United Bancorp 10-Q 2013 Q2 Quarterly report

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 June 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 July 26, 2013, there were outstanding 12,712,977 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," 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 potential partial redemption of Preferred Shares and possible future redemption of the remaining Preferred Shares, 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 Preferred Shares 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

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	32
		Background	32
		Other Developments	33
		Executive Summary	34
		Financial Condition	36
		Results of Operations	44
		Liquidity and Capital Resources	53
		Critical Accounting Policies	55
	Item 3	Quantitative and Qualitative Disclosures about Market Risk	55
	Item 4	Controls and Procedures	56
Part II	Other Information		56
	Item 6	Exhibits	56
Signatures			56
Exhibit Index			57

Page 3

Part I – Financial Information

Item 1 – Financial Statements

(a)Condensed Consolidated Balance Sheets

In thousands of dollars	(unaudited)
	June 30,			December 31,
Assets	2013			2012
Cash and demand balances in other banks	$	18,608		$	13,769
Interest bearing balances with banks		35,924			56,843
Total cash and cash equivalents		54,532			70,612
Securities available for sale		195,141			206,129
FHLB Stock		2,691			2,571
Loans held for sale		7,022			13,380
Portfolio loans		618,974			586,678
Less allowance for loan losses		22,001			22,543
Net portfolio loans		596,973			564,135
Premises and equipment, net		10,500			10,719
Bank-owned life insurance		14,440			14,241
Accrued interest receivable and other assets		26,031			25,954
Total Assets	$	907,330		$	907,741
Liabilities
Deposits
Noninterest bearing deposits	$	163,738		$	165,430
Interest bearing deposits		628,381			619,213
Total deposits		792,119			784,643
FHLB advances payable		11,999			21,999
Accrued interest payable and other liabilities		4,810			3,702
Total Liabilities		808,928			810,344
Commitments and Contingent Liabilities
Shareholders' Equity
Preferred stock, no par value; 2,000,000 shares authorized, 20,600 shares outstanding; liquidation preference $1,000 per share		20,535			20,476
Common stock and paid in capital, no par value; 30,000,000 shares authorized; 12,712,977, and 12,705,983 shares issued and outstanding, respectively		85,770			85,682
Accumulated deficit		(6,970	)		(10,426	)
Accumulated other comprehensive income (loss), net of tax		(933	)		1,665
Total Shareholders' Equity		98,402			97,397
Total Liabilities and Shareholders' Equity	$	907,330		$	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						Six Months Ended
In thousands of dollars, except per share data	June 30,						June 30,
Interest Income	2013			2012			2013			2012
Interest and fees on loans	$	7,681		$	7,852		$	15,197		$	15,778
Interest on securities
Taxable		727			696			1,181			1,370
Tax exempt		158			167			312			346
Interest on federal funds sold and balances with banks		29			43			65			97
Total interest income		8,595			8,758			16,755			17,591
Interest Expense
Interest on deposits		680			985			1,415			2,041
Interest on FHLB advances		91			207			228			415
Total interest expense		771			1,192			1,643			2,456
Net Interest Income		7,824			7,566			15,112			15,135
Provision for loan losses		600			2,550			1,600			4,650
Net Interest Income after Provision for Loan Losses		7,224			5,016			13,512			10,485
Noninterest Income
Service charges on deposit accounts		472			449			896			882
Wealth Management fee income		1,487			1,311			2,891			2,536
Gains on securities transactions		11			-			39			4
Income from loan sales and servicing		2,767			2,592			5,819			4,496
ATM, debit and credit card fee income		561			559			1,057			1,066
Income from bank-owned life insurance		100			106			199			210
Other income		249			261			670			842
Total noninterest income		5,647			5,278			11,571			10,036
Noninterest Expense
Salaries and employee benefits		6,223			5,221			12,100			10,222
Occupancy and equipment expense, net		1,357			1,320			2,705			2,638
External data processing		353			267			725			514
Advertising and marketing		292			184			556			377
Attorney, accounting and other professional fees		349			770			760			1,238
Director fees		104			97			209			195
Expenses relating to ORE property and foreclosed assets		259			183			427			1,116
FDIC insurance premiums		190			296			376			591
Other expenses		747			810			1,502			1,426
Total noninterest expense		9,874			9,148			19,360			18,317
Income Before Federal Income Tax		2,997			1,146			5,723			2,204
Federal income tax		910			361			1,694			577
Net Income	$	2,087		$	785		$	4,029		$	1,627
Preferred stock dividends and amortization		(287	)		(285	)		(573	)		(570	)
Income Available to Common Shareholders	$	1,800		$	500		$	3,456		$	1,057
Basic and diluted earnings per share	$	0.14		$	0.04		$	0.27		$	0.08
Cash dividends declared per share of common stock	$	-		$	-		$	-		$	-
The accompanying notes are an integral part of these condensed consolidated financial statements.

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

	Three Months Ended					Six Months Ended
In thousands of dollars	June 30,					June 30,
	2013			2012		2013			2012
Net income	$	2,087		$	785	$	4,029		$	1,627
Other comprehensive income (loss):
Unrealized gains/losses on securities:
Unrealized gains (losses) on securities available for sale		(3,734	)		401		(3,898	)		204
Less: Reclassification for realized amount included in income		(11	)		-		(39	)		(4	)
Other comprehensive income (loss) before tax effect		(3,745	)		401		(3,937	)		200
Tax expenses (benefit)		(1,273	)		136		(1,339	)		68
Other comprehensive income (loss)		(2,472	)		265		(2,598	)		132
Total comprehensive income (loss)	$	(385	)	$	1,050	$	1,431		$	1,759
The accompanying notes are an integral part of these condensed consolidated financial statements.

