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, 2013

_________________________

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 þNoo

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 þ No 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 25, 2013, there were outstanding 12,715,490 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," "trend,"  "future," "possible," 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 the possible future redemption of the remaining shares of Preferred Stock, 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 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, the effects on earnings of changes in interest rates and the future level of other revenue sources. Future redemption of the remaining shares of Preferred Stock would require regulatory and Board of Directors approval. 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 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, 2012. 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  Income (unaudited)	5
	(c)	Condensed Consolidated Statements of Comprehensive Income (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	36
		Background	36
		Other Developments	37
		Executive Summary	38
		Financial Condition	40
		Results of Operations	48
		Liquidity and Capital Resources	58
		Critical Accounting Policies	61
	Item 3	Quantitative and Qualitative Disclosures about Market Risk	61
	Item 4	Controls and Procedures	62
Part II	Other Information		62
	Item 5	Other Information	62
	Item 6	Exhibits	63
Signatures			63
Exhibit Index			64

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	2013			2012
Cash and demand balances in other banks	$	23,514		$	13,769
Interest bearing balances with banks		8,267			56,843
Total cash and cash equivalents		31,781			70,612
Securities available for sale		204,827			206,129
FHLB Stock		2,691			2,571
Loans held for sale		8,388			13,380
Portfolio loans		643,151			586,678
Less allowance for loan losses		21,963			22,543
Net portfolio loans		621,188			564,135
Premises and equipment, net		10,379			10,719
Bank-owned life insurance		14,540			14,241
Accrued interest receivable and other assets		25,038			25,954
Total Assets	$	918,832		$	907,741
Liabilities
Deposits
Noninterest bearing deposits	$	160,225		$	165,430
Interest bearing deposits		645,515			619,213
Total deposits		805,740			784,643
FHLB advances payable		11,983			21,999
Other borrowings		6,000			-
Accrued interest payable and other liabilities		4,472			3,702
Total Liabilities		828,195			810,344
Commitments and Contingent Liabilities
Shareholders' Equity
Preferred stock, no par value; 2,000,000 shares authorized, 10,300 and 20,600 shares outstanding, respectively; liquidation preference $1,000 per share		10,282			20,476
Common stock and paid in capital, no par value; 30,000,000 shares authorized; 12,715,490, and 12,705,983 shares issued and outstanding, respectively		85,830			85,682
Accumulated deficit		(5,063	)		(10,426	)
Accumulated other comprehensive income (loss), net of tax		(412	)		1,665
Total Shareholders' Equity		90,637			97,397
Total Liabilities and Shareholders' Equity	$	918,832		$	907,741
The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 4

(b)Condensed Consolidated Statements of Income (unaudited)

	Three Months Ended						Nine Months Ended
In thousands of dollars, except per share data	September 30,						September 30,
Interest Income	2013			2012			2013			2012
Interest and fees on loans	$	7,723		$	7,917		$	22,920		$	23,695
Interest on securities
Taxable		770			618			1,951			1,988
Tax exempt		163			160			475			506
Interest on federal funds sold and balances with banks		19			36			84			133
Total interest income		8,675			8,731			25,430			26,322
Interest Expense
Interest on deposits		618			895			2,033			2,936
Interest on FHLB advances		72			190			300			605
Interest on other borrowings		4			-			4			-
Total interest expense		694			1,085			2,337			3,541
Net Interest Income		7,981			7,646			23,093			22,781
Provision for loan losses		300			2,000			1,900			6,650
Net Interest Income after Provision for Loan Losses		7,681			5,646			21,193			16,131
Noninterest Income
Service charges on deposit accounts		473			496			1,369			1,378
Wealth Management fee income		1,465			1,319			4,356			3,855
Gains on securities transactions		1			-			40			4
Income from loan sales and servicing		2,252			2,803			8,071			7,299
ATM, debit and credit card fee income		580			517			1,637			1,583
Income from bank-owned life insurance		101			106			300			316
Other income		243			323			913			1,165
Total noninterest income		5,115			5,564			16,686			15,600
Noninterest Expense
Salaries and employee benefits		5,884			5,464			17,984			15,686
Occupancy and equipment expense, net		1,350			1,350			4,055			3,988
External data processing		352			250			1,077			764
Advertising and marketing		304			190			860			567
Attorney, accounting and other professional fees		334			416			1,094			1,654
Director fees		105			98			314			293
Expenses relating to ORE property and foreclosed assets		158			417			585			1,533
FDIC insurance premiums		189			292			565			883
Other expenses		856			823			2,358			2,249
Total noninterest expense		9,532			9,300			28,892			27,617
Income Before Federal Income Tax		3,264			1,910			8,987			4,114
Federal income tax		988			520			2,682			1,097
Net Income	$	2,276		$	1,390		$	6,305		$	3,017
Preferred stock dividends and amortization		(305	)		(285	)		(879	)		(856	)
Income Available to Common Shareholders	$	1,971		$	1,105		$	5,426		$	2,161
Basic and diluted earnings per share	$	0.15		$	0.09		$	0.42		$	0.17
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 (unaudited)

	Three Months Ended					Nine Months Ended
In thousands of dollars	September 30,					September 30,
	2013			2012		2013			2012
Net income	$	2,276		$	1,390	$	6,305		$	3,017
Other comprehensive income (loss):
Unrealized gains/losses on securities:
Unrealized gains (losses) on securities available for sale		791			872		(3,107	)		1,076
Less: Reclassification for realized amount included in income		(1	)		-		(40	)		(4	)
Other comprehensive income (loss) before tax effect		790			872		(3,147	)		1,072
Tax expenses (benefit)		269			296		(1,070	)		364
Other comprehensive income (loss)		521			576		(2,077	)		708
Total comprehensive income	$	2,797		$	1,966	$	4,228		$	3,725
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	2013			2012			2013			2012
Balance at beginning of period	$	98,402		$	95,113		$	97,397		$	93,774
Net income		2,276			1,390			6,305			3,017
Other comprehensive income (loss)		521			576			(2,077	)		708
Redemption of preferred shares		(10,300	)		-			(10,300	)		-
Cash dividends paid on preferred shares		(322	)		(258	)		(836	)		(772	)
Other common stock transactions		60			15			148			109
Balance at end of period	$	90,637		$	96,836		$	90,637		$	96,836
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,
	2013			2012
Cash Flows from Operating Activities
Net income	$	6,305		$	3,017
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
Depreciation and amortization		4,286			4,070
Provision for loan losses		1,900			6,650
Gain on sale of loans		(7,331	)		(6,945	)
Proceeds from sales of loans originated for sale		270,399			271,598
Loans originated for sale		(258,076	)		(268,129	)
Gains on securities transactions		(40	)		(4	)
Change in deferred income taxes		1,406			737
Stock based compensation expense		188			112
Increase in cash surrender value of bank-owned life insurance		(300	)		(316	)
Change in investment in limited partnership		(309	)		(224	)
Change in accrued interest receivable and other assets		991			3,332
Change in accrued interest payable and other liabilities		859			1,791
Net cash from operating activities		20,278			15,689
Cash Flows from Investing Activities
Securities available for sale
Purchases		(72,828	)		(80,231	)
Sales		11,752			2,847
Maturities and calls		19,633			25,870
Principal payments		36,339			24,601
Purchase of FHLB stock		(120	)		-
Net change in portfolio loans		(59,419	)		(35,464	)
Premises and equipment expenditures		(470	)		(769	)
Net cash from investing activities		(65,113	)		(63,146	)
Cash Flows from Financing Activities
Net change in deposits		21,097			11,169
Net change in other borrowings		6,000			-
Principal payments on FHLB advances		(10,016	)		(2,276	)
Repurchase of preferred stock		(10,300	)		-
Other common stock transactions		59			20
Cash dividends paid on preferred shares		(836	)		(772	)
Net cash from financing activities		6,004			8,141
Net change in cash and cash equivalents		(38,831	)		(39,316	)
Cash and cash equivalents at beginning of year		70,612			107,592
Cash and cash equivalents at end of period	$	31,781		$	68,276
Supplemental Disclosure of Cash Flow Information:
Interest paid	$	2,410		$	3,629
Loans transferred to other real estate		466			2,535
Income taxes paid		610			-
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, 2012 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, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. 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, 2012.

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, 2013 and December 31, 2012. All securities are classified as available for sale.

At September 30, 2013, in thousands of dollars	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. Treasury and agency securities	$	26,556	$	34	$	(823	)	$	25,767
Mortgage-backed agency securities		154,205		1,407		(1,369	)		154,243
Obligations of states and political subdivisions		24,664		468		(342	)		24,790
Equity securities		26		1		-			27
Total	$	205,451	$	1,910	$	(2,534	)	$	204,827
At December 31, 2012, in thousands of dollars
U.S. Treasury and agency securities	$	27,200	$	130	$	(14	)	$	27,316
Mortgage-backed agency securities		158,829		2,324		(654	)		160,499
Obligations of states and political subdivisions		17,551		740		(5	)		18,286
Equity securities		26		2		-			28
Total	$	203,606	$	3,196	$	(673	)	$	206,129

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, 2013 and December 31, 2012.

At September 30, 2013	Less than 12 Months					12 Months or Longer					Total
In thousands of dollars	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
U.S. Treasury and agency securities	$	18,643	$	(823	)	$	-	$	-		$	18,643	$	(823	)
Mortgage-backed agency securities		84,078		(1,305	)		3,084		(64	)		87,162		(1,369	)
Obligations of states and political subdivisions		8,535		(342	)		-		-			8,535		(342	)
Total	$	111,256	$	(2,470	)	$	3,084	$	(64	)	$	114,340	$	(2,534	)
At December 31, 2012
In thousands of dollars
U.S. Treasury and agency securities	$	4,131	$	(14	)	$	-	$	-		$	4,131	$	(14	)
Mortgage-backed agency securities		54,538		(639	)		1,309		(15	)		55,847		(654	)
Obligations of states and political subdivisions		941		(5	)		-		-			941		(5	)
Total	$	59,610	$	(658	)	$	1,309	$	(15	)	$	60,919	$	(673	)

Unrealized losses within the investment portfolio are temporary. The Company performed an evaluation of its investments for other than temporary impairment, and no losses were recognized during the first nine months of 2013 or 2012.  The unrealized losses on the Company's investment in available for sale securities were caused by interest rate changes. All of the Company's mortgage-backed securities are issued by U.S. Government-sponsored agencies. The Company owns no obligations issued by the City of Detroit. 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 likely that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company did not consider those investments to be other-than-temporarily impaired at September 30, 2013 or December 31, 2012.

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 likely the Company will not have to sell any security before recovery of its cost basis.

Page 9

Sales activity for securities for the three and nine month periods ended September 30, 2013 and 2012 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	2013		2012		2013			2012
Sales proceeds	$	-	$	-	$	11,752		$	2,847
Gross gains on sales		-		-		136			30
Gross loss on sales		-		-		(97	)		(26	)
Gross gains on calls		1		-		1			-

The amortized cost and fair value of securities available for sale by contractual maturity as of September 30, 2013 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	$	16,821	$	16,892
Due after one year through five years		28,480		28,006
Due after five years through ten years		5,919		5,659
Due after ten years		-		-
Mortgage-backed agency securities		154,205		154,243
Equity securities		26		27
Total securities	$	205,451	$	204,827

Securities carried at $1.0 million as of September 30, 2013 were pledged to secure deposits of public funds, funds borrowed, repurchase agreements, and for other purposes as required by law.

