 108.0% at September 30, 2012. This represents the first time that the Company's ratio of allowance for loan losses to nonperforming loans has exceeded 100% since the second quarter of 2007. Loan workout and collection efforts continue with all delinquent clients, in an effort to bring them back to performing status.

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Other assets owned includes other real estate owned and other repossessed assets, which may include automobiles, boats and other personal property. Holdings of other assets owned decreased by $1.5 million since the end of 2011 and $2.1 million since September 30, 2011, as the Bank continued to sell other assets owned, while additional other assets owned have been added to its totals. At September 30, 2012, other real estate owned included twenty-one properties that were acquired through foreclosure or in lieu of foreclosure. The properties included fifteen commercial properties, eight of which were the result of out-of-state loan participations, and six residential properties. All properties are for sale. Other repossessed assets at September 30, 2012 consisted of one automobile.

The following table reflects the changes in other assets owned during 2012.

In thousands of dollars	ORE			Other Assets			Total
Balance at January 1	$	3,657		$	12		$	3,669
Additions		2,535			40			2,575
Sold		(3,571	)		(49	)		(3,620	)
Write-downs of book value		(445	)		-			(445	)
Balance at September 30	$	2,176		$	3		$	2,179

Troubled Debt Restructurings. In the course of working with borrowers, the Bank may choose to restructure the contractual terms of certain loans. In this scenario, the Bank attempts to work out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified are reviewed by the Bank to identify if a troubled debt restructuring ("TDR") has occurred, which is when, for economic or legal reasons related to a borrower's financial difficulties, the Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two. If such efforts by the Bank do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time foreclosure proceedings are initiated. At any time prior to a sale of the property at foreclosure, the Bank may terminate foreclosure proceedings if the borrower is able to work-out a satisfactory payment plan.

It is the Bank's policy to have any restructured loans which are on nonaccrual status prior to being restructured, remain on nonaccrual status until six months of satisfactory borrower performance, at which time management would consider its return to accrual status. The balance of nonaccrual restructured loans, which is included in nonaccrual loans, was $15.0 million at September 30, 2012 and $10.7 million at December 31, 2011. If a restructured loan is on accrual status prior to being restructured, it is reviewed to determine if the restructured loan should remain on accrual status. The balance of accruing restructured loans was $16.3 million at September 30, 2012 and $21.8 million at December 31, 2011.

All TDRs are considered impaired by the Company. Loans that are considered TDRs are classified as performing unless they are on nonaccrual status or greater than 90 days delinquent as of the end of the most recent quarter.  Under Company policy, a loan may be removed from TDR status when it is determined that the loan has performed according to its modified terms for

Page 40

a sustained period of repayment performance (generally not less than six months and not during the calendar year in which the restructuring took place), and the restructuring agreement specified an interest rate greater than or equal to an acceptable rate for a comparable new loan. On a quarterly basis, the Company individually reviews all TDR loans to determine if a loan meets these criteria. As of September 30, 2012, there were six commercial loans totaling $3.0 million that were proceeding through this six-month performance period and whose rate is not below current market rates.

Accruing restructured loans at September 30, 2012 are comprised of two categories of loans on which interest is being accrued under their restructured terms, and the loans are current or less than ninety days past due. The first category consists of commercial loans, primarily comprised of business loans that have been temporarily modified as interest-only loans, generally for a period of up to one year, without a sufficient corresponding increase in the interest rate.

Within this category are CLD loans that have been renewed as interest only, generally for a period of up to one year, to assist the borrower. The Bank does not generally forgive principal or interest on restructured loans. However, when a loan is restructured, principal is generally received on a delayed basis as compared to the original repayment schedule. CLD loans that are restructured are generally modified to require interest-only for a period of time. The Bank does not generally reduce interest rates on restructured commercial loans.

The second category included in accruing restructured loans consists of residential mortgage and home equity loans whose terms have been restructured at less than market terms and include rate modifications, extension of maturity, and forbearance.

The table below provides a breakdown of accruing restructured loans by type at September 30, 2012. The table also includes the average yield on restructured loans and the yield for the entire portfolio, for commercial loans and the residential mortgage and home equity line portfolio, for the third quarter of 2012.

	September 30, 2012				Third Quarter
Dollars in thousands	Number of Loans		Recorded Balance		Avg. Yield			Portfolio Yield
CLD Loans		7	$	5,017
Other Commercial Loans		18		7,819
Total Commercial Loans		25		12,836		5.17	%		5.31	%
Residential Mortgage & Home Equity Loans		17		3,447		3.80	%		5.34	%
Total accruing restructured loans		42	$	16,283

The Company has no personal loans other than the loans described above that are classified as troubled debt restructurings.

The Company performed its quarterly evaluation of the specific reserves on all of its loans previously identified as TDRs at September 30, 2012. All of the Company's accruing TDRs are performing in accordance with their modified terms and have demonstrated the necessary performance for the accrual of interest. The following table compares the recorded investment in accruing TDR loans and their specific reserve amount, as of September 30, 2012 and December 31, 2011.

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In thousands of dollars	9/30/12			12/31/11			Change
Balance of TDR Loans	$	16,283		$	21,839		$	(5,556	)
Specific reserve on above loans		4,131			4,764			(633	)
Percent		25.4	%		21.8	%

Impaired Loans. A loan is classified as impaired when it is probable that the Bank will be unable to collect all amounts due (including both interest and principal) according to the contractual terms of the loan agreement. Within the Bank's loan portfolio, $38.2 million of impaired loans have been identified as of September 30, 2012, down from $52.0 million at December 31, 2011. The specific allowance for impaired loans was $8.3 million at September 30, 2012, down from $9.0 million at December 31, 2011. The ultimate amount of the impairment and the potential losses to the Company may be substantially higher or lower than estimated, depending on the realizable value of the collateral. The level of provision for loan losses made in connection with impaired loans reflects the amount management believes to be necessary to maintain the allowance for loan losses at an adequate level, based upon the Bank's current analysis of losses inherent in its loan portfolios.