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

	Three Months Ended						Six Months Ended
In thousands of dollars	June 30,						June 30,
Total Shareholders' Equity	2013			2012			2013			2012
Balance at beginning of period	$	99,001		$	94,265		$	97,397		$	93,774
Net income		2,087			785			4,029			1,627
Other comprehensive income (loss)		(2,472	)		265			(2,598	)		132
Cash dividends paid on preferred shares		(258	)		(258	)		(515	)		(515	)
Other common stock transactions		44			56			89			95
Balance at end of period	$	98,402		$	95,113		$	98,402		$	95,113
Blank Line
The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 6

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

	Six Months Ended
In thousands of dollars	June 30,
	2013			2012
Cash Flows from Operating Activities
Net income	$	4,029		$	1,627
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
Depreciation and amortization		2,992			3,063
Provision for loan losses		1,600			4,650
Gain on sale of loans		(5,393	)		(4,200	)
Proceeds from sales of loans originated for sale		200,056			165,733
Loans originated for sale		(188,305	)		(163,592	)
Gains on securities transactions		(39	)		(4	)
Change in deferred income taxes		447			397
Stock based compensation expense		125			75
Increase in cash surrender value of bank-owned life insurance		(199	)		(210	)
Change in investment in limited partnership		(294	)		(236	)
Change in accrued interest receivable and other assets		1,241			1,537
Change in accrued interest payable and other liabilities		1,232			1,708
Net cash from operating activities		17,492			10,548
Cash Flows from Investing Activities
Securities available for sale
Purchases		(47,912	)		(55,689	)
Sales		11,752			4,592
Maturities and calls		16,085			16,100
Principal payments		24,831			14,556
(Purchase) Sale or retirement of FHLB stock		(120	)		-
Net change in portfolio loans		(34,875	)		(19,163	)
Premises and equipment expenditures		(321	)		(512	)
Net cash from investing activities		(30,560	)		(40,116	)
Cash Flows from Financing Activities
Net change in deposits		7,476			(3,468	)
Principal payments on FHLB advances		(10,000	)		(260	)
Other common stock transactions		27			35
Cash dividends paid on preferred shares		(515	)		(515	)
Net cash from financing activities	��	(3,012	)		(4,208	)
Net change in cash and cash equivalents		(16,080	)		(33,776	)
Cash and cash equivalents at beginning of year		70,612			107,592
Cash and cash equivalents at end of period	$	54,532		$	73,816
Supplemental Disclosure of Cash Flow Information:
Interest paid	$	1,690		$	2,540
Loans transferred to other real estate		437			2,400
Income taxes paid		230			-
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 six months ended June 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 June 30, 2013 and December 31, 2012. All securities are classified as available for sale.

At June 30, 2013, in thousands of dollars	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. Treasury and agency securities	$	22,155	$	40	$	(826	)	$	21,369
Mortgage-backed agency securities		151,638		1,288		(2,088	)		150,838
Obligations of states and political subdivisions		22,736		538		(368	)		22,906
Equity securities		26		2		-			28
Total	$	196,555	$	1,868	$	(3,282	)	$	195,141
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

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 June 30, 2013 and December 31, 2012.

Page 8

At June 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	$	14,284	$	(826	)	$	-	$	-		$	14,284	$	(826	)
Mortgage-backed agency securities		84,140		(2,051	)		3,125		(37	)		87,265		(2,088	)
Obligations of states and political subdivisions		7,960		(368	)		-		-			7,960		(368	)
Total	$	106,384	$	(3,245	)	$	3,125	$	(37	)	$	109,509	$	(3,282	)
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 determined to be temporary. The Company has performed an evaluation of its investments for other than temporary impairment, and no losses were recognized during the first six 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 more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company did not consider those investments to be other-than-temporarily impaired at June 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 more likely than not that the Company will not have to sell any security before recovery of its cost basis. Sales activity for securities for the three and six month periods ended June 30, 2013 and 2012 is shown in the following table. All sales were of securities identified as available for sale.

	Three Months Ended					Six Months Ended
	June 30,					June 30,
In thousands of dollars	2013			2012		2013			2012
Sales proceeds	$	5,693		$	1,745	$	11,752		$	4,592
Gross gains on sales		60			-		136			30
Gross loss on sales		(49	)		-		(97	)		(26	)

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The fair value and amortized cost of securities available for sale by contractual maturity as of June 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	$	14,734	$	14,840
Due after one year through five years		24,218		23,774
Due after five years through ten years		5,939		5,661
Due after ten years		-		-
Mortgage-backed agency securities		151,638		150,838
Equity securities		26		28
Total securities	$	196,555	$	195,141

Securities carried at $1.0 million as of June 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 1.4% of the investment portfolio is issued by political subdivisions located within Lenawee County, Michigan, 1.6% in Monroe County, Michigan and 1.9% in Washtenaw County, Michigan. The total amount of municipal obligations issued by political subdivisions located in these three counties is approximately $9.7 million.

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 June 30, 2013 and December 31, 2012.

	June 30, 2013					December 31, 2012
In thousands of dollars	Balance		% of total			Balance		% of total
Commercial construction & land development	$	20,374		3.3	%	$	28,511		4.9	%
Owner-occupied commercial real estate loans		100,956		16.3	%		97,755		16.7	%
Other commercial real estate loans		134,613		21.7	%		113,370		19.3	%
Commercial & industrial loans		98,989		16.0	%		104,332		17.8	%
Residential mortgages		128,839		20.8	%		121,393		20.6	%
Consumer construction		13,220		2.1	%		12,123		2.1	%
Home equity loans		78,035		12.6	%		72,983		12.4	%
Other consumer loans		37,408		6.0	%		33,969		5.8	%
Deferred loan fees and costs, overdrafts, in-process accounts		6,540		1.1	%		2,242		0.4	%
Total portfolio loans	$	618,974		100.0	%	$	586,678		100.0	%

Page 10

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.

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

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

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.

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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 six month periods ended June 30, 2013 and 2012 and balances as of December 31, 2012 follows:

	Three Months Ended June 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, March 31	$	4,081		$	4,241		$	5,310	$	4,182		$	2,318		$	2,026		$	22,158
Provision charged to expense		(664	)		(54	)		99		927			142			150			600
Losses charged off		(800	)		-			-		(712	)		(44	)		(180	)		(1,736	)
Recoveries		308			322			36		85			40			188			979
Balance, June 30	$	2,925		$	4,509		$	5,445	$	4,482		$	2,456		$	2,184		$	22,001

	Six Months Ended June 30, 2013
Thousands of dollars
Allowance for Loan Losses:
Balance, January 1	$	4,216		$	5,093		$	4,708		$	4,131		$	2,456		$	1,939		$	22,543
Blank Line
Provision charged to expense		(1,251	)		807			584			1,001			68			391			1,600
Losses charged off		(800	)		(1,738	)		(38	)		(751	)		(123	)		(390	)		(3,840	)
Recoveries		760			347			191			101			55			244			1,698
Balance, June 30	$	2,925		$	4,509		$	5,445		$	4,482		$	2,456		$	2,184		$	22,001
Ending balance:
Individually evaluated for impairment	$	2,129		$	1,937		$	992		$	703		$	732		$	-		$	6,493
Collectively evaluated for impairment	$	796		$	2,572		$	4,453		$	3,779		$	1,724		$	2,184		$	15,508
Total Loans:
Ending balance	$	33,594		$	104,876		$	153,444		$	99,848		$	105,989		$	121,223		$	618,974
Ending balance:
Individually evaluated for impairment	$	4,882		$	4,765		$	7,314		$	3,239		$	5,230		$	319		$	25,749
Collectively evaluated for impairment	$	28,712		$	100,111		$	146,130		$	96,609		$	100,759		$	120,904		$	593,225