The municipal portfolio contains a small level of geographic risk, as approximately 1.3% of the investment portfolio is issued by political subdivisions located within Lenawee County, Michigan, 1.1% in Monroe County, Michigan and 3.5% in Washtenaw County, Michigan. The total fair value of municipal obligations issued by political subdivisions located in these three counties is approximately $12.1 million.

Page 10

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 class at September 30, 2013 and December 31, 2012.

	September 30, 2013					December 31, 2012
In thousands of dollars	Balance		% of total			Balance		% of total
Commercial construction & land development	$	18,528		2.9	%	$	28,511		4.9	%
Owner-occupied commercial real estate loans		109,144		17.0	%		97,755		16.7	%
Other commercial real estate loans		140,686		21.9	%		113,370		19.3	%
Commercial & industrial loans		104,133		16.2	%		104,332		17.8	%
Residential mortgages		133,905		20.8	%		121,393		20.6	%
Consumer construction		13,709		2.1	%		12,123		2.1	%
Home equity loans		79,898		12.4	%		72,983		12.4	%
Other consumer loans		38,797		6.0	%		33,969		5.8	%
Deferred loan fees and costs, overdrafts, in-process accounts		4,351		0.7	%		2,242		0.4	%
Total portfolio loans	$	643,151		100.0	%	$	586,678		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 loan 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 450-20.

The Company's past loan loss experience is determined by analyzing pools of loans based on internal credit risk ratings for commercial loans (construction & land development, owner-occupied commercial real estate, other commercial real estate and all other commercial and industrial loans), and by delinquency status for residential mortgages, consumer loans and all other loan types, based on a migration analysis that is performed quarterly. The quarterly migration analysis is 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"). 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.

Page 11

Loss rates are adjusted to consider qualitative factors such as economic conditions and trends, among others. In addition, the Company applies a detailed analysis of qualitative factors that are assessed on a quarterly basis based upon ratios 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.

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, 2013 and 2012 and balances as of December 31, 2012 follows:

	Three Months Ended September 30, 2013
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	$	2,925		$	4,509		$	5,445		$	4,482		$	2,456		$	2,184		$	22,001
Provision charged to expense		(163	)		1			(26	)		414			(12	)		86			300
Losses charged off		(8	)		(92	)		(35	)		(367	)		(77	)		(89	)		(668	)
Recoveries		244			8			3			8			1			66			330
Balance, September 30	$	2,998		$	4,426		$	5,387		$	4,537		$	2,368		$	2,247		$	21,963

Page 12

	Nine Months Ended September 30, 2013
Thousands of dollars	CLD (1)			Owner- Occupied CRE (2)			OtherCRE (2)			Commercial & Industrial			Residential Mortgage			Personal Loans			Total
Allowance for Loan Losses:
Balance, January 1	$	4,216		$	5,093		$	4,708		$	4,131		$	2,456		$	1,939		$	22,543
Provision charged to expense		(1,414	)		808			559			1,415			55			477			1,900
Losses charged off		(808	)		(1,830	)		(73	)		(1,118	)		(200	)		(479	)		(4,508	)
Recoveries		1,004			355			193			109			57			310			2,028
Balance, September 30	$	2,998		$	4,426		$	5,387		$	4,537		$	2,368		$	2,247		$	21,963
Ending balance:
Individually evaluated for impairment	$	2,134		$	1,874		$	1,088		$	781		$	719		$	-		$	6,596
Collectively evaluated for impairment	$	864		$	2,552		$	4,299		$	3,756		$	1,649		$	2,247		$	15,367
Total Loans:
Ending balance	$	32,237		$	110,417		$	164,457		$	104,231		$	106,723		$	125,086		$	643,151
Ending balance:
Individually evaluated for impairment	$	4,812		$	4,261		$	7,914		$	3,528		$	4,560		$	345		$	25,420
Collectively evaluated for impairment	$	27,425		$	106,156		$	156,543		$	100,703		$	102,163		$	124,741		$	617,731

	Three Months Ended September 30, 2012
Allowance for Loan Losses:
Balance, June 30, 2012	$	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
Thousands of dollars
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

Page 13

	Balances at December 31, 2012
Thousands of dollars	CLD (1)		Owner- Occupied CRE (2)		OtherCRE (2)		Commercial & Industrial		Residential Mortgage		Personal Loans		Total
Allowance for Loan Losses:
Ending balance:
Individually evaluated for impairment	$	3,271	$	2,904	$	1,079	$	274	$	771	$	5	$	8,304
Collectively evaluated for impairment		945		2,189		3,629		3,857		1,685		1,934		14,239
Total Allowance for Loan Losses	$	4,216	$	5,093	$	4,708	$	4,131	$	2,456	$	1,939	$	22,543
Total Loans:
Ending balance:
Individually evaluated for impairment	$	8,224	$	10,263	$	7,797	$	2,049	$	5,561	$	394	$	34,288
Collectively evaluated for impairment		32,410		92,316		123,207		96,336		96,095		112,026		552,390
Total Loans	$	40,634	$	102,579	$	131,004	$	98,385	$	101,656	$	112,420	$	586,678
(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 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 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.

Page 14

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 consumer loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their 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.

Page 15

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, 2013 and December 31, 2012 based on the Bank's internal risk categories are detailed in the following tables.

In thousands of dollars		At September 30, 2013
Commercial & Tax-exempt Loans		CLD		Owner-Occupied CRE		Other CRE		Commercial & Industrial		Total Commercial
Credit Risk Profile by Internally Assigned Rating
1-4	Pass	$	7,930	$	96,748	$	118,953	$	91,616	$	315,247
5	Special Mention		5,110		6,600		13,671		5,627		31,008
6	Substandard		5,008		5,796		8,062		6,855		25,721
7	Doubtful		480		-		-		35		515
8	Loss		-		-		-		-		-
Total Commercial & Tax-exempt Loans		$	18,528	$	109,144	$	140,686	$	104,133	$	372,491

Page 16

	At September 30, 2013
Consumer Loans	Residential Mortgage		Consumer Construction		Home Equity		Other Consumer		Total Consumer
Credit risk profile based on payment activity
Performing	$	128,144	$	13,709	$	79,611	$	38,546	$	260,010
Accruing restructured		3,748		-		170		-		3,918
Delinquent less than 90 days		1,079		-		-		192		1,271
Nonperforming		934		-		117		59		1,110
Total Consumer Loans	$	133,905	$	13,709	$	79,898	$	38,797		266,309
Subtotal Commercial, Tax-exempt & Consumer Loans										638,800
Deferred loan fees and costs, overdrafts, in-process accounts										4,351
Total Portfolio Loans									$	643,151

In thousands of dollars		At December 31, 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	$	12,813	$	78,507	$	86,445	$	91,711	$	269,476
5	Special Mention		7,378		11,510		17,073		5,104		41,065
6	Substandard		7,840		7,738		9,852		7,475		32,905
7	Doubtful		480		-		-		42		522
8	Loss		-		-		-		-		-
Total Commercial & Tax-exempt Loans		$	28,511	$	97,755	$	113,370	$	104,332	$	343,968

Consumer Loans	Residential Mortgage		Consumer Construction		Home Equity		Other Consumer		Total Consumer
Credit risk profile based on payment activity
Performing	$	114,071	$	12,123	$	72,344	$	33,764	$	232,302
Accruing restructured		3,267		-		171		-		3,438
Delinquent less than 90 days		1,714		-		343		150		2,207
Nonperforming		2,341		-		125		55		2,521
Total Consumer Loans	$	121,393	$	12,123	$	72,983	$	33,969		240,468
Subtotal Commercial, Tax-exempt & Consumer Loans										584,436
Deferred loan fees and costs, overdrafts, in-process accounts										2,242
Total Portfolio Loans									$	586,678

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.

Page 17

Tables detailing the loan portfolio aging analysis as of September 30, 2013 and December 31, 2012 follow.

Thousands of dollars	Delinquent Loans
As of September 30, 2013	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	$	-	$	-	$	-	$	14,620	$	18,528	$	3,908	$	3,908
Owner-Occupied CRE		569		-		569		105,846		109,144		2,729		2,729
Other CRE		300		-		300		137,718		140,686		2,668		2,668
Commercial & Industrial		125		-		125		101,103		104,133		2,905		2,905
Consumer
Residential Mortgage		1,079		292		1,371		131,892		133,905		642		934
Consumer Construction		-		-		-		13,709		13,709		-		-
Home Equity		-		-		-		79,781		79,898		117		117
Other Consumer		192		-		192		38,546		38,797		59		59
Subtotal	$	2,265	$	292	$	2,557	$	623,215		638,800	$	13,028	$	13,320
Deferred loan fees and costs, overdrafts, in-process accounts										4,351
Total Portfolio Loans									$	643,151

As of December 31, 2012
Commercial
Commercial CLD	$	117	$	-	$	117	$	24,545	$	28,511	$	3,849	$	3,849
Owner-Occupied CRE		-		-		-		92,498		97,755		5,257		5,257
Other CRE		-		-		-		109,638		113,370		3,732		3,732
Commercial & Industrial		683		-		683		102,257		104,332		1,392		1,392
Consumer
Residential Mortgage		1,714		-		1,714		117,338		121,393		2,341		2,341
Consumer Construction		-		-		-		12,123		12,123		-		-
Home Equity		343		37		380		72,515		72,983		88		125
Other Consumer		150		-		150		33,764		33,969		55		55
Subtotal	$	3,007	$	37	$	3,044	$	564,678		584,436	$	16,714	$	16,751
Deferred loan fees and costs, overdrafts, in-process accounts										2,242
Total Portfolio Loans									$	586,678
(1) All are accruing.

Page 18

Impaired Loans

Information regarding impaired loans as of September 30, 2013 and December 31, 2012 follows.

	September 30, 2013						December 31, 2012
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	$	445	$	753	$	-	$	654	$	1,673	$	-
Owner-Occupied CRE		947		1,334		-		4,181		6,267		-
Other CRE		1,891		2,313		-		4,438		6,158		-
Commercial & Industrial		1,262		3,315		-		1,640		3,992		-
Consumer
Residential Mortgage		1,667		1,667		-		2,207		2,989		-
Home Equity		170		170		-		232		232		-
Other Consumer		175		175		-		157		157		-
Subtotal		6,557		9,727		-		13,509		21,468		-

Loans with a specific valuation allowance
Commercial
Commercial CLD		4,367		4,546		2,134		7,570		7,629		3,271
Owner-Occupied CRE		3,314		6,489		1,874		6,082		7,495		2,904
Other CRE		6,023		6,273		1,088		3,359		3,359		1,079
Commercial & Industrial		2,266		3,077		781		409		409		274
Consumer
Residential Mortgage		2,893		2,893		719		3,354		3,817		771
Other Consumer		-		-		-		5		5		5
Subtotal		18,863		23,278		6,596		20,779		22,714		8,304
Total Impaired Loans
Commercial
Commercial CLD		4,812		5,299		2,134		8,224		9,302		3,271
Owner-Occupied CRE		4,261		7,823		1,874		10,263		13,762		2,904
Other CRE		7,914		8,586		1,088		7,797		9,517		1,079
Commercial & Industrial		3,528		6,392		781		2,049		4,401		274
Consumer
Residential Mortgage		4,560		4,560		719		5,561		6,806		771
Home Equity		170		170		-		232		232		-
Other Consumer		175		175		-		162		162		5
Total Impaired Loans	$	25,420	$	33,005	$	6,596	$	34,288	$	44,182	$	8,304

Page 19

Information regarding average investment in impaired loans and interest income recognized on those loans for the three and nine month periods ended September 30, 2013 and 2012 is shown below.