Business loans carry the largest balances per loan, and any single loss would be proportionally larger than losses in other portfolios. In addition to internal loan rating systems and active monitoring of loan trends, the Bank uses an independent loan review firm to assess the quality of its business loan portfolio. Interest payments received on impaired loans are recorded as interest income unless collection of the remaining recorded investment is doubtful, at which time payments received are recorded as reductions to principal.

CLD loans include residential and non-residential construction and land development loans. The residential CLD loan portfolio consists mainly of loans for the construction, development, and improvement of residential lots, homes, and subdivisions. The non-residential CLD loan portfolio consists mainly of loans for the construction and development of office buildings and other non-residential commercial properties. This type of lending is generally considered to have more complex credit risks than traditional single-family residential lending because the principal is concentrated in a limited number of loans with repayment dependent on the successful completion and sales of the related real estate project. Consequently, these loans are often more sensitive to adverse conditions in the real estate market or the general economy than other real estate loans. These loans are generally less predictable and more difficult to evaluate and monitor and collateral may be difficult to dispose of in a market decline.

The Bank's portfolio of residential mortgages consists of loans to finance 1-4 family residences, second homes, vacation homes, and residential investment properties. The personal loan portfolio consists of direct and indirect installment, home equity and unsecured revolving line of credit loans. Installment loans consist primarily of home equity loans and loans for consumer durable goods, principally automobiles. Indirect personal loans, which make up a small percent of the personal loans, consist of loans for automobiles, boats and manufactured housing.

Allowance for Loan Losses. The Company's allowance for loan losses increased by $363,000 during the third quarter of 2012 and $1.8 million since December 31, 2011. The allowance for loan losses as a percent of total loans of 3.80% at September 30, 2012 was up from 3.66% at

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December 31, 2011. The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred credit losses in the loan portfolio. Management's determination of the adequacy of the allowance for loan losses is based on an evaluation of the loan portfolio, past loan loss experience, current economic conditions, volume, amount, and composition of the loan portfolio, and other factors management believes to be relevant.

The table below provides a breakdown of ALLL, charge-offs and combined losses as of September 30, 2012 for impaired and non-impaired loans. Impaired loans are further split between accruing TDRs and other impaired loans.

Dollars in thousands	Unpaid Principal Balance		ALLL		Cumulative Charge- offs		Combined Losses		% of Unpaid Principal Balance
Accruing TDRs	$	16,283	$	4,131			$	4,131		25.4	%
Other Impaired Loans		21,887		4,136				4,136
Cumulative Charge-offs		8,948		-		8,948		8,948
Total		30,835		4,136		8,948		13,084		42.4	%
Non-impaired loans	$	553,638	$	14,193			$	14,193		2.6	%

Deposits

United internally funds its operations through a large, stable base of core deposits that provides cost-effective funding for its lending operations. The majority of deposits are derived from core client sources, relating to long term relationships with local individual, business and public clients. Public clients include local governments and municipal bodies, hospitals, universities and other educational institutions. At September 30, 2012, core deposits accounted for 99.1% of total deposits, up from 98.7% at September 30, 2011. For this presentation, core deposits consist of total deposits less national certificates of deposit and brokered deposits. Core deposits include CDARS deposits as they represent deposits originated in the Bank's market area.

The table below shows the change in the various categories of the deposit portfolio for the reported periods.

	This Quarter						Year to Date						Twelve-Month
In thousands of dollars	Change			Percent			Change			Percent			Change			Percent
Noninterest bearing	$	(1,974	)		-1.2	%	$	19,987			14.3	%	$	24,660			18.3	%
Interest bearing deposits		16,611			2.8	%		(8,818	)		-1.4	%		(24,164	)		-3.8	%
Total deposits	$	14,637			1.9	%	$	11,169			1.5	%	$	496			0.1	%

Deposit balances grew by $14.6 million, or 1.9%, in the third quarter of 2012, and have increased by $496,000, or 0.1%, in the twelve months ended September 30, 2012. In the most recent quarter, demand deposit balances decreased by $2.0 million, while interest bearing deposits increased by $16.6 million. The increase in interest bearing deposits during the three months ended September 30, 2012 included a seasonal increase in public fund balances.

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The Bank utilizes purchased or brokered deposits for interest rate risk management purposes, but does not support its growth through the use of those products. In addition, the Bank participates in the CDARS program, which allows it to provide competitive CD products while maintaining FDIC insurance for clients with larger balances. Management believes the Bank's deposit rates are consistently competitive with other banks in its market areas.

Noninterest bearing deposits made up 20.5% of total deposits at September 30, 2012, compared to 18.2% at December 31, 2011 and 17.4% at September 30, 2011. The following table shows the makeup of the Company's deposits at September 30, 2012, December 31, 2011 and September 30, 2011.

Percentage Makeup of Deposit Portfolio	9/30/12			12/31/11			9/30/11
Noninterest bearing		20.5	%		18.2	%		17.4	%
Interest bearing deposits		79.5	%		81.8	%		82.6	%
Total deposits		100.0	%		100.0	%		100.0	%

Cash Equivalents and Borrowed Funds

The Company maintains correspondent accounts with a number of other banks for various purposes. In addition, cash sufficient to meet the operating needs of its banking offices is maintained at its lowest practical levels. The Bank is sometimes a participant in the federal funds market, either as a borrower or seller. Federal funds are generally borrowed or sold for one-day periods. The Bank maintains interest-bearing deposit accounts with the Federal Reserve Bank and the FHLBI, as alternatives to federal funds. The Bank also has the ability to utilize short term advances from the FHLBI and borrowings at the discount window of the Federal Reserve Bank as additional short-term funding sources, but has not used either of these borrowing sources during the reported periods.