Page 12

	Three Months Ended June 30, 2012
Thousands of dollars	CLD (1)			Owner- Occupied CRE (2)		OtherCRE (2)			Commercial & Industrial			Residential Mortgage			Personal Loans			Total
Allowance for Loan Losses:
Balance, March 31, 2012	$	4,706		$	3,961	$	4,370		$	4,461		$	1,886		$	1,664		$	21,048
Provision charged to expense		197			812		1,359			(54	)		122			114			2,550
Losses charged off		(474	)		-		(963	)		(337	)		(258	)		(207	)		(2,239	)
Recoveries		158			5		79			285			58			153			738
Balance, June 30	$	4,587		$	4,778	$	4,845		$	4,355		$	1,808		$	1,724		$	22,097

	Six Months Ended June 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		1,449			935			1,843			(191	)		453			161			4,650
Losses charged off		(758	)		(58	)		(1,818	)		(700	)		(639	)		(490	)		(4,463	)
Recoveries		220			26			99			505			63			364			1,277
Balance, June 30	$	4,587		$	4,778		$	4,845		$	4,355		$	1,808		$	1,724		$	22,097

	Balances at December 31, 2012
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.

Page 13

The risk characteristics of each loan portfolio segment are as follows:

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

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

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

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

Page 14

Repayment of these 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.

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 June 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 June 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	$	10,348	$	87,165	$	110,922	$	85,885	$	294,320
5	Special Mention		4,547		8,317		14,873		6,379		34,116
6	Substandard		4,999		5,474		8,818		6,688		25,979
7	Doubtful		480		-		-		37		517
8	Loss		-		-		-		-		-
Total		$	20,374	$	100,956	$	134,613	$	98,989	$	354,932

Page 15

Consumer Loans	Residential Mortgage		Consumer Construction		Home Equity		Other Consumer		Total Consumer
Credit risk profile based on payment activity
Performing	$	122,369	$	13,220	$	77,792	$	37,279	$	250,660
Accruing restructured		4,296		-		171		-		4,467
Delinquent less than 90 days		902		-		-		52		954
Nonperforming		1,272		-		72		77		1,421
Total	$	128,839	$	13,220	$	78,035	$	37,408	$	257,502
Subtotal									$	612,434
Deferred loan fees and costs, overdrafts, in-process accounts										6,540
Total Portfolio Loans									$	618,974

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		$	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	$	121,393	$	12,123	$	72,983	$	33,969	$	240,468
Subtotal									$	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. Tables detailing the loan portfolio aging analysis as of June 30, 2013 and December 31, 2012 follow.

Page 16

Thousands of dollars	Delinquent Loans
As of June 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	$	117	$	-	$	117	$	16,298	$	20,374	$	3,959	$	3,959
Owner-Occupied CRE		43		-		43		97,863		100,956		3,050		3,050
Other CRE		408		-		408		131,107		134,613		3,098		3,098
Commercial & Industrial		874		-		874		95,435		98,989		2,680		2,680
Consumer
Residential Mortgage		902		298		1,200		126,665		128,839		974		1,272
Consumer Construction		-		-		-		13,220		13,220		-		-
Home Equity		-		-		-		77,963		78,035		72		72
Other Consumer		52		-		52		37,279		37,408		77		77
Subtotal	$	2,396	$	298	$	2,694	$	595,830	$	612,434	$	13,910	$	14,208
Deferred loan fees and costs, overdrafts, in-process accounts										6,540
Total Portfolio Loans									$	618,974

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.

Impaired Loans

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

	June 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		1,351		1,808		-		4,181		6,267		-
Other CRE		4,002		4,769		-		4,438		6,158		-
Commercial & Industrial		630		3,322		-		1,640		3,992		-
Consumer
Residential Mortgage		1,971		2,028		-		2,207		2,989		-
Home Equity		174		174		-		232		232		-
Other Consumer		145		145		-		157		157		-
Subtotal		8,718		12,999		-		13,509		21,468		-

Page 17

	June 30, 2013						December 31, 2012
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Recorded Balance		Unpaid Principal Balance		Specific Allowance
Loans with a specific valuation allowance
Commercial
Commercial CLD		4,437		4,577		2,129		7,570		7,629		3,271
Owner-Occupied CRE		3,414		5,809		1,937		6,082		7,495		2,904
Other CRE		3,312		3,312		992		3,359		3,359		1,079
Commercial & Industrial		2,609		3,035		703		409		409		274
Consumer
Residential Mortgage		3,259		3,316		732		3,354		3,817		771
Home Equity		-		-		-		-		-		-
Other Consumer		-		-		-		5		5		5
Subtotal		17,031		20,049		6,493		20,779		22,714		8,304

Total Impaired Loans
Commercial
Commercial CLD		4,882		5,330		2,129		8,224		9,302		3,271
Owner-Occupied CRE		4,765		7,617		1,937		10,263		13,762		2,904
Other CRE		7,314		8,081		992		7,797		9,517		1,079
Commercial & Industrial		3,239		6,357		703		2,049		4,401		274
Consumer
Residential Mortgage		5,230		5,344		732		5,561		6,806		771
Home Equity		174		174		-		232		232		-
Other Consumer		145		145		-		162		162		5
Total Impaired Loans	$	25,749	$	33,048	$	6,493	$	34,288	$	44,182	$	8,304

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

Periods ended June 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	$	-	$	476	$	-	$	4,211	$	-	$	4,715	$	-
Owner-Occupied CRE		1,430		9		2,395		18		2,115		15		2,133		21
Other CRE		4,040		5		4,224		14		10,569		12		11,901		118
Commercial & Industrial		633		3		813		10		2,047		16		1,805		21
Consumer
Residential Mortgage		940		9		1,186		17		1,428		6		1,255		12
Home Equity		4		1		10		2		14		1		25		2
Other Consumer		130		-		139		-		177		-		171		-
Subtotal		7,622		27		9,243		61		20,561		50		22,005		174