Periods ended September 30,	2013								2012
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	$	445	$	-	$	466	$	-	$	3,538	$	-	$	4,323	$	-
Owner-Occupied CRE		948		3		1,912		21		2,438		12		2,777		51
Other CRE		3,980		21		4,143		34		5,215		6		9,672		124
Commercial & Industrial		1,265		7		964		17		1,715		9		1,839		29
Consumer
Residential Mortgage		993		7		1,122		24		1,312		6		1,274		17
Home Equity		3		1		8		3		25		1		25		4
Other Consumer		158		-		145		-		122		-		155		-
Subtotal		7,792		39		8,760		99		14,365		34		20,065		225

Loans with a specific valuation allowance
Commercial
Commercial CLD		4,385		18		5,458		95		8,285		89		8,443		298
Owner-Occupied CRE		3,319		19		3,407		59		6,803		47		6,668		114
Other CRE		3,966		43		3,546		111		3,432		36		4,331		140
Commercial & Industrial		2,272		9		2,141		71		712		8		888		34
Consumer
Residential Mortgage		3,404		29		3,480		103		4,555		32		4,099		96
Home Equity		-		-		-		-		-		-		-		-
Other Consumer		-		-		-		-		78		-		56		2
Subtotal		17,346		118		18,032		439		23,865		212		24,485		684
Total Impaired Loans
Commercial
Commercial CLD		4,830		18		5,924		95		11,823		89		12,766		298
Owner-Occupied CRE		4,267		22		5,319		80		9,241		59		9,445		165
Other CRE		7,946		64		7,689		145		8,647		42		14,003		264
Commercial & Industrial		3,537		16		3,105		88		2,427		17		2,727		63
Consumer
Residential Mortgage		4,397		36		4,602		127		5,867		38		5,373		113
Home Equity		3		1		8		3		25		1		25		4
Other Consumer		158		-		145		-		200		-		211		2
Total Impaired Loans	$	25,138	$	157	$	26,792	$	538	$	38,230	$	246	$	44,550	$	909

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. These policies apply to each class of the Company's loan portfolio.

Page 20

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 before 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 loan that is on nonaccrual status before 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 $10.0 million at September 30, 2013 and $10.8 million at December 31, 2012. 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 $10.6 million at September 30, 2013 and $15.8 million at December 31, 2012.

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's to determine if any TDR should be removed from TDR status.

Accruing restructured loans at September 30, 2013 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.

Page 21

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 following tables present information regarding loans newly-classified as TDRs for the three and nine month periods ended September 30, 2013 and 2012.

Periods ended September 30, 2013	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
Owner-Occupied CRE		-	$	-	$	-		2	$	182	$	182
Other CRE		1		665		665		1		665		665
Consumer
Residential Mortgage		-		-		-		4		800		800
Total		1	$	665	$	665		7	$	1,647	$	1,647

Periods ended September 30, 2012
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

The table below provides a breakdown of accruing restructured loans by type at September 30, 2013. The table also includes the average yield on accruing restructured loans and the yield for the entire portfolio, for commercial loans and residential mortgage and home equity loans, for the third quarter of 2013.

	September 30, 2013				Third Quarter 2013
Dollars in thousands	Number of Loans		Recorded Balance		Avg. Yield			Portfolio Yield
CLD Loans		4	$	1,658
Other Commercial Loans		12		5,021
Total Commercial Loans		16		6,679		4.92	%		4.95	%
Residential Mortgage & Home Equity Loans		20		3,918		3.59	%		4.75	%
Total Accruing Restructured Loans		36	$	10,597

Page 22

The Company has no personal loans other than the loans described above that are classified as troubled debt restructurings. In determining the amount of the allowance for loan losses, all restructured loans are classified as 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.

For the third quarter and first nine months ended in 2013, there were no TDRs that subsequently defaulted within twelve months of being restructured.  For the same periods in 2012, information is shown below regarding subsequent defaults.

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

A TDR is in payment default once it is ninety days contractually past due under the modified terms (unless otherwise stated). Since the Company treats accruing TDRs as impaired loans and evaluates TDRs individually for impairment, the allowance for loan losses is not generally affected by a subsequent default of a TDR.

Note 5 - Stock Based Compensation

The Company has stock based compensation plans as described below. The Company recorded compensation expense related to stock based compensation of $62,500 and $37,500, respectively, for the three month periods and $187,500 and $112,500, respectively, for the nine month periods ended September 30, 2013 and 2012. The Company has a policy of issuing authorized but unissued common shares for the award, satisfaction or settlement of stock-based compensation.

Stock Incentive Plan of 2010

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.

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The following tables show activity for the nine months ended September 30, 2013 for awards granted under the Incentive Plan:

Stock-Only Stock Appreciation Rights
				Weighted
	Awards			Avg. Exer-
	Outstanding			cise Price
Balance at January 1		167,250		$	3.33
Awards granted		46,250			5.05
Awards exercised		(7,946	)		3.33
Awards forfeited		(8,250	)		3.63
Balance at September 30, 2013		197,304		$	3.72

	Restricted Stock					Restricted Stock Units
	Awards			Grant Date		Awards			Grant Date
	Outstanding			Fair Value		Outstanding			Fair Value
Nonvested at January 1		22,625		$	3.35		46,795		$	3.35
Awards granted		10,500			5.05		54,582			5.05
Awards vested		(22,625	)		3.35		-			-
Awards forfeited		-			-		(3,903	)		4.24
Nonvested at September 30		10,500		$	5.05		97,474		$	4.27

As of September 30, 2013, unrecognized compensation expense related to the Incentive Plan totaled $410,000. Compensation expense for stock-only stock appreciation rights ("SOSARs") and restricted stock grants is recognized over approximately three years. Compensation expense for restricted stock units ("RSUs") is based on an expected level of achievement of performance targets as determined at the time of each grant, and is usually recognized over three years.

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 2013 and 2012. Fair value of grants is based on the weighted-average assumptions shown in the following table.

	2013			2012
Dividend yield		0.0	%		0.0	%
Expected life in years		5			5
Expected volatility		28.8	%		37.0	%
Risk-free interest rate		0.72	%		0.84	%
Fair value	$	1.345		$	1.105

At September 30, 2013, the aggregate intrinsic value of SOSARs outstanding was $608,466. Intrinsic value was determined by calculating the difference between the Company's closing common stock price on September 30, 2013 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, 2013. The weighted–average period over which non-vested SOSARs are expected to be recognized is one year.

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The fair value of restricted stock and RSU grants is considered to be the market price of Company common stock at the grant date. The Company has established three performance targets for 2013 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 2013 financial plan.

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:

	Options			Weighted Avg.
Stock Options	Outstanding			Exercise Price
Balance at January 1, 2013		358,070		$	21.32
Options expired		(25,434	)		22.97
Options forfeited		(3,400	)		12.71
Balance at September 30, 2013		329,236		$	21.28

The table below provides information regarding stock options outstanding under the 2005 Plan at September 30, 2013.

	Options Outstanding							Options Exercisable
Range of	Number		Weighted Average			Weighted Avg.		Number		Weighted Avg.
Exercise Prices	Outstanding		Remaining Contractual Life			Exercise Price		Outstanding		Exercise Price
$6.00 to $32.14		329,236		3.12	Years	$	21.28		329,236	$	21.28

As of the end of the third quarter of 2013, there was no unrecognized compensation expense related to the stock options granted under the 2005 Plan. At September 30, 2013, 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 common stock price on September 30, 2013 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, 2013.

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

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Note 6 - Loan Servicing

Loans serviced for others are not included in the accompanying consolidated financial statements. The unpaid principal balance of loans serviced for others at September 30, 2013 and December 31, 2012 were as follows:

In thousands of dollars	9/30/13		12/31/12		Change		Percent
Total loans serviced	$	962,935	$	853,761	$	109,174		12.8	%

Unamortized loan servicing rights are included in accrued interest receivable and other assets on the consolidated balance sheet, for the three and nine month periods ended September 30, 2013 and 2012, are shown below.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
In thousands of dollars	2013			2012			2013			2012
Balance at beginning of period	$	7,072		$	5,855		$	6,379		$	5,405
Amount capitalized		627			780			2,205			2,029
Amount amortized		(386	)		(509	)		(1,271	)		(1,308	)
Balance at September 30,	$	7,313		$	6,126		$	7,313		$	6,126

The fair value of servicing rights was as follows:

In thousands of dollars	9/30/13		9/30/12
Fair value, January 1	$	8,285	$	7,331
Fair value, end of period	$	11,041	$	7,848

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. The diluted earnings per share further assumes the dilutive effect of additional common shares issuable under stock based compensation plans and warrants.

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A reconciliation of basic and diluted earnings per common share follows.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
In thousands, except per-share data	2013			2012			2013			2012
Net income	$	2,276		$	1,390		$	6,305		$	3,017
Less:
Accretion of discount on preferred stock		(47	)		(27	)		(106	)		(83	)
Dividends on preferred stock		(258	)		(258	)		(773	)		(773	)
Income available to common shareholders	$	1,971		$	1,105		$	5,426		$	2,161

Basic earnings per share:
Weighted avg. common shares outstanding		12,703.5		12,683.4		12,698.6		12,677.7
Weighted avg. contingently issuable shares		133.3		114.5		127.6		113.5
Total weighted average common shares outstanding		12,836.8		12,797.9		12,826.2		12,791.2
Basic earnings per share	$	0.15	$	0.09	$	0.42	$	0.17
Diluted earnings per share:
Weighted average common shares outstanding from basic earnings per share		12,836.8		12,797.9		12,826.2		12,791.2
Dilutive effect of stock incentive plans		73.9		-		55.1		-
Total weighted average common shares outstanding		12,910.7		12,797.9		12,881.4		12,791.2
Diluted earnings per share	$	0.15	$	0.09	$	0.42	$	0.17

A total of 370,986 and 373,986 shares subject to RSU and SOSAR grants, stock options and restricted stock existed for the three and nine month periods ended September 30, 2013 and 527,751 shares subject to RSU and SOSAR grants, stock options and restricted stock existed for the same time periods in 2012.  These shares were not considered in computing diluted earnings per share because they were not dilutive.

Note 8 – 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.

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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

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, 2013 and December 31, 2012, in thousands of dollars:

Thousands of dollars			Fair Value Measurements Using
September 30, 2013	Fair Value		Level 1		Level 2		Level 3
Available for sale securities:
U.S. Treasury and agency securities	$	25,767	$	-	$	25,767	$	-
Mortgage-backed agency securities		154,243		-		154,243		-
Obligations of states and political subdivisions		24,790		-		24,790		-
Equity securities		27		27		-		-
Hedged loan		7,257		-		7,257		-
Interest rate swap asset		120		-		120		-

December 31, 2012
Available for sale securities:
U.S. Treasury and agency securities	$	27,316	$	-	$	27,316	$	-
Mortgage-backed agency securities		160,499		-		160,499		-
Obligations of states and political subdivisions		18,286		-		18,286		-
Equity securities		28		28		-		-

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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.

Interest Rate Swaps (Derivatives)

The fair value of interest rate swaps is based on valuation models using observable market data as of the measurement date (Level 2). Additional information is included in Note 9 – Derivative Instruments of the Notes to Consolidated Condensed Financial Statements of this Form 10-Q.