The Company periodically finds it advantageous to utilize longer-term borrowings from the FHLBI. These longer-term borrowings serve to provide a balance to some of the interest rate risk inherent in the Company's balance sheet. Additional information regarding borrowed funds is found in the Liquidity section below.

Results of Operations

Earnings Summary and Key Ratios

The Company achieved consolidated net income of $1.4 million in the third quarter and $3.0 million for the first nine months of 2012. This compares to consolidated net losses of $2.1 million and $1.4 million for the same periods of 2011. The improvement in income in the third quarter and first nine months of 2012 resulted primarily from increased levels of noninterest income and reduced amounts in the Company's provision for loan losses, and in spite of increased compensation expense and continued elevated levels of attorney and professional fees and expenses relating to ORE and foreclosed property.

United's net interest margin was relatively stable, at 3.63% for both the three and nine month periods ended September 30, 2012. This compares to 3.58% and 3.63%, respectively, for the same periods of 2011. For the third quarter of 2012, net interest income of $7.6 million was up

Page 44

2.8% compared to the same period of 2011, and net interest income of $22.8 million for the first nine months of 2012 was 1.9% above the same period of 2011. Noninterest income of $5.6 million for the most recent quarter improved by 30.7% compared to the third quarter of 2011, while noninterest income for the nine months ended September 30, 2012 was 24.0% higher than the same period of 2011. Noninterest income represented 42.1% and 40.6%, respectively, of the Company's combined net interest income and noninterest income for the three and nine months ended September 30, 2012, compared to 36.4% and 36.0%, respectively, for the same periods of 2011.

Total noninterest expense for the third quarter of 2012 was up 2.4% from the third quarter of 2011, and increased by 7.0% for the first nine months of 2012 compared to the same period of 2011. In the third quarter of 2012, the largest dollars of increase in noninterest expense were in compensation expense. For the first nine months of 2012, the largest dollars of increase were in compensation expense and expenses related to ORE and other foreclosed properties, which included write-downs of the value and losses on the sale of property held as ORE, costs to maintain and carry those properties, and losses and fees related to foreclosed mortgage loans previously sold on the secondary market.

Expenses related to salaries and employee benefits increased by 14.8% and 11.2%, respectively, in the third quarter and first nine months of 2012 compared to the same periods of 2011. The increase reflects, in part, continued higher levels of commissions and other compensation costs related to the generation of income from loan sales and servicing. In addition, the Company has increased its staffing levels modestly to accommodate its anticipated future expansion, including expansion into Livingston and Monroe Counties, and salary increases were reinstated effective April 1, 2011. However, the Company did not pay or accrue any cash bonus or other payout to executive officers or non-commissioned employees under its bonus plans in 2011 or the first nine months of 2012.

The Company's provision for loan losses of $2.0 million in the third quarter of 2012 was down from $6.0 million for the third quarter of 2011. For the first nine months of 2012, the Company's provision for loan losses of $6.7 million was down from $11.9 million for the same period of 2011. ROA was 0.62% for the third quarter and 0.45% for the first nine months of 2012, compared to -0.95% and -0.21% for the comparable periods of 2011. ROE was 5.79% for the third quarter and 4.26% for the first nine months of 2012, compared to -8.85% and -1.97%, respectively, for the same periods of 2011.

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The following chart shows trends in these and other ratios, along with trends of the major components of earnings for the five most recent quarters.

	2012									2011
in thousands of dollars, where appropriate	3rd Qtr			2nd Qtr			1st Qtr			4th Qtr			3rd Qtr
Net interest income	$	7,646		$	7,566		$	7,569		$	7,687		$	7,437
Provision for loan losses		2,000			2,550			2,100			250			6,000
Noninterest income		5,564			5,278			4,758			4,635			4,256
Noninterest expense		9,300			9,148			9,169			8,815			9,084
Federal income tax provision		520			361			216			960			(1,291	)
Net income (loss)		1,390			785			842			2,297			(2,100	)
Earnings (loss) per common share	$	0.09		$	0.04		$	0.04		$	0.16		$	(0.19	)
Return on average assets (a)		0.62	%		0.36	%		0.38	%		1.03	%		-0.95	%
Return on average shareholders' equity (a)		5.79	%		3.35	%		3.61	%		9.89	%		-8.85	%
Net interest margin		3.63	%		3.62	%		3.62	%		3.67	%		3.58	%
Efficiency ratio (tax equivalent basis)		69.9	%		70.7	%		73.8	%		70.9	%		77.0	%
(a)  annualized

Pre-tax, Pre-provision Income and Return on Average Assets

In an attempt to evaluate the trends of net interest income, noninterest income and noninterest expense, the Company calculates pre-tax, pre-provision income ("PTPP Income") and pre-tax, pre-provision return on average assets ("PTPP ROA"). PTPP Income adjusts net income by the amount of the Company's federal income tax (benefit) and provision for loan losses, which is excluded because its level is elevated and volatile in times of economic stress. PTPP ROA measures PTPP Income as a percent of average assets. While this information is not consistent with, or intended to replace, presentation under generally accepted accounting principles, it is presented here for comparison.