Page 18

	2013								2012
	Three Months				Year to Date				Three Months				Year to Date
Thousands of dollars	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 with a specific valuation allowance
Commercial
Commercial CLD		4,465		18		5,994		77		8,204		99		8,522		209
Owner-Occupied CRE		3,455		19		3,451		40		8,408		54		7,414		84
Other CRE		3,325		35		3,336		69		3,772		39		4,780		104
Commercial & Industrial		2,565		39		2,076		62		1,064		14		1,072		26
Consumer
Residential Mortgage		3,498		35		3,519		73		3,819		30		3,872		64
Home Equity		-		-		-		-		-		-		-		-
Other Consumer		-		-		-		-		85		2		45		2
Subtotal		17,308		146		18,376		321		25,352		238		25,705		489

Total Impaired Loans
Commercial
Commercial CLD		4,910		18		6,470		77		12,415		99		13,237		209
Owner-Occupied CRE		4,885		28		5,846		58		10,523		69		9,547		105
Other CRE		7,365		40		7,560		83		14,341		51		16,681		222
Commercial & Industrial		3,198		42		2,889		72		3,111		30		2,877		47
Consumer
Residential Mortgage		4,438		44		4,705		90		5,247		36		5,127		76
Home Equity		4		1		10		2		14		1		25		2
Other Consumer		130		-		139		-		262		2		216		2
Total Impaired Loans	$	24,930	$	173	$	27,619	$	382	$	45,913	$	288	$	47,710	$	663

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.

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.

Page 19

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 loan that is 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 $9.2 million at June 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 $11.2 million at June 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 June 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.

Page 20

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

Periods ended June 30, 2013	Three Months						Six 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		1	$	61	$	61		2	$	182	$	182
Consumer
Residential Mortgage		3		432		432		4		800		800
Total		4	$	493	$	493		6	$	982	$	982

Periods ended June 30, 2012
Commercial
Commercial CLD	2	$	400	$	400	2	$	400	$	400
Owner-Occupied CRE	3		329		329	5		626		626
Other CRE	2		1,894		1,894	4		2,304		2,304
Commercial & Industrial	-		-		-	1		190		190
Consumer
Residential Mortgage	-		-		-	2		224		224
Total	7	$	2,623	$	2,623	14	$	3,744	$	3,744

The table below provides a breakdown of accruing restructured loans by type at June 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 second quarter of 2013.

	June 30, 2013				Second Quarter
Dollars in thousands	Number of Loans		Recorded Balance		Avg. Yield			Portfolio Yield
CLD Loans		4	$	1,686
Other Commercial Loans		12		5,029
Total Commercial Loans		16		6,715		5.10	%		5.11	%
Residential Mortgage & Home Equity Loans		21		4,467		3.92	%		4.96	%
Total accruing restructured loans		37	$	11,182

The Company has no personal loans other than the loans described above that are classified as troubled debt restructurings. With regard to determination of the amount of the allowance for loan losses, all restructured loans are considered to be impaired. As a result, the determination of the amount of impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed previously.

Page 21

Information regarding TDRs that subsequently defaulted within twelve months of being restructured is shown below.

Periods ended June 30, 2013	Three Months				Six Months
Dollars in thousands	Number of Loans		Recorded Balance		Number of Loans		Recorded Balance
Commercial
Total		-	$	-		-	$	-

Periods ended June 30, 2012	Three Months				Six Months
Commercial
Commercial CLD		2	$	1,356		3	$	1,531
Owner-Occupied CRE		1		230		2		239
Total		3	$	1,586		5	$	1,770

A TDR is considered to be in payment default generally once it is ninety days contractually past due under the modified terms. 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 $62,500 and $37,500, respectively, in compensation expense related to stock based compensation plans for the three months and $125,000 and $75,000, respectively, in the six month periods ended June 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

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

The following tables show activity for the six months ended June 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 forfeited		-		-
Balance at June 30, 2013		213,500	$	3.70

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	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		-			-		-		-
Nonvested at June 30		10,500		$	5.05		101,377	$	4.27

As of June 30, 2013, unrecognized compensation expense related to the Incentive Plan totaled $485,000. Compensation expense for SOSARs and restricted stock grants is recognized over approximately three years. Compensation expense for RSUs is based on an expected level of achievement of performance targets as determined at the time of each grant, and is expected to be recognized over three years.

The fair value of restricted stock grants 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.

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 June 30, 2013, the aggregate intrinsic value of SOSARs outstanding was $363,000. Intrinsic value was determined by calculating the difference between the Company's closing common stock price on June 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 June 30, 2013. The weighted–average period over which nonvested SOSARs are expected to be recognized is 1.24 years.

Stock Option Plan

Through December 31, 2009, the Company granted stock options under its 2005 Stock Option Plan (the "2005 Plan"), which is a non-qualified stock option plan as defined under Internal Revenue Service regulations. The shares of stock that are subject to options are the authorized and unissued shares of common stock of the Company.

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

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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		(23,118	)		22.58
Options forfeited		-			-
Balance at June 30, 2013		334,952		$	21.23

The table below provides information regarding stock options outstanding under the 2005 Plan at June 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		334,952		3.36	Years	$	21.23		334,952	$	21.23

As of the end of the second quarter of 2013, there was no unrecognized compensation expense related to the stock options granted under the 2005 Plan. At June 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 June 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 June 30, 2013.

Note 6 - Loan Servicing

Loans serviced for others are not included in the accompanying consolidated financial statements. The balance of loans serviced for others related to servicing rights that have been capitalized and the unpaid principal balance of loans serviced for others at June 30, 2013 and December 31, 2012 were as follows:

In thousands of dollars	6/30/13		12/31/12		Change		Percent
Loans serviced with service rights	$	931,810	$	850,728	$	81,082		9.5	%
Total loans serviced		935,819		853,761		82,058		9.6	%

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
In thousands of dollars	2013			2012			2013			2012
Balance at beginning of period	$	6,759		$	5,545		$	6,379		$	5,405
Amount capitalized		736			721			1,578			1,249
Amount amortized		(423	)		(411	)		(885	)		(799	)
Balance at June 30,	$	7,072		$	5,855		$	7,072		$	5,855

The fair value of servicing rights was as follows:

In thousands of dollars	6/30/13		6/30/12
Fair value, January 1	$	8,285	$	7,331
Fair value, end of period	$	10,117	$	7,766