Transfers between Levels

There were no transfers between Levels 1, 2 and 3 in the quarter ended September 30, 2013 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, 2013 and December 31, 2012:

In thousands of dollars			Fair Value Measurements Using
Impaired Loans (Collateral Dependent):	Fair Value		Level 1		Level 2		Level 3
September 30, 2013	$	13,803	$	-	$	-	$	13,803
December 31, 2012		21,866		-		-		21,866

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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. Those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.

Impaired Loans (Collateral Dependent)

Loan balances which indicate that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Collateral-dependent loans are assigned an impairment rating using the Fair Value of the Collateral method, based on the current appraisals of loan collateral.

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 Chief Financial Officer. 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.

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, 2013 and December 31, 2012. For both periods, the valuation technique used is market comparable properties and unobservable inputs are based on marketability discount at the rates shown.

	Impaired loans (collateral dependent)
dollars in thousands	9/30/13				12/31/12
Fair value		$	13,803			$	21,866
Range			7.5%-49.5	%			7.5%-49.5	%
Weighted average			16.3	%			14.0	%

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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, 2013 and December 31, 2012, were as follows:

	September 30, 2013
	Carrying			Fair Value Measurements Using
	Amount			Level 1			Level 2			Level 3
Financial Assets
Cash and cash equivalents	$	31,781		$	31,781		$	-		$	-
Securities available for sale		204,827			27			204,800			-
FHLB Stock		2,691			-			2,691			-
Loans held for sale		8,388			-			8,388			-
Net portfolio loans		621,188			-			7,257			618,335
Accrued interest receivable		2,760			-			2,760			-
Interest rate swap asset		120			-			120			-
Financial Liabilities
Total deposits	$	(805,740	)	$	(160,225	)	$	(646,587	)	$	-
FHLB advances		(11,983	)		-			(12,595	)		-
Other borrowings		(6,000	)		-			(6,000	)		-
Accrued interest payable		(281	)		-			(281	)		-

	December 31, 2012
Financial Assets
Cash and cash equivalents	$	70,612		$	70,612	$	-		$	-
Securities available for sale		206,129			28		206,101			-
FHLB Stock		2,571			-		2,571			-
Loans held for sale		13,380			-		13,380			-
Net portfolio loans		564,135			-		-			574,137
Accrued interest receivable		2,620			-		2,620			-
Financial Liabilities
Total deposits	$	(784,643	)	$	-	$	(787,015	)	$	-
FHLB advances		(21,999	)		-		(23,007	)		-
Accrued interest payable		(354	)		-		(354	)		-

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.

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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 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.

Other borrowings – The fair value is estimated by discounting future cash flows using current rates on borrowings 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 9 – Derivative Instruments

The Company may use interest rate swaps as part of its interest rate risk management strategy to add stability to interest income and to manage its exposure to interest rate movements. The Company does not use derivative instruments for trading or speculative purposes. The Company has entered into an interest rate swap agreement, primarily as an asset/liability management strategy, in order to mitigate the changes in the fair value of a specified long-term fixed-rate loan caused by changes in interest rates. This hedge allowed us to offer a long-term fixed rate loan to a client without assuming the interest rate risk of a long-term asset. Converting our fixed-rate interest stream to a floating-rate interest stream, benchmarked to the one-month U.S. dollar LIBOR index, protects against changes in the fair value of our loan otherwise associated with fluctuating interest rates.

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The fixed-rate payment feature of the interest rate swap is structured at inception to mirror substantially all of the provisions of the hedged loan agreements. This interest rate swap, designated and qualified as a fair value hedge, is carried on the consolidated balance sheet at fair value in "other assets" (when the fair value is positive) or in "other liabilities" (when the fair value is negative).

The change in fair value of the interest rate swap is recorded in interest income. The unrealized gain or loss in fair value of the hedged fixed-rate loan due to LIBOR interest rate movements is recorded as an adjustment to the hedged loan and is offset in interest income. The net effect of the change in fair value of the interest rate swap and the change in the fair value of the hedged loan may result in an insignificant amount of hedge ineffectiveness recognized in interest income.

Our credit exposure, if any, on the interest rate swap is limited to the favorable value (net of any collateral pledged to us) and interest payments of the interest rate swap by the counterparty. We are required to post collateral to the counterparty. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap values. As of September 30, 2013, we have posted cash collateral of $370,100 related to the collateral requirements of the interest rate swap.

As of September 30, 2013, we had one interest rate swap, which is scheduled to mature in June 2020. The interest rate swap is accounted for as a fair value hedge, and is settled monthly with the counterparty. As of September 30, 2013, the notional amount of the interest rate swap was approximately $7.4 million. The fair value of the interest rate swap at September 30, 2013 was $120,000. The Company had no interest rate swaps at December 31, 2012.

The hedging relationship of the interest rate swap is tested for effectiveness on a quarterly basis, and, at September 30, 2013, was determined to be highly effective, with no resulting impact on the income statement of the Company for the three and nine months ended September 30, 2013.

Note 10 – Borrowings

The Company entered into a Business Loan Agreement with Chemical Bank (the "Loan Agreement") and a revolving line of credit as of September 16, 2013.  The Loan Agreement provides for a $10.0 million line of credit by Chemical Bank to the Company at an interest rate of prime plus 0.125% (3.375% as of September 30, 2013).  The Company will pay quarterly payments of accrued interest, and the balance of all outstanding principal and accrued interest will become due on September 16, 2015.  As of September 30, 2013, United had an outstanding principal balance of $6.0 million on the line of credit.

The Loan Agreement contained customary affirmative and negative covenants and events of default.  Affirmative covenants include the maintenance of certain minimum capital ratios, a maximum net charge off to average loan ratio, a maximum non-performing loan to total assets ratio, a minimum return on average assets, a minimum return on average equity and a limit on the amount of dividends that the Company may pay to holders of common stock.

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If return on average assets falls below a certain specified level, then the Company's quarterly dividend payment to common shareholders could not be increased and the payout ratio could not exceed 40%. Negative covenants include restrictions on additional indebtedness, and a covenant not to merge, acquire or consolidate with another entity without Chemical Bank's consent.  Events of default include payment defaults, false representations, insolvency and certain other events.

As security for its obligations under the Loan Agreement, the Company pledged to Chemical Bank all of the outstanding common stock of its subsidiary, United Bank & Trust.

Note 11 – Preferred Stock Redemption

On September 30, 2013, the Company completed the redemption of 10,300 shares, or 50%, of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, Liquidation Preference Amount $1,000 per share ("Preferred Stock") that were originally issued to the United States Department of the Treasury ("U.S. Treasury") under the Troubled Asset Relief Program Capital Purchase Program.  U.S. Treasury sold all 20,600 shares of Preferred Stock to private investors in June 2012.  Following completion of the partial redemption, 10,300 shares of Preferred Stock remain outstanding.

The redemption price for the shares of Preferred Stock was the stated liquidation preference amount of $1,000 per share, plus any accrued and unpaid dividends to but excluding September 30, 2013.  The total cost of the partial redemption of shares of Preferred Stock was approximately $10.4 million, which was funded with a combination of excess cash at the holding company, a dividend to the holding company of retained earnings by the Bank, and the borrowing of $6.0 million under the Company's $10.0 million revolving line of credit.

Following completion of the partial redemption of shares of Preferred Stock, the capital ratios of the Company and the Bank continue to exceed regulatory standards to be categorized as well-capitalized.  In addition, the Bank's Tier 1 capital ratio continues to exceed the 8.5% level required by resolution of the Bank's Board of Directors.  The Bank's Tier 1 leverage ratio was 9.72% at September 30, 2013, after payment of a $3.0 million dividend to the Company in the third quarter of 2013.

Note 12 – Accounting Developments

Accounting Standards Update No. 2013-04 – Liabilities (Topic 405). On February 28, 2013, FASB issued ASU 2013-04. The amendments in this Update provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this Update is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors.

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The guidance in this Update also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. This Accounting Standards Update is the final version of Proposed Accounting Standards Update EITF12D – Liabilities (Topic 405) which has been deleted.

The amendments in this Update are effective for fiscal years beginning after December 31, 2013. Early adoption is permitted. 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.

Accounting Standards Update No. 2013-07 – Presentation of Financial Statements (Topic 205). On April 22, 2013, FASB issued ASU 2013-07. The objective of this Update is to clarify when an entity should apply the liquidation basis of accounting and to provide principles for the measurement of assets and liabilities under the liquidation basis of accounting, as well as any required disclosures. This Accounting Standards Update is the final version of Proposed Accounting Standards Update 2012-210– Presentation of Financial Statements (Topic 205), which has been deleted.

The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. Entities should apply the requirements prospectively from the day that liquidation becomes imminent. Early adoption is permitted. 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.

Accounting Standards Update No. 2013-10 - Derivatives and Hedging (Topic 815) In July 2013, FASB issued ASU 2013-10. The objective of this Update is to provide for the inclusion of the Fed Funds Effective Swap Rate - Overnight Index Swap Rate (OIS) as a U.S. benchmark interest rate for hedge accounting purposes, in addition to U.S. Treasury (UST) or London Interbank Offered Rate (LIBOR) indices. The Update also removes a restriction stating that entities must use the same rates for similar hedges, offering greater flexibility in hedge accounting.

The amendments in this Update are effective prospectively for qualifying new or re-designated hedging relationships entered into on or after July 17, 2013. The Company has adopted the applicable methodologies prescribed by this ASU and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

Accounting Standards Update No. 2013-11- Income Taxes (Topic 740) – In July 2013, FASB issued ASU 2013-11. This update pertains to the unrecognized tax benefit when a net operating loss carry forward, a similar tax loss or a tax credit carry forward exists. The ASU is intended to end the varying ways that entities present these situations since GAAP is non-specific and leads to diversity in practice.  The new standard deems that any unrecognized tax benefit or portion of an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carry forward, a similar tax loss, or a tax credit carry forward except for certain defined situations.

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The amendments in this Update are effective for fiscal years beginning after December 15, 2013. Early adoption is permitted. 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 13 – Legal Proceedings

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, 2013 and 2012. 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 120 years ago. We are registered as a bank holding company under the Bank Holding Company Act of 1956. At September 30, 2013, we had total assets of $918.8 million, deposits of $805.7 million, and total shareholders' equity of $90.6 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, 2013, our noninterest income equaled 41.9% of our combined net interest income and noninterest income. For the five years ended December 31, 2012, noninterest income averaged 35.7% of our combined net interest income and noninterest income.

This diverse revenue stream has enabled us to achieve a pre-tax, pre-provision return on average assets of 1.55% and 1.60%, respectively, for the three and nine month periods ended September 30, 2013. 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.

The 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.

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The Bank offers a full complement of online services, including internet banking and bill payment. In 2011, the Bank opened a loan production office in Livingston County, Michigan which was converted to a full-service banking office in 2012.  The Bank opened a loan production office in the city of Monroe, Michigan in 2012, which was converted to a full-service banking office effective July 15, 2013.

Our mortgage group offers our customers a full array of conventional residential mortgage products, including purchase, refinance and construction loans. Due to our local decision making and fully-functional back office, we believe we have consistently been one of the most active originators of residential mortgage loans in our market area. Our mortgage group generated 34.5% of our noninterest income for the nine months ended September 30, 2013.

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 26.1% of our noninterest income for the nine months ended September 30, 2013.

Our structured finance group, United Structured Finance Company ("USFC"), 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.