Management believes that PTPP Income and PTPP ROA are useful and consistent measures of the Company's earning capacity, as these financial measures enable investors and others to assess the Company's ability to generate capital to cover credit losses through a credit cycle, particularly in times of economic stress.

The Company's strong PTPP Income has been achieved through a substantial core funding base which has resulted in a comparatively strong net interest margin, a diversity of noninterest income sources and expansion of our markets. The Company's PTPP ROA improved to 1.74% and 1.61%, respectively, for the third quarter and first nine months of 2012, compared to 1.19% and 1.40%, respectively, for the same periods in 2011.

Increases in noninterest income generated most of the improvements in PTPP ROA for the third quarter and first nine months of 2012.

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The following table shows the calculation and trend of the components of PTPP Income and PTPP ROA for the three and nine month periods ended September 30, 2012 and 2011.

	Three Months Ended September 30,									Nine Months Ended September 30,
In thousands of dollars	2012			2011			Change			2012			2011			Change
Interest income	$	8,731		$	8,906			-2.0	%	$	26,322		$	27,086			-2.8	%
Interest expense		1,085			1,469			-26.1	%		3,541			4,722			-25.0	%
Net interest income		7,646			7,437			2.8	%		22,781			22,364			1.9	%
Noninterest income		5,564			4,256			30.7	%		15,600			12,576			24.0	%
Noninterest expense		9,300			9,084			2.4	%		27,617			25,803			7.0	%
Pre-tax, pre-provision income	$	3,910		$	2,609			49.9	%		10,764			9,137			17.8	%
Average assets	$	892,235		$	876,095			1.8	%	$	890,539		$	873,808			1.9	%
Pre-tax, pre-provision ROA		1.74	%		1.19	%		0.55	%		1.61	%		1.40	%		0.21	%
Reconcilement to GAAP income:
Provision for loan losses		2,000			6,000						6,650			11,900
Income tax (benefit)		520			(1,291	)					1,097			(1,383	)
Net income	$	1,390		$	(2,100	)				$	3,017		$	(1,380	)

Net Interest Income

Despite continued downward pressure on both short and long-term interest rates, United has maintained a stable net interest margin over the past several quarters, primarily as a result of three factors  – portfolio loan growth, deployment of excess liquidity, and funding of growth with core deposits.

The Company's mix of assets has evolved over recent quarters, resulting in a slowing of the decline in its yields on earning assets. Portfolio loan growth of $14.5 million in the third quarter and $28.1 million in first nine months of 2012 has contributed to this shift in mix. The Company converted its loan production office in Brighton, Michigan to a full-service banking office in the second quarter of 2012, and opened a new loan production office within the City of Monroe, Michigan in July 2012. Both offices have contributed to increased lending activity. In addition, loan volumes within the Bank's existing markets have improved modestly.

The Company has held historically high levels of liquidity since 2009, during this extended period of economic uncertainty. While the additional liquidity contributed to the Company's margin compression during that time period, a shift of a portion of its liquidity from federal funds and equivalents to investment securities in 2012 has slowed United's decline in yields on earning assets.  At the same time, the Bank has reduced its average balances of FHLB advances and higher-cost deposits during the third quarter and first nine months of 2012, and continues to fund its growth primarily with core deposits.

United's net interest margin was 3.63% for both the three and nine month periods ended September 30, 2012, compared to 3.58% and 3.63% respectively, for the same periods of 2011. Net interest spread on a tax equivalent basis improved from 3.37% for the third quarter of 2011 to 3.45% for the third quarter of 2012, and net interest spread for the first nine months of 2012 improved to 3.44%, up from 3.40% for the same period of 2011.

The following table provides a summary of the various components of net interest income, and the results of changes in balance sheet makeup that have resulted in the changes in net interest spread and net interest margin for the three and nine month periods ended September 30, 2012 and 2011.

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	Three Months Ended September 30,																		Nine Months Ended September 30,
	2012									2011									2012									2011
dollars in thousands	Average Balance			Interest (b)			Yield/ Rate (c)			Average Balance			Interest (b)			Yield/ Rate (c)			Average Balance			Interest (b)			Yield/ Rate (c)			Average Balance			Interest (b)			Yield/ Rate (c)
Assets
Interest earning assets (a)
Federal funds & equivalents	$	55,558		$	36			0.26	%	$	97,514		$	63			0.26	%	$	69,385		$	133			0.25	%	$	107,004		$	204			0.25	%
Taxable investments		179,999			618			1.34	%		135,346			739			2.14	%		169,445			1,988			1.57	%		123,167			2,043			2.22	%
Tax exempt securities (b)		16,450			241			5.73	%		20,627			279			5.28	%		19,878			760			5.86	%		22,659			877			5.16	%
Taxable loans		593,992			7,898			5.29	%		580,949			7,888			5.39	%		588,064			23,633			5.37	%		581,411			24,165			5.56	%
Tax exempt loans (b)		1,744			28			6.34	%		2,093			43			8.09	%		1,800			93			6.91	%		2,122			131			8.25	%
Total int. earning assets (b)		847,743			8,821			4.14	%		836,529			9,012			4.28	%		848,572			26,607			4.18	%		836,363			27,420			4.38	%
Less allowance for loan losses		(22,921	)								(25,752	)								(22,126	)								(25,568	)
Other assets		67,413									65,318									64,093									63,013
Total Assets	$	892,235								$	876,095								$	890,539								$	873,808
Liabilities and Shareholders' Equity
NOW and savings deposits	$	363,878			131			0.14	%	$	349,956			212			0.24	%	$	363,522			436			0.16	%	$	348,110			690			0.27	%
Other interest bearing deposits		240,684			764			1.26	%		263,655			1,038			1.56	%		250,225			2,500			1.34	%		265,324			3,279			1.65	%
Total int. bearing deposits		604,562			895			0.59	%		613,611			1,250			0.81	%		613,747			2,936			0.64	%		613,434			3,969			0.86	%
Short term borrowings		-			-			0.00	%		1			-			0.00	%		-			-			0.00	%		252			11			5.99	%
Other borrowings		22,446			190			3.37	%		24,924			219			3.49	%		23,429			605			3.39	%		27,926			742			3.50	%
Total int. bearing liabilities		627,008			1,085			0.69	%		638,536			1,469			0.91	%		637,176			3,541			0.74	%		641,612			4,722			0.98	%
Noninterest bearing deposits		162,066			-						138,744			-						155,161			-						135,648			-
Total including noninterestbearing deposits		789,074			1,085			0.55	%		777,280			1,469			0.75	%		792,337			3,541			0.60	%		777,260			4,722			0.82	%
Other liabilities		7,678									4,656									3,656									3,071
Shareholders' equity		95,483									94,159									94,546									93,477
Total Liabilities and Shareholders' Equity	$	892,235								$	876,095								$	890,539								$	873,808
Net interest income (b)					7,736									7,543									23,066									22,698
Net spread (b)								3.45	%								3.37	%								3.44	%								3.40	%
Net yield on interest earning assets (b)								3.63	%								3.58	%								3.63	%								3.63	%
Tax equivalent adjustment on interest income					(90	)								(106	)								(285	)								(334	)
Net interest income per income statement				$	7,646								$	7,437								$	22,781								$	22,364
Ratio of interest earning assets to interest bearing liabilities								1.35									1.31									1.33									1.30
(a) Non-accrual loans and overdrafts are included in the average balances of loans
(b) Fully tax-equivalent basis, net of nondeductible interest impact; 34% tax rate
(c) Annualized