Note 7 - Common Stock and Earnings Per Share

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

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
In thousands, except per-share data	2013			2012			2013			2012
Net income	$	2,087		$	785		$	4,029		$	1,627
Less:
Accretion of discount on preferred stock		(29	)		(27	)		(58	)		(55	)
Dividends on preferred stock		(258	)		(258	)		(515	)		(515	)
Income available to common shareholders	$	1,800		$	500		$	3,456		$	1,057

Basic and diluted income:
Weighted avg. common shares outstanding		12,702.5		12,677.1		12,696.1		12,674.8
Weighted avg. contingently issuable shares		129.9		114.1		127.7		113.1
Total weighted average common shares outstanding		12,832.4		12,791.2		12,823.9		12,787.9
Basic and diluted income per share	$	0.14	$	0.04	$	0.27	$	0.08

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A total of 381,202 and 530,984 shares for the three and six month periods ended June 30, 2013 and 2012, respectively, subject to stock options, restricted stock, RSU and SOSAR grants, and 311,492 shares subject to warrants as of June 30, 2012, are not considered in computing diluted earnings per share because they were not dilutive. The Company had no warrants outstanding at June 30, 2013.

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.

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 June 30, 2013 and December 31, 2012, in thousands of dollars:

Thousands of dollars			Fair Value Measurements Using
June 30, 2013	Fair Value		Level 1		Level 2		Level 3
Available for sale securities:
U.S. Treasury and agency securities	$	21,369	$	-	$	21,369	$	-
Mortgage-backed agency securities		150,838		-		150,838		-
Obligations of states and political subdivisions		22,906		-		22,906		-
Equity securities		28		28		-		-
Hedged loan		7,362		-		7,362		-
Interest rate swap asset		58		-		58		-

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			Fair Value Measurements Using
December 31, 2012	Fair Value		Level 1		Level 2		Level 3
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		-		-

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 June 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 June 30, 2013 and December 31, 2012:

Page 27

In thousands of dollars			Fair Value Measurements Using
Impaired Loans (Collateral Dependent):	Fair Value		Level 1		Level 2		Level 3
June 30, 2013	$	11,440	$	-	$	-	$	11,440
December 31, 2012		21,866		-		-		21,866

Significant Unobservable Inputs

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

Impaired Loans (Collateral Dependent)

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

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. The Company's practice is to obtain new or updated appraisals on the loans subject to the initial impairment review and then to generally update on an annual basis thereafter. The Company discounts the appraisal amount as necessary for selling costs and past due real estate taxes. If a new or updated appraisal is not available at the time of a loan's impairment review, the Company typically applies a discount to the value of an old appraisal to reflect the property's current estimated value if there is believed to be deterioration in either (i) the physical or economic aspects of the subject property or (ii) any market conditions. These discounts and estimates are developed by the Credit Department, and are reviewed by the Chief Credit Officer and the Chief Financial Officer. The results of the impairment review result 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 June 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	6/30/13			12/31/12
Fair value	$	11,440		$	21,866
Range		7.5%-49.5	%		7.5%-49.5	%
Weighted average		15.9	%		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 June 30, 2013 and December 31, 2012, were as follows:

			Fair Value Measurements Using
June 30, 2013	Carrying Amount		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	54,532	$	54,532	$	-	$	-
Securities available for sale		195,141		28		195,113		-
FHLB Stock		2,691		-		2,691		-
Loans held for sale		7,022		-		7,022		-
Net portfolio loans		596,973		-		7,362		591,156
Accrued interest receivable		2,653		-		2,653		-
Interest rate swap asset		58		-		58		-

Financial Liabilities
Total deposits	$	(792,119	)	$	(163,738	)	$	(630,744	)	$	-
FHLB advances		(11,999	)		-			(12,634	)		-
Accrued interest payable		(307	)		-			(307	)		-

			Fair Value Measurements Using
December 31, 2012	Carrying Amount		Level 1		Level 2		Level 3
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. 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.

Page 29

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

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

Note 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 derivatives 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.

The fixed-rate payment feature of the interest rate swap agreement 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 statements of condition at their 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 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 interest rate swaps 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 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 June 30, 2013, we have posted cash collateral of $370,000 related to the collateral requirements of our derivative instrument.

As of June 30, 2013, we had one interest rate swap agreement, 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 June 30, 2013, the notional amount of the interest rate swap was approximately $7.4 million. The fair value of the interest rate swap at June 30, 2013 was $58,000. The Company had no interest rate swaps at December 31, 2012.

Page 30

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

Note 10 – 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.

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.

Note 11 – 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.

Page 31

Note 12 – Subsequent Events

On July 18, 2013, the Company announced that it intends to redeem half of its outstanding 20,600 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, Liquidation Preference Amount $1,000 per share. The partial redemption is expected to occur on or before September 30, 2013. The Company has received all necessary regulatory approvals to complete the planned partial redemption. Additional information regarding the planned partial redemption can be found in Management's Discussion and Analysis of Financial Condition and Results of Operations, below, under "Capital Planning and Preferred Share Redemption."

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 six month periods ended June 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 June 30, 2013, we had total assets of $907.3 million, deposits of $792.1 million, and total shareholders' equity of $98.4 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 six months ended June 30, 2013, our noninterest income equaled 43.4% 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 1.59% and 1.63%, respectively, for the three and six month periods ended June 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.

Page 32

The Bank offers a full complement of online services, including internet banking and bill payment. In 2011, the Bank opened its first loan production office in Livingston County, Michigan. In 2012, that office was converted to a full-service banking office, and the Bank opened a new loan production office in the city of Monroe, Michigan. In the second quarter of 2013, the Bank received permission from its regulators to convert the Monroe loan production office to a full-service banking office. That conversion was 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 35.5% of our noninterest income for the six months ended June 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 25.0% of our noninterest income for the six months ended June 30, 2013.

Our structured finance group, United Structured Finance Company, offers simple, effective financing solutions to small businesses and commercial property owners, primarily by utilizing various government guaranteed loan programs and other off-balance sheet finance solutions through secondary market sources. 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 six months ended March 31, 2013, USFC was the largest SBA 7A lender in Michigan. 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 9.80% at June 30, 2013, after payment of a $2.0 million dividend to the Company in the second 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

Page 33

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 20,600 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, Liquidation Preference Amount $1,000 per share (the "Preferred Shares").