For the twelve months ended September 30, 2012 and 2011, USFC was the leading SBA lender in each of Lenawee, Washtenaw and Livingston Counties. For the twelve months ended September 30, 2012, USFC was the second largest SBA 7A lender in Michigan, based on loan volume.² For the nine months ended June 30, 2013, USFC was the third largest SBA 7A lender in Michigan, based on loan volume. ³

Other Developments

Board Resolutions

In connection with the termination of the Bank's Memorandum of Understanding in the fourth quarter of 2012, the Board of Directors of the Bank has resolved that the Bank will maintain a Tier 1 leverage ratio at a level equal to or exceeding 8.5% and that the Bank will not declare or pay any dividend to the Company unless the Board of Directors first determines that the Bank has produced stable earnings. The Bank's Tier 1 leverage ratio was 9.72% at September 30, 2013, after payment of a $3.0 million dividend to the Company in the third quarter of 2013.

On April 22, 2010, at the direction of the Federal Reserve Bank, the Company's Board of Directors adopted a resolution requiring the Company to obtain written approval from the Federal Reserve Bank 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.

² U.S. Small Business Administration, Detroit, Michigan office

³ U.S. Small Business Administration, Detroit, Michigan office

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On February 12, 2013, the Federal Reserve Bank notified the Company that it is no longer required to obtain prior approval of future payments of dividends on the Company's outstanding shares of Preferred Stock.

Capital Planning and Partial Redemption of Preferred Stock

On September 30, 2013, the Company completed the redemption of 10,300 shares, or 50%, of its Preferred Stock that were originally issued to the United States Department of the Treasury ("U.S. Treasury") under the Troubled Asset Relief Program Capital Purchase Program.  U.S. Treasury sold all 20,600 shares of Preferred Stock to private investors in June 2012.  Following completion of the partial redemption, 10,300 shares of Preferred Stock remain outstanding.

The redemption price for the shares of Preferred Stock was the stated liquidation preference amount of $1,000 per share, plus any accrued and unpaid dividends to but excluding September 30, 2013.  The total cost of the partial redemption of shares of Preferred Stock was approximately $10.4 million, which was funded with a combination of excess cash at the holding company, a dividend to the holding company of retained earnings by the Bank, and the borrowing of $6.0 million under the Company's $10.0 million revolving line of credit.  The partial redemption of shares of Preferred Stock will result in an estimated annual savings of $660,000, or $0.05 per common share, due to the elimination of payment of dividends on the redeemed shares.

Following completion of the partial redemption of shares of Preferred Stock, the capital ratios of the Company and the Bank continue to exceed regulatory standards to be categorized as well-capitalized.  In addition, the Bank's Tier 1 capital ratio continues to exceed the 8.5% level required by resolution of the Bank's Board of Directors.  The Bank's Tier 1 leverage ratio was 9.72% at September 30, 2013, after payment of a $3.0 million dividend to the Company in the third quarter of 2013.

The Company continues to evaluate the possible future redemption of its remaining $10.3 million of Preferred Stock in light of the dividend rate increase from 5% to 9% that will occur in January 2014. The Company's cash balance at the holding company was $6.4 million at September 30, 2013, and the Bank had $5.7 million of retained earnings that could be available to be paid in dividends to the Company at September 30, 2013. In addition, the Company had $4.0 million in borrowing available on its $10.0 million revolving line of credit at September 30, 2013.  These sources of funding may be available to fund the possible future redemption of the remaining shares of Preferred Stock.

Executive Summary

The Company's consolidated net income was $2.3 million in the third quarter of 2013 and $6.3 million for the first nine months of 2013, compared to $1.4 million and $3.0 million, respectively, for the same periods of 2012. Net income per common share for the three and nine months ended September 30, 2013 was $0.15 and $0.42, respectively, compared to $0.09 and $0.17, respectively, for the comparable periods of 2012. Return on average assets ("ROA") was 0.99% and 0.93%, respectively, for the third quarter and first nine months of 2013, compared to 0.62% and 0.45%, respectively, for the comparable periods of 2012. Return on average shareholders' equity ("ROE") was 9.20% and 8.57%, respectively, for the third quarter and first nine months of 2013, compared to 5.79% and 4.26%, respectively, for the same periods of 2012.

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The Company's combined net interest income and noninterest income was down 0.9% in the third quarter of 2013 but up 3.6% in the first nine months of 2013 compared to the same periods of 2012. While some categories of noninterest income decreased in the first nine months of 2013 compared to the same period of 2012, large increases in wealth management income and structured finance income more than offset the decreases. Total noninterest income for the third quarter of 2013 was down 8.1% compared to the same period of 2012, but was up 7.0% for the nine month period ended September 30, 2013 compared to the same period of 2012.

Total noninterest expense was up 2.5% in the third quarter and 4.6% in the first nine months of 2013, compared to the same periods of 2012. The largest dollar increases were in compensation expense, while several categories of noninterest expense declined. Among those declining were attorney, accounting and other professional fees, FDIC insurance premiums, and expenses related to other real estate owned ("ORE") and other foreclosed properties.

The Company's provision for loan losses for the third quarter and first nine months of 2013 was $300,000 and $1.9 million, respectively, down from $2.0 million and $6.7 million for the same periods of 2012. The reduced level of provision for loan losses is a direct result of United's improvement in its credit quality measures and Management's evaluation of the adequacy of the allowance for loan losses.

Total consolidated assets of the Company were $918.8 million at September 30, 2013, compared to $907.7 million at December 31, 2012 and $898.6 million at September 30, 2012. Total portfolio loans of $643.2 million increased by $56.5 million in the first nine months of 2013, and by $51.3 million since September 30, 2012.

The Company generally sells its fixed rate long-term residential mortgages on the secondary market, and retains adjustable rate mortgages in its loan portfolio. Loans serviced for others are not included in the accompanying consolidated financial statements. The unpaid principal balance of loans serviced for others at September 30, 2013 was $962.9 million, and has increased by $146.7 million, or 18.0%, in the twelve months ended September 30, 2013.

United's balances in federal funds sold and other short-term investments were $8.3 million at September 30, 2013, compared to $56.8 million at December 31, 2012 and $52.0 million at September 30, 2012.  Higher levels of loan activity contributed to the decreased level during the third quarter of 2013.Securities available for sale of $204.8 million at September 30, 2013 were down $1.3 million from December 31, 2012 levels, but have increased by $6.8 million since September 30, 2012.

Total deposits of $805.7 million at September 30, 2013 were up $21.1 million from $784.6 million at December 31, 2012, with all of the growth in 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 fund clients. Public fund 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 0.39% and 0.43%, respectively, for the third quarter and first nine months of 2013 down, from 0.59% and 0.64%, respectively, for the same periods of 2012.

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The Company's ratio of allowance for loan losses to total loans was 3.41% and the ratio of allowance for loan losses to nonperforming loans was 164.9% at September 30, 2013, compared to 3.84% and 134.6%, respectively, at December 31, 2012 and 3.80% and 108.0%, respectively, at September 30, 2012. The Company's allowance for loan losses decreased by $580,000 from December 31, 2012 to September 30, 2013, as net charge-offs exceeded the provision for loan losses in the period. Net charge-offs for the most recent quarter were $338,000, and annualized net charge-offs through the first nine months of 2013 were 0.55% of average loans.

Within the Company's loan portfolio, $13.3 million of loans were considered nonperforming at September 30, 2013, compared to $16.8 million at December 31, 2012 and $20.8 million at September 30, 2012. Total nonperforming loans as a percent of total portfolio loans decreased from 2.86% at the end of 2012 and 3.51% at September 30, 2012 to 2.07% at September 30, 2013. 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, 2013, December 31, 2012 and September 30, 2012 were $10.6 million, $15.8 million and $16.3 million, respectively. The decline in balances of accruing restructured loans during the first nine months of 2013 was primarily the result of the payoff of two loans in the second quarter.

Financial Condition

Investment Securities

Balances in the securities portfolio have declined modestly in the first nine months of 2013.  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 the various categories of investment securities of the Company, along with the percentage composition of the portfolio by type as of September 30, 2013 and December 31, 2012.

	September 30, 2013					December 31, 2012
In thousands of dollars	Balance		% of total			Balance		% of total
U.S. Treasury and agency securities	$	25,767		12.6	%	$	27,316		13.3	%
Mortgage-backed agency securities		154,243		75.3	%		160,499		77.9	%
Obligations of states and political subdivisions		24,790		12.1	%		18,286		8.9	%
Equity securities		27		0.0	%		28		0.0	%
Total Investment Securities	$	204,827		100.0	%	$	206,129		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 Company's portfolio contains no mortgage-backed securities or structured notes that the Company believes to be "high risk." The municipal portfolio contains a small level of geographic risk, as approximately 1.3% of the investment portfolio is issued by political subdivisions located within Lenawee County, Michigan, 3.5% in Washtenaw County,Michigan, and 1.1% in Monroe County, Michigan. The Bank's investment in local municipal issues reflects our commitment to the development of the local area through support of its local political subdivisions. The Company has no investments in securities of issuers outside of the United States.  The Company owns no obligations issued by the City of Detroit.

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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 and losses in each category of the portfolio at September 30, 2013 and December 31, 2012.

Unrealized gains (losses) in thousands of dollars	9/30/13			12/31/12		Change
U.S. Treasury and agency securities	$	(789	)	$	116	$	(905	)
Mortgage-backed agency securities		38			1,670		(1,632	)
Obligations of states and political subdivisions		126			735		(609	)
Equity securities		1			2		(1	)
Total Investment Securities	$	(624	)	$	2,523	$	(3,147	)

Portfolio Loans

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

Periods ended September 30, 2013	Three Months						Nine Months						Twelve Months
In thousands of dollars	Change			Percent			Change			Percent			Change			Percent
Personal loans	$	3,252			2.8	%	$	11,743			11.0	%	$	12,244			11.5	%
Business loans		19,405			5.8	%		38,506			12.2	%		34,600			10.8	%
Residential mortgages		5,066			3.9	%		12,512			10.3	%		22,249			19.9	%
Construction & development		(1,357	)		-4.0	%		(8,397	)		-20.7	%		(15,899	)		-33.0	%
Other (1)		(2,189	)		-33.5	%		2,109			94.1	%		(1,851	)		-29.8	%
Total portfolio loans	$	24,177			3.9	%	$	56,473			9.6	%	$	51,343			8.7	%
(1) Includes deferred loan fees and costs, overdrafts, in-process accounts

The Company continues to experience steady growth of portfolio loans. Total portfolio loan balances increased by $56.5 million, or 9.6%, from December 31, 2012 and $51.3 million, or 8.7%, from September 30, 2012. 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 $3.3 million, or 2.8%, in the third quarter of 2013, and grew by $12.2 million, or 11.5%, in the twelve months ended September 30, 2013.

Business loan balances (consisting of owner-occupied commercial real estate loans, other commercial real estate loans and commercial and industrial loans) increased by $19.4 million, or 5.8%, in the third quarter of 2013, and have increased by $34.6 million, or 10.8%, over the twelve months ended September 30, 2013. Growth of business loans in those periods reflected an improvement in loan demand, net of write-downs, charge-offs and payoffs. The Bank's loan portfolio includes $3.6 million of purchased participations in business loans originated by other institutions. These participations represent 0.6% of total loans. Of those participation loans, 95.5% of the outstanding balances are the result of participations purchased from other Michigan community banks.

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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 2013 and by 19.9% in the twelve months ended September 30, 2013.