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Provision for Loan Losses

The Company's provision for loan losses for the third quarter and first nine months of 2012 was $2.0 million and $6.7 million, respectively, down from $6.0 million and $11.9 million for the same periods of 2011. The provision for loan losses provides for probable incurred credit losses inherent in the loan portfolio. The Company's provision for loan losses exceeded net charge-offs of $1.6 million and $4.8 million, respectively, for the quarter and nine months ended September 30, 2012.

The loan portfolio of the Bank continues to be affected by loans to a number of larger commercial borrowers that continue to struggle to meet their financial obligations. Loans in the Bank's residential CLD loan portfolio are secured by unimproved and improved land, residential lots, and single-family homes and condominium units. In addition, loans secured by commercial real estate are continuing to experience stresses resulting from the current economic conditions. The Bank has continued to closely monitor the impact of economic circumstances on its lending clients, and is working with these clients to minimize losses. Information regarding the allowance for loan losses is included in the "Credit Quality" discussion above.

Noninterest Income

Total noninterest income improved by 30.7% and 24.0%, respectively, for the third quarter and first nine months of 2012 compared to the same periods of 2011. The following table summarizes changes in noninterest income by category for the three and nine month periods ended September 30, 2012 and 2011.

	Three Months Ended September 30,							Nine Months Ended September 30,
In thousands of dollars	2012		2011		Change			2012		2011		Change
Service charges on deposit accounts	$	496	$	486		2.1	%	$	1,378	$	1,500		-8.1	%
Wealth Management fee income		1,319		1,226		7.6	%		3,855		3,780		2.0	%
Income from loan sales and servicing		2,803		1,610		74.1	%		7,299		4,540		60.8	%
ATM, debit and credit card fee income		517		550		-6.0	%		1,583		1,619		-2.2	%
Other income		429		384		11.7	%		1,485		1,137		30.6	%
Total noninterest income	$	5,564	$	4,256		30.7	%	$	15,600	$	12,576		24.0	%

Service charges on deposit accounts were up 2.1% in the third quarter of 2012 compared to the same period a year earlier, and have declined by 8.1%  in the first nine months of 2012 compared to the same period of 2011. Substantially all of the change in both periods of 2012 was due to the Company's levels of non-sufficient funds and overdraft fees collected.

The Wealth Management Group of UBT provides a relatively large component of the Company's noninterest income. Wealth Management Group income includes trust and investment management fee income and income from the sale of non-deposit investment products. Wealth Management Group income improved by 7.6% in the third quarter of 2012 compared to the same period of 2011, and was up 2.0% in the first nine months of 2012 compared to the same period of 2011.

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Income from loan sales and servicing includes gains on the sale of residential mortgages and the guaranteed portion of SBA loans sold on the secondary market, along with servicing income resulting from loans sold with servicing retained. Income in this category has continued at elevated levels in 2012, and has increased by 74.1% and 60.8%, respectively, in the third quarter and first nine months of 2012 when compared to the same periods of 2011 as a result of continued high levels of residential mortgage loans originated and sold on the secondary market.

The Bank generally sells the fixed rate long-term residential mortgages it originates on the secondary market, and retains adjustable rate residential mortgages for its portfolios. The guaranteed portion of SBA loans originated by its structured finance group, United Structured Finance Company ("USFC"), is typically sold on the secondary market, and gains on the sale of those loans contribute to income from loan sales and servicing.