Capital Planning and Preferred Share Redemption

Under the terms of the Preferred Shares, the dividend rate will increase from 5% to 9% in January, 2014. The Company has cautiously evaluated its alternatives regarding a possible partial redemption of the Preferred Shares. The Company has continued its efforts to build its cash balance at the holding company to provide additional holding company liquidity. The Company's cash balance at the holding company was $8.1 million at June 30, 2013, and the Bank had $6.3 million of retained earnings that could be available to be paid in dividends to the Company at June 30, 2013. The Bank had Tier 1 capital of $11.7 million in excess of the required 8.5% Tier 1 leverage ratio at June 30, 2013. In the second quarter of 2013, the Company received a commitment of $10.0 million for a two-year secured revolving line of credit, of which the Company has received regulatory approval to use up to $6.0 million of borrowing toward funding of redemption of Preferred Shares.

On July 18, 2013, the Company announced that it intends to redeem half of the outstanding Preferred Shares. The partial redemption is expected to occur on or before September 30, 2013. The Company has received all necessary regulatory approvals to complete the planned partial redemption. The redemption price will be the stated liquidation preference amount of $1,000 per share, plus any accrued and unpaid dividends to but excluding the date of redemption. The Company anticipates the total cost of the partial redemption will be approximately $10.4 million. Excess cash at the holding company, retained earnings at the Bank available for dividend to the holding company and up to $6.0 million borrowed on the holding company's $10.0 million line of credit are sources of funding of the planned partial redemption of Preferred Shares. These sources of funding may also be available to fund a possible future redemption of the remaining Preferred Shares.

Executive Summary

The Company's consolidated net income was $2.1 million in the second quarter of 2013 and $4.0 million for the first six months of 2013, compared to $785,000 and $1.6 million, respectively, for the same periods of 2012. Net income per common share for the three and six months ended June 30, 2013 was $0.14 and $0.27, respectively, compared to $0.04 and $0.08, respectively, for the comparable periods of 2012. Return on average assets ("ROA") was 0.92% and 0.90%, respectively, for the second quarter and first six months of 2013, compared to 0.36% and 0.37%, respectively, for the comparable periods of 2012. Return on average shareholders' equity ("ROE") was 8.44% and 8.26%, respectively, for the second quarter and first six months of 2013, compared to 3.35% and 3.48%, respectively, for the same periods of 2012.

Page 34

The Company's combined net interest income and noninterest income was up 4.9% in the second quarter and 6.0% in the first six months of 2013 compared to the same periods of 2012. While some categories of noninterest income decreased in the second quarter and first half of 2013 compared to the same periods of 2012, large increases in wealth management income and income from loan sales and servicing more than offset the decreases. Total noninterest income for the quarter and six month periods ended June 30, 2013 was up 7.0% and 15.3%, respectively, compared to the same periods of 2012.

Total noninterest expenses were up 7.9% in the second quarter and 5.7% in the first six months of 2013, respectively, compared to the same periods of 2012. The largest dollar increases were in compensation expense, and several categories of noninterest expense declined in the same periods. Among those were attorney, accounting and other professional fees, and FDIC insurance premiums. Expenses related to other real estate owned ("ORE") and other foreclosed properties increased in the second quarter of 2013 compared to the same quarter of 2012, but declined by 61.7% for the first six months of 2013 compared to the same period of 2012.

The Company's provision for loan losses for the second quarter and first six months of 2013 was $600,000 and $1.6 million, respectively, down from $2.6 million and $4.7 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 $907.3 million at June 30, 2013, compared to $907.7 million at December 31, 2012 and $884.2 million at June 30, 2012. Total portfolio loans of $619.0 million increased by $32.3 million in the first six months of 2013, and by $41.7 million since June 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 June 30, 2013 was $935.8 million, and has increased by $140.8 million, or 17.7%, in the twelve months ended June 30, 2013.

United's balances in federal funds sold and other short-term investments were $35.9 million at June 30, 2013, compared to $56.8 million at December 31, 2012 and $57.6 million at June 30, 2012. Securities available for sale of $195.1 million at June 30, 2013 were down $11.0 million from December 31, 2012 levels, but have increased by $3.3 million since June 30, 2012.

Total deposits of $792.1 million at June 30, 2013 were up $7.5 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 0.43% and 0.45%, respectively, for the second quarter and first six months of 2013 down from 0.65% and 0.66%, respectively, for the same periods of 2012.

Page 35

The Company's ratio of allowance for loan losses to total loans was 3.55% and the ratio of allowance for loan losses to nonperforming loans was 154.8% at June 30, 2013, compared to 3.84% and 134.6%, respectively, at December 31, 2012 and 3.83% and 85.4%, respectively, at June 30, 2012. The Company's allowance for loan losses decreased by $542,000 from December 31, 2012 to June 30, 2013, as net charge-offs exceeded the provision for loan losses in the period. Net charge-offs for the most recent quarter were $757,000, representing the lowest level since the second quarter of 2008, and averaged approximately $1.6 million per quarter for 2012.

Within the Company's loan portfolio, $14.2 million of loans were considered nonperforming at June 30, 2013, compared to $16.8 million at December 31, 2012 and $25.9 million at June 30, 2012. Total nonperforming loans as a percent of total portfolio loans decreased from 2.86% at the end of 2012 and 4.48% at June 30, 2012 to 2.30% at June 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 June 30, 2013, December 31, 2012 and June 30, 2012 were $11.2 million, $15.8 million and $18.9 million, respectively. Substantially all of the decline in balances of accruing restructured loans the first six months of 2013 was a result of the payoff off two loans.

Financial Condition

Investment Securities

Balances in the securities portfolio have declined modestly in the first six 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 June 30, 2013 and December 31, 2012.

	June 30, 2013					December 31, 2012
In thousands of dollars	Balance		% of total			Balance		% of total
U.S. Treasury and agency securities	$	21,369		11.0	%	$	27,316		13.3	%
Mortgage-backed agency securities		150,838		77.3	%		160,499		77.9	%
Obligations of states and political subdivisions		22,906		11.7	%		18,286		8.9	%
Equity securities		28		0.0	%		28		0.0	%
Total Investment Securities	$	195,141		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 1.4% of the investment portfolio is issued by political subdivisions located within Lenawee County, Michigan, 1.9% in Washtenaw County,Michigan, and 1.6% 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.

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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 June 30, 2013 and December 31, 2012.