Outstanding balances of loans for construction and development have decreased by $1.4 million in the third quarter of 2013 and by $15.9 million since September 30, 2012. The decrease over the past year consisted of approximately $15.0 million of commercial construction (primarily owner-occupied) loans, and $931,000 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

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.

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

In thousands of dollars	9/30/13			6/30/13			3/31/13			12/31/12			9/30/12
Nonaccrual loans	$	13,028		$	13,910		$	14,598		$	16,714		$	20,386
Accruing loans past due 90 days or more		292			298			380			37			406
Total nonperforming loans		13,320			14,208			14,978			16,751			20,792
Nonperforming loans % of total portfolio loans		2.07	%		2.30	%		2.50	%		2.86	%		3.51	%
Allowance coverage of nonperforming loans		164.9	%		154.8	%		147.9	%		134.6	%		108.0	%
Other assets owned		2,056			2,402			3,106			3,412			2,179
Total nonperforming assets	$	15,376		$	16,610		$	18,084		$	20,163		$	22,971
Nonperforming assets % of total assets		1.67	%		1.83	%		1.95	%		2.22	%		2.56	%

Loans delinquent 30-89 days	$	2,265	$	2,396	$	2,352	$	3,007	$	2,807
Accruing restructured loans
Business, including commercial mortgages	$	5,021	$	5,029	$	5,266	$	7,643	$	7,819
Construction and development		1,658		1,686		4,728		4,738		5,017
Residential mortgage		3,748		4,296		4,001		3,267		3,276
Home equity		170		171		171		171		171
Total accruing restructured loans	$	10,597	$	11,182	$	14,166	$	15,819	$	16,283

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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.

The Company has achieved significant improvement in its credit quality measures in recent periods. Total nonperforming loans have declined by $3.4 million since December 31, 2012, and have declined by $7.5 million since September 30, 2012. Total nonperforming loans as a percent of total portfolio loans were 2.07% at September 30, 2013, down from 2.86% and 3.51% at December 31 and September 30, 2012, respectively, while the ratio of allowance for loan losses to nonperforming loans improved from 108.0% and 134.6%, respectively, at September 30 and December 31, 2012, to 164.9% at September 30, 2013. Loan workout and collection efforts continue with all delinquent clients, in an effort to bring them back to performing status.

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 $1.4 million for the nine months ended September 30, 2013. At September 30, 2013, other real estate owned included ten properties that were acquired through foreclosure or in lieu of foreclosure. The properties included seven commercial properties, four of which were the result of out-of-state loan participations, and three residential properties. All properties are for sale. Other repossessed assets at September 30, 2013 consisted of two automobiles. The following table reflects the activity in other assets owned during the first nine months of 2013.

In thousands of dollars	ORE			Other Repossessed Assets			Total
Balance at January 1	$	3,409		$	3		$	3,412
Additions		466			95			561
Sold		(1,696	)		(83	)		(1,779	)
Write-downs of book value		(138	)		-			(138	)
Balance at September 30	$	2,041		$	15		$	2,056

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.

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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 $10.0 million at September 30, 2013 and $10.8 million at December 31, 2012. 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 $10.6 million at September 30, 2013 and $15.8 million at December 31, 2012.

All TDRs are considered impaired by the Company. Loans that are considered TDRs are classified as performing unless they are on nonaccrual status or are 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 TDRs to determine if any TDR should be removed from TDR status.

Accruing restructured loans at September 30, 2013 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 Company performed its quarterly evaluation of the specific reserves on all of its TDRs at September 30, 2013. 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.

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The following table compares the recorded investment in accruing TDRs and their specific reserve amount, as of September 30, 2013 and December 31, 2012.

In thousands of dollars	9/30/13			12/31/12			Change
Balance of TDR Loans	$	10,597		$	15,819		$	(5,222	)
Specific reserve on above loans		2,802			4,467			(1,665	)
Percent		26.4	%		28.2	%

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, $25.4 million of impaired loans have been identified as of September 30, 2013, down from $34.3 million at December 31, 2012. The specific allowance for impaired loans was $6.6 million at September 30, 2013, down from $8.3 million at December 31, 2012.

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 portfolio.

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 greater and 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 difficult to evaluate and monitor. Collateral may be difficult to dispose of in a market decline.

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The residential mortgage portfolio 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 declined by $38,000 during the third quarter of 2013 and has decreased by $497,000 since September 30, 2012. The allowance for loan losses as a percent of total loans of 3.41% at September 30, 2013 was down from 3.80% at September 30, 2012. 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, 2013 for impaired and non-impaired loans. Impaired loans are further split between accruing TDRs and other impaired loans.

							% of
	Unpaid						Unpaid
	Principal				Cumulative		Principal
Dollars in thousands	Balance		ALLL		Allowance		Balance
Accruing TDRs	$	10,597	$	2,802	$	2,802		26.4	%
Other Impaired Loans		14,823		3,794		3,794
Cumulative Charge-offs		7,585		-		7,585
Total		22,408		3,794		11,379		50.8	%
Non-impaired loans	$	617,731	$	15,367	$	15,367		2.5	%

Deposits

United, funds its operations internally through a large stable base of core deposits to provide 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 fund clients. Public fund clients include local governments and municipal bodies, hospitals, universities and other educational institutions. At September 30, 2013, core deposits accounted for 99.3% of total deposits, up slightly from 99.1% at September 30, 2012. 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.

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The table below shows the change in the various categories of the deposit portfolio for the three, nine and twelve month periods ended September 30, 2013.

Changes in categories of deposits
	Three Months							Nine Months							Twelve Months
In thousands of dollars	Change				Percent			Change				Percent			Change			Percent
Noninterest bearing		$	(3,513	)		-2.1	%		$	(5,205	)		-3.1	%		$	892		0.6	%
Interest bearing deposits			17,134			2.7	%			26,302			4.2	%			28,823		4.7	%
Total deposits		$	13,621			1.7	%		$	21,097			2.7	%		$	29,715		3.8	%

Deposit balances increased by $13.6 million, or 1.7%, in the third quarter of 2013, and have also increased by $29.7 million, or 3.8%, in the twelve months ended September 30, 2013. In the most recent quarter, demand deposit balances decreased by $3.5 million, while interest bearing deposits increased by $17.1 million. The increase in interest bearing deposits during the three months ended September 30, 2013 was primarily a result of a seasonal increase in public fund balances.

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 continue to make up approximately 20% of total deposits. The following table shows the makeup of the Company's deposits at September 30, 2013, December 31, 2012 and September 30, 2012.

Percentage Makeup of Deposit Portfolio	9/30/13			12/31/12			9/30/12
Noninterest bearing		19.9	%		21.1	%		20.5	%
Interest bearing deposits		80.1	%		78.9	%		79.5	%
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.

Page 47

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.

The Bank entered into a Business Loan Agreement with Chemical Bank (the "Loan Agreement") and a revolving line of credit as of September 16, 2013.  The Loan Agreement provides for a $10,000,000 line of credit by Chemical Bank to the Company.  The Company will pay quarterly payments of accrued interest, and principal payments as cash flow permits.  The balance of all outstanding principal and accrued interest will become due on September 16, 2015.  As of September 30, 2013, United had an outstanding principal balance of $6.0 million on the line of credit.

Results of Operations

Earnings Summary and Key Ratios

The Company achieved consolidated net income of $2.3 million in the third quarter and $6.3 million for the first nine months of 2013. This compares to consolidated net income of $1.4 million and $3.0 million for the same periods of 2012. The improvement in net income in the third quarter of 2013 resulted primarily from increased net interest income and reduced amounts in the Company's provision for loan losses, offset in part by increases in noninterest expense of 2.5%.  For the nine month period ended September 30, 2013, the Company also recognized higher levels of net interest income, as well as an increase of noninterest income of 7.0% over levels for the same period of 2012, and reduced amounts of provision for loan losses.  Noninterest expense partially offset these positive factors by increasing 4.6% for the first nine months of 2013 compared to the same period in 2012.

United's net interest margin of 3.70% for the third quarter of 2013 was up from 3.63% for the third quarter of 2012, while the net interest margin of 3.61% for the first nine months of 2013 was down from 3.63% for the same period of 2012. For the third quarter of 2013, net interest income of $8.0 million was up 4.4% compared to the same period of 2012, and net interest income of $23.1 million for the first nine months of 2013 was up slightly from the same period of 2012.

Noninterest income of $5.1 million for the quarter ended September 30, 2013 declined by 8.1% compared to the third quarter of 2012, while noninterest income for the nine months ended September 30, 2013 was 7.0% higher than the same period of 2012. Noninterest income represented 39.1% and 41.9%, respectively, of the Company's combined net interest income and noninterest income for the three and nine months ended September 30, 2013, compared to 42.1% and 40.6%, respectively, for the same periods of 2012.

Page 48

Total noninterest expense for the third quarter of 2013 was up 2.5% from the third quarter of 2012, and increased by 4.6% for the first nine months of 2013 compared to the same period of 2012. In the third quarter and first nine months of 2013, the largest dollar increases in noninterest expense were in compensation expense. Compensation expense increased by 7.7% in the third quarter of 2013 compared to the same period of 2012, and by 14.7% in the first nine months of 2013 compared to the same period of 2012. The increase in the first nine months of 2013 reflected, 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 moderate salary increases were implemented effective April 1, 2013. Expenses in the third quarter and first nine months of 2013 also included accruals for profit sharing and cash bonuses, reflecting the Company's improved financial condition and results of operations. The Company did not pay or accrue any cash bonus or other payout to executive officers under our bonus plans in 2012.

The Company's provision for loan losses of $300,000 in the third quarter of 2013 was down from $2.0 million for the third quarter of 2012. The Company's provision for loan losses of $1.9 million for the first nine months of 2013 was down from $6.7 million for the same period of 2012.

ROA was 0.99% for the third quarter and 0.93% for the first nine months of 2013, compared to 0.62% and 0.45%, respectively, for the comparable periods of 2012. ROE was 9.20% for the third quarter and 8.57% for the first nine months of 2013, compared to 5.79% and 4.26%, respectively, for the same periods of 2012.

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.

	2013									2012
in thousands of dollars, where appropriate	3rd Qtr			2nd Qtr			1st Qtr			4th Qtr			3rd Qtr
Net interest income	$	7,981		$	7,824		$	7,288		$	7,384		$	7,646
Provision for loan losses		300			600			1,000			1,700			2,000
Noninterest income		5,115			5,647			5,924			5,891			5,564
Noninterest expense		9,532			9,874			9,486			9,586			9,300
Federal income tax provision		988			910			784			543			520
Net income		2,276			2,087			1,942			1,446			1,390
Earnings per common share	$	0.15		$	0.14		$	0.13		$	0.09		$	0.09
Return on average assets (a)		0.99	%		0.92	%		0.87	%		0.64	%		0.62	%
Return on average shareholders' equity (a)		9.20	%		8.44	%		8.07	%		5.94	%		5.79	%
Net interest margin		3.70	%		3.68	%		3.46	%		3.45	%		3.63	%
Efficiency ratio (tax equivalent basis)		72.2	%		72.8	%		71.3	%		71.7	%		69.9	%
Tier 1 leverage ratio		9.8	%		10.7	%		10.5	%		10.2	%		10.1	%
(a)  annualized

Page 49

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 was 1.55% and 1.60%, respectively, for the third quarter and first nine months of 2013, compared to 1.74% and 1.61%, respectively, for the same periods in 2012.

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, 2013 and 2012.