The Company maintains a portfolio of sold residential real estate mortgages that it services, and this servicing provides ongoing income for the life of the loans. The Bank also originates, sells and services SBA loans through USFC. Loans serviced consist primarily of residential mortgages sold on the secondary market. The following table shows the breakdown of income from loan sales and servicing between residential mortgages and USFC.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
In thousands of dollars	2012		2011		2012		2011
Residential mortgage sales and servicing	$	2,054	$	1,569	$	5,692	$	3,685
USFC commercial loan sales and servicing		749		41		1,607		855
Total income from loan sales and servicing	$	2,803	$	1,610	$	7,299	$	4,540

ATM, debit and credit card fee income provides a source of noninterest income for the Company. The Bank operates twenty ATMs throughout its market areas, and Bank clients are active users of debit cards. The Bank receives ongoing fee income from credit card referrals and operation of its credit card merchant business. Income from these areas has declined in the three and nine month periods ended September 30, 2012 compared to the same periods of 2011, primarily as a result of reduced levels of net ATM interchange income.

Other income includes income from bank-owned life insurance and various fee-based banking services, including sale of official checks, wire transfer fees, safe deposit box income, sweep account and other fees. Other income also includes gains on the sale of ORE property of $127,000 in the third quarter and $518,000 in the first nine months of 2012, compared to $125,000 and $201,000, respectively, in the comparable periods of 2011. Total other income was up 11.7% and 30.6%, respectively, in the third quarter and first nine months of 2012 compared to the same periods of 2011.

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The following table shows the trends of various noninterest income categories for the most recent five quarters.

	2012						2011
In thousands of dollars	3rd Qtr		2nd Qtr		1st Qtr		4th Qtr		3rd Qtr
Service charges on deposit accounts	$	496	$	449	$	433	$	471	$	486
Wealth Management fee income		1,319		1,311		1,225		1,299		1,226
Income from loan sales and servicing		2,803		2,592		1,904		1,894		1,610
ATM, debit and credit card fee income		517		559		507		557		550
Other income		429		367		689		414		384
Total noninterest income	$	5,564	$	5,278	$	4,758	$	4,635	$	4,256

Noninterest Expense

Salaries and employee benefits typically make up roughly 55% to 60% of the Company's total noninterest expense. Occupancy and equipment expense is the second-largest noninterest expense category, and expenses in this area have remained relatively consistent over the most recent five quarters. Attorney, accounting and other professional fees were down from the second quarter of 2012, and were in line with expenses in the prior three quarters. The increase in expenses in the second quarter of 2012 resulted primarily from legal and accounting fees related to the sale by U.S. Treasury of the  Preferred Shares during the quarter. For more information about this transaction, see "Exit from TARP Capital Purchase Program" above. Expenses relating to ORE property and other foreclosed assets continue to be a significant expense.

The following table shows the trends of various noninterest expense categories for the most recent five quarters.

	2012						2011
In thousands of dollars	3rd Qtr		2nd Qtr		1st Qtr		4th Qtr		3rd Qtr
Salaries and employee benefits	$	5,464	$	5,221	$	5,001	$	4,870	$	4,759
Occupancy and equipment expense, net		1,350		1,320		1,318		1,196		1,276
External data processing		250		267		247		301		392
Advertising and marketing		190		184		193		143		164
Attorney, accounting and other      professional fees		416		770		468		336		476
Director fees		98		97		98		65		102
Expenses relating to ORE property and      other foreclosed assets		417		183		933		693		815
FDIC insurance premiums		292		296		295		294		288
Other expenses		823		810		616		917		812
Total noninterest expense	$	9,300	$	9,148	$	9,169	$	8,815	$	9,084

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The following table summarizes changes in the Company's noninterest expense by category for the three and nine month periods ended September 30, 2012 and 2011.

	Three Months Ended September 30,							Nine Months Ended September 30,
In thousands of dollars	2012		2011		Change			2012		2011		Change
Salaries and employee benefits	$	5,464	$	4,759		14.8	%	$	15,686	$	14,101		11.2	%
Occupancy and equipment expense, net		1,350		1,276		5.8	%		3,988		3,819		4.4	%
External data processing		250		392		-36.2	%		764		1,041		-26.6	%
Advertising and marketing		190		164		15.9	%		567		482		17.6	%
Attorney, accounting and other      professional fees		416		476		-12.6	%		1,654		1,342		23.2	%
Director fees		98		102		-3.9	%		293		305		-3.9	%
Expenses relating to ORE property and  other foreclosed assets		417		815		-48.8	%		1,533		1,326		15.6	%
FDIC insurance premiums		292		288		1.4	%		883		1,021		-13.5	%
Other expenses		823		812		1.4	%		2,249		2,366		-4.9	%
Total noninterest expense	$	9,300	$	9,084		2.4	%	$	27,617	$	25,803		7.0	%

Total noninterest expenses were up 2.4% and 7.0%, respectively, in the third quarter and first nine months of 2012 compared to the same periods of 2011. A number of categories of noninterest expense declined during the third quarter and first nine months of 2012 compared to the same periods of 2011. External data processing expenses were down 36.2% and 26.6%, respectively, in the third quarter and first nine months of 2012 compared to the same periods of 2011. The reduction was due, in part, to lower costs of data processing within the Wealth Management Group, resulting from a conversion to a new processor in the second half of 2011. FDIC insurance premiums declined by 13.5% during the first nine months of 2012 compared to the same period of 2011 as a result of lower base charges. Other expenses were up 1.4% and down 4.9%, respectively, during the third quarter and first nine months of 2012 compared to the same periods of 2011.

Salaries and employee benefits for the third quarter and first nine months of 2012 increased by 14.8% and 11.2%, respectively, over the same periods one year earlier. The increases reflect, in part, continued higher levels of commissions and other compensation costs related to the generation of income from loan sales and servicing. In addition, the Company has increased its staffing levels modestly to accommodate its expansion into Livingston and Monroe Counties, and salary increases were reinstated effective April 1, 2011. However, the Company did not pay or accrue any cash bonus or other payout to executive officers or non-commissioned employees under our bonus plans in 2011 or the first nine months of 2012.