Unrealized gains (losses) in thousands of dollars	6/30/13			12/31/12		Change
U.S. Treasury and agency securities	$	(786	)	$	116	$	(902	)
Mortgage-backed agency securities		(800	)		1,670		(2,470	)
Obligations of states and political subdivisions		170			735		(565	)
Equity securities		2			2		-
Total Investment Securities	$	(1,414	)	$	2,523	$	(3,937	)

FHLB Stock

The Bank is a member of the Federal Home Loan Bank of Indianapolis ("FHLBI") and holds a $2.7 million investment in stock of the FHLBI. The investment is carried at par value, as there is not an active market for FHLBI stock. The FHLBI reported a profit of $143 million for 2012⁴ and $39.4 million for the first quarter of 2013⁵, and continues to pay dividends on its stock. The Company regularly reviews the credit quality of FHLBI stock for impairment, and determined that no impairment of FHLBI stock was necessary as of June 30, 2013.⁴

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.

	This Quarter						Year to Date						Twelve-Month
In thousands of dollars	Change			Percent			Change			Percent			Change			Percent
Personal loans	$	4,914			4.4	%	$	8,491			7.9	%	$	9,690			9.2	%
Business loans		14,196			4.4	%		19,101			6.1	%		14,884			4.7	%
Residential mortgages		6,271			5.1	%		7,446			6.1	%		21,935			20.5	%
Construction & development		(8,739	)		-20.6	%		(7,040	)		-17.3	%		(5,062	)		-13.1	%
Other (1)		2,211			51.1	%		4,298			191.7	%		248			3.9	%
Total portfolio loans	$	18,853			3.1	%	$	32,296			5.5	%	$	41,695			7.2	%
(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 $32.3 million, or 5.5%, from December 31, 2012 and $41.7 million, or 7.2%, from June 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 $4.9 million, or 4.4%, in the second quarter of 2013, and grew by $9.7 million, or 9.2%, in the twelve months ended June 30, 2013.

⁴ Federal Home Loan Bank of Indianapolis, Form 10-K Annual Report for the period ended December 31, 2012.

⁵ Federal Home Loan Bank of Indianapolis, Form 10-Q Quarterly Report for the period ended March 31, 2013.

Page 37

Business loan balances (consisting of owner-occupied commercial real estate loans, other commercial real estate loans and commercial and industrial loans) increased by $14.2 million, or 4.4%, in the second quarter of 2013, and have increased by $14.9 million, or 4.7%, over the twelve months ended June 30, 2013. Growth of business loans in the first six months of 2013 reflected a modest improvement in loan demand, net of write-downs, charge-offs and payoffs. The Bank's loan portfolio includes $4.2 million of purchased participations in business loans originated by other institutions. These participations represent 0.7% of total loans. Of those participation loans, 53.9% of the outstanding balances are the result of participations purchased from other Michigan community banks.

The Bank generally sells its production of fixed-rate residential mortgages on the secondary market, and retains high credit quality residential mortgage loans that are not otherwise eligible to be sold on the secondary market and shorter-term adjustable rate residential mortgages in its portfolio. As a result, the mix of residential mortgage production for any given year will have an impact on the amount of residential mortgages held in the portfolio of the Bank. Portfolio balances of residential mortgages increased by 5.1% in the second quarter of 2013 and by 20.5% in the twelve months ended June 30, 2013.

Outstanding balances of loans for construction and development have decreased by $8.7 million in the second quarter of 2013 and by $5.1 million since June 30, 2012. The decrease in the second quarter of 2013 consisted of approximately $8.5 million of commercial construction (primarily owner-occupied) loans, and $0.2 million of 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	6/30/13			3/31/13			12/31/12			9/30/12			6/30/12
Nonaccrual loans	$	13,910		$	14,598		$	16,714		$	20,386		$	25,634
Accruing loans past due 90 days or more		298			380			37			406			242
Total nonperforming loans		14,208			14,978			16,751			20,792			25,876
Nonperforming loans % of total portfolio loans		2.30	%		2.50	%		2.86	%		3.51	%		4.48	%
Allowance coverage of nonperforming loans		154.8	%		147.9	%		134.6	%		108.0	%		85.4	%
Other assets owned		2,402			3,106			3,412			2,179			3,392
Total nonperforming assets	$	16,610		$	18,084		$	20,163		$	22,971		$	29,268
Nonperforming assets % of total assets		1.83	%		1.95	%		2.22	%		2.56	%		3.31	%

Page 38

	6/30/13		3/31/13		12/31/12		9/30/12		6/30/12
Loans delinquent 30-89 days	$	2,396	$	2,352	$	3,007	$	2,807	$	2,070
Accruing restructured loans
Business, including commercial mortgages	$	5,029	$	5,266	$	7,643	$	7,819	$	8,641
Construction and development		1,686		4,728		4,738		5,017		6,840
Residential mortgage		4,296		4,001		3,267		3,276		3,284
Home Equity		171		171		171		171		171
Total accruing restructured loans	$	11,182	$	14,166	$	15,819	$	16,283	$	18,936

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 $2.5 million since December 31, 2012, and have declined by $11.7 million since June 30, 2012. Total nonperforming loans as a percent of total portfolio loans were 2.30% at June 30, 2013, down from 2.86% and 4.48% at December 31 and June 30, 2012, respectively, while the ratio of allowance for loan losses to nonperforming loans improved from 85.4% and 134.6%, respectively, at June 30 and December 31, 2012, to 154.8% at June 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 $1.0 million since the end of 2012 as the Bank continued to sell other assets owned, while additional other assets owned have been added to its totals. At June 30, 2013, other real estate owned included twelve properties that were acquired through foreclosure or in lieu of foreclosure. The properties included eight commercial properties, four of which were the result of out-of-state loan participations, and four residential properties. All properties are for sale. Other repossessed assets at June 30, 2013 consisted of two automobiles. The following table reflects the activity in other assets owned during 2013.

In thousands of dollars	ORE			Other Assets			Total
Balance at January 1	$	3,409		$	3		$	3,412
Additions		437			78			515
Sold		(1,391	)		(63	)		(1,454	)
Write-downs of book value		(71	)		-			(71	)
Balance at June 30	$	2,384		$	18		$	2,402

Page 39

Troubled Debt Restructurings. In the course of working with borrowers, the Bank may choose to restructure the contractual terms of certain loans. In this scenario, the Bank attempts to work out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified are reviewed by the Bank to identify if a troubled debt restructuring ("TDR") has occurred, which is when, for economic or legal reasons related to a borrower's financial difficulties, the Bank grants a concession to the borrower that it would not otherwise consider.