	Three Months Ended September 30,									Nine Months Ended September 30,
In thousands of dollars	2013			2012			Change			2013			2012			Change
Interest income	$	8,675		$	8,731			-0.6	%	$	25,430		$	26,322			-3.4	%
Interest expense		694			1,085			-36.0	%		2,337			3,541			-34.0	%
Net interest income		7,981			7,646			4.4	%		23,093			22,781			1.4	%
Noninterest income		5,115			5,564			-8.1	%		16,686			15,600			7.0	%
Noninterest expense		9,532			9,300			2.5	%		28,892			27,617			4.6	%
Pre-tax, pre-provision income	$	3,564		$	3,910			-8.8	%	$	10,887		$	10,764			1.1	%
Average assets	$	914,815		$	892,235			2.5	%	$	907,102		$	890,539			1.9	%
Pre-tax, pre-provision ROA		1.55	%		1.74	%		-0.19	%		1.60	%		1.61	%		-0.01	%
Reconcilement to GAAP income:
Provision for loan losses		300			2,000						1,900			6,650
Income tax		988			520						2,682			1,097
Net income	$	2,276		$	1,390					$	6,305		$	3,017

Net Interest Income

United's net interest margin has been under pressure in recent quarters, as a result of continued downward pressure on both short and long-term interest rates. The Company's mix of assets has evolved over recent quarters. Portfolio loan growth of $51.3 million in the twelve months ended September 30, 2013 has contributed to this shift in mix and has helped United's yield on its earning assets. The Company converted its loan production office in Brighton, Michigan to a full-service banking office in the second quarter of 2012.  In July 2012, the Company opened a loan production office within the City of Monroe, Michigan, which was converted to a full-service banking office during the third quarter of 2013. Both offices have contributed to increased lending activity. In addition, loan volumes within the Bank's other markets have improved modestly.

Page 50

The Company has held historically high levels of liquidity since 2009. 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 twelve months ended September 30, 2013. The Company continues to fund its growth primarily with core deposits.

United's net interest margin was 3.70% and 3.61%, respectively, for the three and nine month periods ended September 30, 2013, compared to 3.63% for both the same periods of 2012. Net interest spread on a fully-tax equivalent basis improved from 3.45% for the third quarter of 2012 to 3.59% for the third quarter of 2013. Net interest spread on a fully-tax-equivalent basis of 3.49% for the first nine months of 2013 was also improved over 3.44% for the same period of 2012.

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, 2013 and 2012.

Page 51

	Three Months Ended September 30,																		Nine Months Ended September 30,
	2013									2012									2013									2012
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	$	28,948		$	19			0.26	%	$	55,558		$	36			0.26	%	$	43,920		$	84			0.25	%	$	69,385		$	133			0.25	%
Taxable investments		183,499			770			1.64	%		179,999			618			1.34	%		185,722			1,951			1.40	%		169,445			1,988			1.57	%
Tax exempt securities (b)		21,140			245			4.54	%		16,450			241			5.73	%		18,287			714			5.21	%		19,878			760			5.86	%
Taxable loans		630,262			7,691			4.84	%		593,992			7,898			5.29	%		613,789			22,829			4.97	%		588,064			23,633			5.37	%
Tax exempt loans (b)		3,516			48			5.33	%		1,744			28			6.34	%		3,340			137			5.46	%		1,800			93			6.91	%
Total int. earning assets (b)		867,365			8,773			4.02	%		847,743			8,821			4.14	%		865,058			25,715			3.97	%		848,572			26,607			4.18	%
Less allowance for loan losses		(22,690	)								(22,921	)								(22,935	)								(22,126	)
Other assets		70,140									67,413									64,979									64,093
Total Assets	$	914,815								$	892,235								$	907,102								$	890,539
Liabilities and Shareholders' Equity
NOW and savings deposits	$	420,046			125			0.12	%	$	363,878			131			0.14	%	$	410,801			376			0.12	%	$	363,522			436			0.16	%
Other interest bearing deposits		213,946			493			0.91	%		240,684			764			1.26	%		222,563			1,657			1.00	%		250,225			2,500			1.34	%
Total int. bearing deposits		633,992			618			0.39	%		604,562			895			0.59	%		633,364			2,033			0.43	%		613,747			2,936			0.64	%
FHLB advances		11,996			72			2.38	%		22,446			190			3.37	%		15,581			300			2.54	%		23,429			605			3.39	%
Other borrowings		522			4			3.04	%		-			-			-			175			4			3.09	%		-			-			-
Total int. bearing liabilities		646,510			694			0.43	%		627,008			1,085			0.69	%		649,120			2,337			0.48	%		637,176			3,541			0.74	%
Noninterest bearing deposits		162,205			-						162,066			-						155,986			-						155,161			-
Total including noninterestbearing deposits		808,715			694			0.34	%		789,074			1,085			0.55	%		805,106			2,337			0.39	%		792,337			3,541			0.60	%
Other liabilities		7,922									7,678									3,676									3,656
Shareholders' equity		98,178									95,483									98,320									94,546
Total Liabilities and Shareholders' Equity	$	914,815								$	892,235								$	907,102								$	890,539
Net interest income (b)					8,079									7,736									23,378									23,066
Net spread (b)								3.59	%								3.45	%								3.49	%								3.44	%
Net yield on interest earning assets (b)								3.70	%								3.63	%								3.61	%								3.63	%
Tax equivalent adjustment on interest income					(98	)								(90	)								(285	)								(285	)
Net interest income per income statement				$	7,981								$	7,646								$	23,093								$	22,781
Ratio of interest earning assets to interest bearing liabilities								1.34									1.35									1.33									1.33
(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

Page 52

Provision for Loan Losses

The Company's provision for loan losses for the third quarter and first nine months of 2013 was $300,000 and $1.9 million, respectively, down from $2.0 million and $6.7 million, respectively, for the same periods of 2012. The provision for loan losses provides for probable incurred credit losses inherent in the loan portfolio.

The Company's net charge-offs of $338,000 in the third quarter of 2013 marginally exceeded the Company's provision for loan losses of $300,000 for the quarter, and were primarily associated with loans for which the Company carried specific reserves at June 30, 2013. 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. Additional information regarding the allowance for loan losses is included in the "Credit Quality" discussion above.

Noninterest Income

Total noninterest income declined by 8.1% for the third quarter of 2013, but has improved 7.0% for the first nine months of 2013, compared to the same periods of 2012. The following table summarizes changes in noninterest income by category for the three and nine month periods ended September 30, 2013 and 2012.

	Three Months Ended September 30,							Nine Months Ended September 30,
In thousands of dollars	2013		2012		Change			2013		2012		Change
Service charges on deposit accounts	$	473	$	496		-4.6	%	$	1,369	$	1,378		-0.7	%
Wealth Management fee income		1,465		1,319		11.1	%		4,356		3,855		13.0	%
Income from loan sales and servicing		2,252		2,803		-19.7	%		8,071		7,299		10.6	%
ATM, debit and credit card fee income		580		517		12.2	%		1,637		1,583		3.4	%
Other income		345		429		-19.6	%		1,253		1,485		-15.6	%
Total noninterest income	$	5,115	$	5,564		-8.1	%	$	16,686	$	15,600		7.0	%

Service charges on deposit accounts were down 4.6% in the third quarter of 2013 and were essentially unchanged in the first nine months of 2013 compared to the same periods a year earlier. Substantially all of the change in the third quarter of 2013 was due to the Company's reduced levels of non-sufficient funds and overdraft fees collected.

The Wealth Management Group of the Bank provides the second-largest 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 11.1% in the third quarter and by 13.0% in the first nine months of 2013, respectively, compared to the same periods of 2012.

Page 53

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 decreased 19.7% during the third quarter of 2013 from the same period in 2012, as mortgage refinance levels slowed due to changes in interest rates.  However, activity for the first nine months of 2013 was strong and is 10.6% above the same period for 2012.

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	2013		2012		2013		2012
Residential mortgage sales and servicing	$	1,651	$	2,054	$	5,758	$	5,692
USFC commercial loan sales and servicing		601		749		2,313		1,607
Total income from loan sales and servicing	$	2,252	$	2,803	$	8,071	$	7,299

ATM, debit and credit card fee income provides a source of noninterest income for the Company. The Bank operates twenty-one 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 increased 12.2% and 3.4%, respectively, over the third quarter and first nine months of 2012.

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 included gains on the sale of ORE property of $18,000 in the third quarter and $334,000 in the first nine months of 2013, compared to $127,000 and $518,000, respectively, in the comparable periods of 2012. Total other income was down 19.6% and 15.6%, respectively, in the third quarter and first nine months of 2013 compared to the same periods of 2012.

Page 54

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

	2013						2012
In thousands of dollars	3rd Qtr		2nd Qtr		1st Qtr		4th Qtr		3rd Qtr
Service charges on deposit accounts	$	473	$	472	$	424	$	483	$	496
Wealth Management fee income		1,465		1,487		1,404		1,395		1,319
Income from loan sales and servicing		2,252		2,767		3,052		2,805		2,803
ATM, debit and credit card fee income		580		561		496		543		517
Other income		345		360		548		665		429
Total noninterest income	$	5,115	$	5,647	$	5,924	$	5,891	$	5,564

Noninterest Expense

Salaries and employee benefits typically make up 60% to 65% 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. The Company has implemented changes in its data processing as part of its risk mitigation initiatives, resulting in an increase in external data processing expense beginning in the third quarter of 2012.

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

	2013						2012
In thousands of dollars	3rd Qtr		2nd Qtr		1st Qtr		4th Qtr		3rd Qtr
Salaries and employee benefits	$	5,884	$	6,223	$	5,877	$	5,796	$	5,464
Occupancy and equipment expense, net		1,350		1,357		1,348		1,323		1,350
External data processing		352		353		372		349		250
Advertising and marketing		304		292		264		185		190
Attorney, accounting and other professional fees		334		349		411		226		416
Expenses relating to ORE property and other foreclosed assets		158		259		168		395		417
FDIC insurance premiums		189		190		186		250		292
Other expenses		961		851		860		1,062		921
Total noninterest expense	$	9,532	$	9,874	$	9,486	$	9,586	$	9,300

Page 55

The following table summarizes changes in the Company's noninterest expense by category for the three and nine month periods ended September 30, 2013 and 2012.

	Three Months Ended September 30,							Nine Months Ended September 30,
In thousands of dollars	2013		2012		Change			2013		2012		Change
Salaries and employee benefits	$	5,884	$	5,464		7.7	%	$	17,984	$	15,686		14.7	%
Occupancy and equipment expense, net		1,350		1,350		0.0	%		4,055		3,988		1.7	%
External data processing		352		250		40.8	%		1,077		764		41.0	%
Advertising and marketing		304		190		60.0	%		860		567		51.7	%
Attorney, accounting and other professional fees		334		416		-19.7	%		1,094		1,654		-33.9	%
Director fees		105		98		7.1	%		314		293		7.2	%
Expenses relating to ORE property and foreclosed assets		158		417		-62.1	%		585		1,533		-61.8	%
FDIC insurance premiums		189		292		-35.3	%		565		883		-36.0	%
Other expenses		856		823		4.0	%		2,358		2,249		4.8	%
Total noninterest expense	$	9,532	$	9,300		2.5	%	$	28,892	$	27,617		4.6	%

Total noninterest expenses were up 2.5% in the third quarter of 2013, and were up 4.6% in the first nine months of 2013 compared to the same periods of 2012. A number of categories of noninterest expense declined during the third quarter and first nine months of 2013 compared to the same periods of 2012. Those included attorney, accounting and other professional fees, FDIC insurance premiums and expenses relating to ORE property and other foreclosed assets.