Attorney, accounting and other professional fees were down 12.6% in the third quarter of 2012 compared to the same quarter of 2011, and increased by 23.2% in the first nine months of 2012 compared to same period of 2011. Costs in the second quarter of 2012 included $299,000 of legal and accounting costs related to the sale of the  Preferred Shares by the U.S. Treasury. For more information about this transaction, see "Exit from TARP Capital Purchase Program" above.

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The Company reduced its advertising and marketing expenditures by approximately 50% in 2009 compared to 2008, and has remained at reduced levels since that time. Advertising and marketing expenses increased by 15.9% in the third quarter and 17.6% in the first nine months of 2012 compared to the same periods of 2011.The increase partially reflects the Company's launch of a new branding initiative in the third quarter of 2012. This branding initiative represents a renewed emphasis on marketing, and the Company expects a trend toward more historic spending levels for marketing and advertising expense.

Expenses related to ORE and other foreclosed properties decreased by nearly $400,000 in the third quarter of 2012 compared to the third quarter of 2011, but have increased by $207,000 in the first nine months of 2012 compared to the same period of 2011. Those expenses included write-downs of the value and losses on the sale of property held as ORE, along with costs to maintain and carry those properties. In addition, during the first six months of 2012, the Company recorded $770,000 of probable incurred expenses relating to residential mortgages previously sold on the secondary market that subsequently defaulted, and no such expense was recorded in the third quarter of 2012.

Federal Income Tax

The table below shows the Company's effective tax rates for the three and nine month periods ended September 30, 2012 and 2011.

	Current Quarter						Year to Date
	2012			2011			2012			2011
Effective tax rate		27.2	%		38.1	%		26.7	%		50.1	%

The differences between the effective rates and the Company's expected tax rate were primarily due to the benefit from tax-exempt income, partially offset by certain nondeductible expenses in the second quarter of 2012 related to the sale of the Preferred Shares by the U.S. Treasury. For more information about this transaction, see "Exit from TARP Capital Purchase Program" above. The Company's effective tax rates for both periods of 2011 were a calculated benefit based upon pre-tax losses, resulting in a tax benefit for the third quarter and first nine months of 2011.

The Company's net deferred tax asset was $8.8 million at September 30, 2012. The Company's net deferred tax asset is included in the category "Accrued interest receivable and other assets" on the balance sheet. A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. The following lists the evidence considered in determining whether a valuation allowance was necessary for deferred tax assets:

Negative Evidence

As a result of cumulative losses in 2009 and 2010, the Company had a tax Net Operating Loss ("NOL") of $7.6 million as of December 31, 2011.

Positive Evidence

1. The Company had many years of consistently profitable operations before 2009.

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2. The Company's NOL carry-forward position was $7.6 million at December 31, 2011, which is not large in comparison to historical profitability (taxable income of $41.6 million from 2004 to 2008).

3. The Company can carry-forward losses for up to 20 years.

4. The Company's pre-tax loss has been reduced from $14.5 million in 2009 to $6.6 million in 2010; the Company generated a pre-tax profit of $0.5 million in 2011 and $4.1 million for the first nine months of 2012.

5. The Company's 2009-2010 losses were due to a goodwill impairment of $3.5 million in 2009 along with high provision for loan losses, which have been reduced from $25.8 million in 2009 to $21.5 million in 2010, $12.2 million in 2011 and $6.7 million in the first nine months of 2012.

6. The Company expects a return to sustained profitability as a result of strong core earnings and a continued reduction in loan losses.

7. The Company does have available certain tax planning strategies, including:

a. Sale and leaseback of premises

b. Sale of mortgage servicing rights

c. Sale of securities

Based upon its analysis of the evidence (both negative and positive), management has determined that no valuation allowance was required at September 30, 2012 or December 31, 2011.

Liquidity and Capital Resources

Liquidity, Cash Equivalents and Borrowed Funds

The Company maintains correspondent accounts with a number of other banks for various purposes. In addition, cash sufficient to meet the operating needs of its banking offices is maintained at its lowest practical levels. At times, the Bank is a participant in the federal funds market, either as a borrower or seller. Federal funds are generally borrowed or sold for one-day periods. In 2012 and 2011, the Bank generally utilized short-term interest-bearing balances with banks as an alternative to federal funds sold.

The Company's balances in federal funds sold and short-term interest-bearing balances with banks were $52.0 million at September 30, 2012, compared to $91.8 million at December 31, 2011 and $99.4 million at September 30, 2011. Balances of investments held for sale have increased to $198.1 million at September 30, 2012, compared to $173.2 million and $164.9 million at December 31, 2011 and September 30, 2011, respectively. The Company continued to maintain high levels of liquidity, with investments, federal funds and cash equivalents held to improve the liquidity of the balance sheet during this prolonged period of economic uncertainty. The Company expects to maintain higher than normal levels of liquidity until economic conditions improve and more attractive investment opportunities emerge.

The Bank also has the ability to utilize short-term advances from the FHLBI and borrowings at the discount window of the Federal Reserve Bank as additional short-term funding sources. Short-term advances and discount window borrowings were not utilized during 2012 or 2011.

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The Company periodically finds it advantageous to utilize longer term borrowings from the FHLBI. These longer-term borrowings serve primarily to provide a balance to some of the interest rate risk inherent in the Company's balance sheet. In the first nine months of 2012, the Bank procured no new advances, repaid $2.0 million of matured borrowings, and made scheduled principal payments of $276,000. In the past twelve months, maturities and principal payments on advances have reduced outstanding balances by $2.3 million.

Regulatory Capital

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum ratios of Total and Tier I capital to risk-weighted assets and of Tier I capital to average assets.