Salaries and employee benefits for the third quarter and the first nine months of 2013 increased by 7.7% and 14.7%, respectively, compared to the same periods one year earlier. The increase in the first nine months of 2013 reflected, 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 moderate salary increases were implemented effective April 1, 2013. Expenses in the first nine months of 2013 also included accruals for profit sharing and cash bonuses, reflecting the Company's improved earnings. The Company did not pay or accrue any cash bonus or other payout to executive officers under our bonus plans in 2012.

Advertising and marketing expenses in the third quarter and the first nine months of 2013 increased by 60.0% and 51.7%, respectively, compared to the same periods of 2012. The increases partially reflect the Company's launch of a new branding initiative in the third quarter of 2012. The Company reduced its advertising and marketing expenditures by approximately 50% in 2009 compared to 2008, and remained at reduced levels until the launch of the branding initiative. This branding initiative represents a renewed emphasis on marketing, and the Company expects a continued trend toward historic spending levels for marketing and advertising expense.

Page 56

Expenses related to ORE and other foreclosed properties decreased by 62.1% in the third quarter of 2013 compared to the same quarter of 2012, and have also declined by 61.8% in the first nine months of 2013 compared to the same period of 2012. 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. During the first nine 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 $275,000 of probable incurred expenses were recorded in the first nine months of 2013. FDIC insurance premiums declined by 35.3% and 36.0%, respectively, during the three and nine months ended September 30, 2013 compared to the same periods of 2012 as a result of lower base charges.

Attorney, accounting and other professional fees in the third quarter and first nine months of 2013 declined by 19.7% and 33.9%, respectively, from comparable periods of 2012. Costs in the second quarter of 2012 included $299,000 of legal and accounting costs related to the sale of the Company's outstanding Preferred Stock by the U.S. Treasury to private investors.

Federal Income Tax

The table below shows the Company's effective tax rates for the three and nine month periods ended September 30, 2013 and 2012. The differences between the effective rates and the Company's expected tax rate were primarily due to the benefit from tax-exempt income.

	Current Quarter						Year to Date
	2013			2012			2013			2012
Effective tax rate		30.3	%		27.2	%		29.8	%		26.7	%

The Company's net deferred tax asset was $8.3 million at September 30, 2013. 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 determined that all or part of the benefit related to such deferred tax 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 from 2009 to 2011, the Company had a tax Net Operating Loss ("NOL") of $1.6 million as of December 31, 2012.

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Positive Evidence

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

· The Company's NOL carry-forward position of $1.6 million at December 31, 2012, which was not large in comparison to historical profitability (taxable income of $41.6 million from 2004 to 2008).

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

· The Company's pre-tax loss was 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, $6.1 million in 2012, and $9.0 million for the first nine months of 2013.

· 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, $8.4 million in 2012, and $1.9 million for the first nine months of 2013.

· The Company believes it has returned to sustained profitability as a result of strong core earnings and continued reduction in loan losses.

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

o Sale and leaseback of premises

o Sale of mortgage servicing rights

o 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, 2013 or December 31, 2012.

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 2013 and 2012, 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 $8.3 million at September 30, 2013, compared to $56.8 million at December 31, 2012 and $52.0 million at September 30, 2012. Balances of investments held for sale were $204.8 million at September 30, 2013, compared to $206.1 million at December 31, 2012 and $198.1 million at September 30, 2012.  Over the past several years, United has maintained high levels of liquidity, with investments, federal funds and cash equivalents held to improve the liquidity of the balance sheet during the prolonged period of economic uncertainty.  However, higher levels of loan activity contributed to the decreased level of federal funds sold and short-term interest-bearing balances during the third quarter of 2013.

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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 2013 or 2012.

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 2013, the Bank procured no new advances, and repaid $10.0 million of matured borrowings. In the twelve months ended September 30, 2013, maturities and principal payments on advances have reduced outstanding balances by $9.8 million.

The Bank entered into a Business Loan Agreement with Chemical Bank (the "Loan Agreement") and a revolving line of credit as of September 16, 2013.  The Loan Agreement provides for a $10,000,000 line of credit by Chemical Bank to the Company.  The Company will pay quarterly payments of accrued interest, and principal payments as cash flow permits.  The balance of all outstanding principal and accrued interest will become due on September 16, 2015.  As of September 30, 2013, United had an outstanding principal balance of $6.0 million on the line of credit.

Capital Resources

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.

In connection with termination of the Bank's MOU, the Board of Directors of the Bank has resolved that the Bank will maintain a Tier 1 leverage ratio at a level equal to or exceeding 8.5% and that the Bank will not declare or pay any dividend to the Company unless the Board of Directors first determines that the Bank has produced stable earnings. The Bank's Tier 1 leverage ratio was 9.72% at September 30, 2013, after payment of a $3.0 million dividend to the Company in the third quarter of 2013.

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The following table shows information about the Company's and the Bank's capital levels compared to regulatory and Board resolution requirements at September 30, 2013 and December 31, 2012.

	Actual					Regulatory Minimum for Capital Adequacy (1)					Regulatory Minimum to be Well Capitalized (2)						Minimum Required by Board Resolution (3)
	$	000	%			$	000	%			$	000		%			$	000		%
As of September 30, 2013
Tier 1 Capital to Average Assets
Consolidated	$	89,424		9.8	%	$	36,528		4.0	%		N/	A		N/	A		N/	A		N/	A
Bank		88,528		9.7	%		36,423		4.0	%		45,529			5.0	%		77,399			8.5	%
Tier 1 Capital to Risk Weighted Assets
Consolidated		89,424		13.7	%		26,109		4.0	%		N/	A		N/	A		N/	A		N/	A
Bank		88,528		13.6	%		26,083		4.0	%		39,124			6.0	%		N/	A		N/	A
Total Capital to Risk Weighted Assets
Consolidated		97,753		15.0	%		52,218		8.0	%		N/	A		N/	A		N/	A		N/	A
Bank		96,849		14.9	%		52,165		8.0	%		65,207			10.0	%		N/	A		N/	A
As of December 31, 2012
Tier 1 Capital to Average Assets
Consolidated	$	91,886		10.2	%	$	36,059		4.0	%		N/	A		N/	A		N/	A		N/	A
Bank		85,727		9.6	%		35,755		4.0	%		44,694			5.0	%		75,980			8.5	%
Tier 1 Capital to Risk Weighted Assets
Consolidated		91,886		15.4	%		23,914		4.0	%		N/	A		N/	A		N/	A		N/	A
Bank		85,727		14.4	%		23,862		4.0	%		35,792			6.0	%		N/	A		N/	A
Total Capital to Risk Weighted Assets
Consolidated		99,545		16.7	%		47,829		8.0	%		N/	A		N/	A		N/	A		N/	A
Bank		93,370		15.7	%		47,723		8.0	%		59,654			10.0	%		N/	A		N/	A
(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.
(3) Represents requirements of a Board resolution adopted in November 2012.

In July 2013, Federal banking regulators issued interim final rules that revise the existing regulatory capital requirements to incorporate certain revisions to the Basel capital framework, including Basel III and other elements. The interim final rule seeks to strengthen the components of regulatory capital, increases risk-based capital requirements, and makes selected changes to the calculation of risk-weighted assets.

The interim final rule:

· Revises minimum capital requirements and adjusts prompt corrective action thresholds.

· Revises the components of regulatory capital, adds a new minimum common equity Tier 1 capital ratio of 4.5% of risk-weighted assets and increases the minimum Tier 1 capital ratio requirement from 4% to 6% of risk-weighted assets.

· Retains the existing risk-based capital treatment for 1-4 family residential mortgage exposures.

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· Permits banking organizations that are not subject to the advanced approaches rule, such as the Company, to retain, through a one-time election, the existing capital treatment for accumulated other comprehensive income.

· Implements a new capital conservation buffer of common equity Tier 1 capital equal to 2.5% of risk-weighted assets, which will be in addition to the 4.5% common equity Tier 1 capital ratio and be phased in over a three year period beginning January 1, 2016.

· Becomes effective January 1, 2015, for most banking organizations, subject to a transition period for several aspects of the rule, including the new minimum capital ratio requirements, the capital conservation buffer, and the regulatory capital adjustments and deductions.

· Increases capital requirements for past-due loans, high volatility commercial real estate exposures, and certain short-term loan commitments.

· Expands the recognition of collateral and guarantors in determining risk-weighted assets.

· Removes references to credit ratings consistent with the Dodd-Frank Wall Street Reform and Consumer Protection Act and establishes due diligence requirements for securitization exposures.

While not effective until 2015, United's capital position at September 30, 2013 exceeded the minimum capital requirements of the interim final rule assuming they were applicable as of September 30, 2013, including the fully phased-in capital conservation buffer.

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, 2012. 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.

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Item 4 – Controls and Procedures

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.

There have been no changes in the Company's internal control over financial reporting that occurred during the third quarter ended September 30, 2013 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 5 – Other Information

The Company has entered into employment contracts with the following named executive officers of the Company and the Bank:

Name and Position With the Company and the Bank	Salary Provided by Contract
Robert K. Chapman President and Chief Executive Officer of the Company; Chief Executive Officer of the Bank	$	285,700
Randal J. Rabe Executive Vice President and Chief Financial Officer of the Company and the Bank	$	212,200
Todd C. Clark Executive Vice President of the Company; President of the Bank	$	234,000

Salary amounts are subject to adjustment as set forth in the contracts.

The contracts are effective from October 24, 2013 through March 31, 2014, and thereafter for successive one year terms unless either party gives timely notice of non-renewal.

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Under the contracts, if the Company terminates the employee's employment before a Change in Control (as defined in the contracts) other than for Cause (as defined in the contracts), the employee will receive severance pay consisting of six months of salary continuation and six months of healthcare continuation payments, provided that the severance pay will end if the employee secures other employment. If the Company terminates the employee's employment other than for Cause within 12 months after a Change in Control, or if the employee resigns for Good Reason (as defined in the contracts) within 12 months after a Change in Control, the employee will receive severance pay consisting of a lump sum payment equal to two years of salary, and will also receive 24 months of healthcare continuation payments.

The contracts provide for a general release from the employee as a condition to eligibility for severance pay. The contracts also provide that to be eligible for severance pay the employee must comply with confidentiality requirements and 24-month non-solicitation and non-competition commitments included in the contracts.

Under the contracts, the Company may recover and the employee must repay any bonus or incentive compensation based on statements of earnings, revenues, gains or other criteria that are later found to be materially inaccurate.

A form of the employment contract is filed as Exhibit 10.1 to this report and is here incorporated by reference.

On October 24, 2013, the Board of Directors adopted an amendment to the Company's Amended and Restated Bylaws, which eliminated a provision that stated that no person shall be nominated or elected as a director of the Company after having attained the age of seventy years.  The amendment is consistent with the Company's Corporate Governance Policy, which states that a director will not ordinarily be nominated for re-election to the Board of Directors following the expiration of the term of office which ends after his or her 70th birthday, but that the Board of Directors recognizes that the wisdom, experience and contribution of an older director could benefit the Board of Directors and the Compensation & Governance Committee may, in its discretion, nominate a director for re-election after his or her 70th birthday.  A copy of the Amended and Restated Bylaws, as amended, is filed as Exhibit 3.2 to this report.

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 25, 2013

/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.
3.3	Certificate of Designations of 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.
10.1	Form of Employment Contract.
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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