UBT is party to the MOU as described under "Other Developments – Memorandum of Understanding" above. The Bank has continued to maintain its ratio of total capital to risk-weighted assets above the prescribed minimum level of 12%. The Bank was in compliance with all capital ratio requirements at December 31, 2010 and 2011, and September 30, 2012. At September 30, 2012 the Bank's Tier 1 capital ratio was 9.63%, and its ratio of total capital to risk-weighted assets was 15.61%. At September 30, 2012, the Bank was categorized as well capitalized under applicable regulatory guidelines.

The following table shows information about the Company's and the Banks' capital levels compared to regulatory requirements at September 30, 2012 and December 31, 2011.

	Actual					Regulatory Minimum for Capital Adequacy (1)					Regulatory Minimum to be Well Capitalized (2)						Required by MOU (3)
Dollars in thousands		$000	%				$000	%				$000		%				$000		%
As of September 30, 2012
Tier 1 Capital to Average Assets
Consolidated	$	89,709		10.1	%	$	35,689		4.0	%		N/	A		N/	A		N/	A		N/	A
Bank		84,881		9.6	%		35,264		4.0	%		44,080			5.0	%		79,344			9.0	%
Tier 1 Capital to Risk Weighted Assets
Consolidated		89,709		15.1	%		23,740		4.0	%		N/	A		N/	A		N/	A		N/	A
Bank		84,881		14.3	%		23,697		4.0	%		35,546			6.0	%		N/	A		N/	A
Total Capital to Risk Weighted Assets
Consolidated		97,305		16.4	%		47,479		8.0	%		N/	A		N/	A		N/	A		N/	A
Bank		92,464		15.6	%		47,395		8.0	%		59,244			10.0	%		71,092			12.0	%

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	Actual					Regulatory Minimum for Capital Adequacy (1)					Regulatory Minimum to be Well Capitalized (2)						Required by MOU (3)
Dollars in thousands		$000	%				$000	%				$000		%				$000		%
As of December 31, 2011
Tier 1 Capital to Average Assets
Consolidated	$	86,430		9.9	%	$	35,031		4.0	%		N/	A		N/	A		N/	A		N/	A
Bank		80,388		9.2	%		34,950		4.0	%		43,688			5.0	%		78,638			9.0	%
Tier 1 Capital to Risk Weighted Assets
Consolidated		86,430		15.3	%		22,675		4.0	%		N/	A		N/	A		N/	A		N/	A
Bank		80,388		14.2	%		22,628		4.0	%		33,942			6.0	%		N/	A		N/	A
Total Capital to Risk Weighted Assets
Consolidated		93,683		16.5	%		45,349		8.0	%		N/	A		N/	A		N/	A		N/	A
Bank		87,627		15.5	%		45,256		8.0	%		56,570			10.0	%		67,884			12.0	%
(1) Represents minimum required to be categorized as adequately capitalized under Federal regulatory requirements.
(2) Represents minimum generally required to be categorized as well-capitalized under Federal regulatory prompt corrective action provisions. The bank is currently subject to higher requirements by its regulators.
(3) Represents requirements by the Bank's regulators under terms of the MOU.

Critical Accounting Policies

Generally accepted accounting principles are complex and require management to apply significant judgments to various accounting, reporting and disclosure matters. The Company's management must use assumptions and estimates to apply these principles where actual measurement is not possible or practical. For a complete discussion of the Company's significant accounting policies, see "Note 1 – Significant Accounting Policies" to the Company's Consolidated Financial Statements beginning on Page A-36 of the Company's Annual Report on Form 10-K for the year ended December 31, 2011. Certain policies are considered critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the Company's financial statements. See "Forward-Looking Statements."

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4 – Controls and Procedures

Internal Control

Our management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"). Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report (the "Evaluation Date"), and have concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms.

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There have been no changes in the Company's internal control over financial reporting that occurred during the quarter ended September 30, 2012 that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Part II – Other Information

Item 6 – Exhibits

The exhibits filed in response to Item 601 of Regulation S-K are listed in the Exhibit Index, which is here incorporated by reference.

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 Bancorp, Inc.

October 26, 2012

/s/ Robert K. Chapman	/s/ Randal J. Rabe
Robert K. Chapman	Randal J. Rabe
President and Chief Executive Officer	Executive Vice President and Chief Financial Officer
(Principal Executive Officer)	(Principal Financial Officer)

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Exhibit Index

	Exhibit	Description
3.1		Restated Articles of Incorporation of United Bancorp, Inc. Previously filed with the Commission on October 1, 2010 in United Bancorp, Inc.'s Form S-1 Registration Statement, Exhibit 3.1. Incorporated here by reference.
3.2		Amended and Restated Bylaws of United Bancorp, Inc. Previously filed with the Commission on December 9, 2009 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 3.1. Incorporated here by reference.
3.3		Certificate of Designations for Fixed Rate Cumulative Perpetual Preferred Stock, Series A. Previously filed with the Commission on January 16, 2009 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 3.1. Incorporated here by reference.
4.1		Restated Articles of Incorporation of United Bancorp, Inc. Exhibit 3.1 is incorporated here by reference.
4.2		Amended and Restated Bylaws of United Bancorp, Inc. Exhibit 3.2 is incorporated here by reference.
4.3		Form of Certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A. Previously filed with the Commission on January 16, 2009 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 4.1. Incorporated here by reference.
4.4		Certificate of Designations for Fixed Rate Cumulative Perpetual Preferred Stock, Series A. Exhibit 3.3 is incorporated here by reference.
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification pursuant to 18 U.S.C. Section 1350.

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