Terms may be modified to fit the ability of the borrower to repay in line with the borrower's current financial status and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two. If such efforts by the Bank do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time foreclosure proceedings are initiated. At any time prior to a sale of the property at foreclosure, the Bank may terminate foreclosure proceedings if the borrower is able to work-out a satisfactory payment plan.

It is the Bank's policy to have any restructured loans which are on nonaccrual status prior to being restructured, remain on nonaccrual status until six months of satisfactory borrower performance, at which time management would consider its return to accrual status. The balance of nonaccrual restructured loans, which is included in nonaccrual loans, was $9.2 million at June 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 $11.2 million at June 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. As of June 30, 2013, there were two commercial loans classified as TDRs totaling $772,000 that were proceeding through this six-month performance period and whose rate is not below current market rates.

Accruing restructured loans at June 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.

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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 June 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.

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

In thousands of dollars	6/30/13			12/31/12			Change
Balance of TDR Loans	$	11,182		$	15,819		$	(4,637	)
Specific reserve on above loans		2,847			4,467			(1,620	)
Percent		25.5	%		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, $25.7 million of impaired loans have been identified as of June 30, 2013, down from $34.3 million at December 31, 2012. The specific allowance for impaired loans was $6.5 million at June 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.

Page 41

This type of lending is generally considered to have more complex credit risks than traditional single-family residential lending because the principal is concentrated in a limited number of loans with repayment dependent on the successful completion and sales of the related real estate project. Consequently, these loans are often more sensitive to adverse conditions in the real estate market or the general economy than other real estate loans. These loans are generally less predictable and more difficult to evaluate and monitor and collateral may be difficult to dispose of in a market decline.

The 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 $157,000 during the second quarter of 2013 and has decreased by $96,000 since June 30, 2012. The allowance for loan losses as a percent of total loans of 3.55% at June 30, 2013 was down from 3.83% at June 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 June 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	$	11,182	$	2,847	$	2,847		25.5	%
Other Impaired Loans		14,567		3,646		3,646
Cumulative Charge-offs		7,299		-		7,299
Total		21,866		3,646		10,945		50.1	%
Non-impaired loans	$	593,225	$	15,508	$	15,508		2.6	%

Deposits

United internally funds its operations through a large, stable base of core deposits that provides cost-effective funding for its lending operations. The majority of deposits are derived from core client sources, relating to long term relationships with local individual, business and public fund clients. Public fund clients include local governments and municipal bodies, hospitals, universities and other educational institutions.

Page 42

At June 30, 2013, core deposits accounted for 99.3% of total deposits, up from 98.8% at June 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.

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

	This Quarter						Year to Date						Twelve-Month
In thousands of dollars	Change			Percent			Change			Percent			Change		Percent
Noninterest bearing	$	11,413			7.5	%	$	(1,692	)		-1.0	%	$	2,431		1.5	%
Interest bearing deposits		(23,339	)		-3.6	%		9,168			1.5	%		28,300		4.7	%
Total deposits	$	(11,926	)		-1.5	%	$	7,476			1.0	%	$	30,731		4.0	%

Deposit balances declined by $11.9 million, or 1.5%, in the second quarter of 2013, but have increased by $30.7 million, or 4.0%, in the twelve months ended June 30, 2013. In the most recent quarter, demand deposit balances increased by $11.4 million, while interest bearing deposits declined by $23.3 million. The decrease in interest bearing deposits during the three months ended June 30, 2013 were primarily a result of a seasonal decline 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 June 30, 2013, December 31, 2012 and June 30, 2012.

Percentage Makeup of Deposit Portfolio	6/30/13			12/31/12			6/30/12
Noninterest bearing		20.7	%		21.1	%		21.2	%
Interest bearing deposits		79.3	%		78.9	%		78.8	%
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 43

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

Results of Operations

Earnings Summary and Key Ratios

The Company achieved consolidated net income of $2.1 million in the second quarter and $4.0 million for the first six months of 2013. This compares to consolidated net income of $785,000 and $1.6 million for the same periods of 2012. The improvement in income in the second quarter and first six months of 2013 resulted primarily from increased levels of noninterest income and reduced amounts in the Company's provision for loan losses, offset in part by increases in noninterest expense of 7.9% and 5.7%, respectively, compared to the same periods of 2012.

United's net interest margin of 3.68% for the second quarter of 2013 was up slightly from 3.62% for the second quarter of 2012, while the net interest margin of 3.57% for the first half of 2013 was down from 3.63% for the same period of 2012. For the second quarter of 2013, net interest income of $7.8 million was up 3.4% compared to the same period of 2012, and net interest income of $15.1 million for the first half of 2013 was substantially unchanged from the same period of 2012.

Noninterest income of $5.6 million for the quarter ended June 30, 2013 improved by 7.0% compared to the second quarter of 2012, while noninterest income for the six months ended June 30, 2013 was 15.3% higher than the same period of 2012. Noninterest income represented 41.9% and 43.4%, respectively, of the Company's combined net interest income and noninterest income for the three and six months ended June 30, 2013, compared to 41.1% and 39.9%, respectively, for the same periods of 2012.

Total noninterest expense for the second quarter of 2013 was up 7.9% from the second quarter of 2012, and increased by 5.7% for the first six months of 2013 compared to the same period of 2012. In the second quarter and first six months of 2013, the largest dollar increases in noninterest expense were in compensation expense. Expenses related to salaries and employee benefits increased by 19.2% in the second quarter of 2013 compared to the same period of 2012, and by 18.4% in the first six months of 2013 compared to the same period of 2012. The increase reflects, in part, continued higher levels of commissions and other compensation costs related to the generation of income from loan sales and servicing.

In addition, the Company has increased its staffing levels modestly to accommodate its anticipated future expansion, including expansion into Livingston and Monroe Counties, and moderate salary increases were implemented effective April 1, 2013. Expenses in the second quarter and first six 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.

Page 44

The Company's provision for loan losses of $600,000 in the second quarter of 2013 was down from $2.6 million for the second quarter of 2012. The Company's provision for loan losses of $1.6 million for the first half of 2013 was down from $4.7 million for the same period of 2012.

ROA was 0.92% for the second quarter and 0.90% for the first six months of 2013, compared to 0.36% and 0.37%, respectively, for the comparable periods of 2012. ROE was 8.44% for the second quarter and 8.26% for the first six months of 2013, compared to 3.35% and 3.48%, 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	2nd Qtr			1st Qtr			4th Qtr			3rd Qtr			2nd Qtr
Net interest income	$	7,824		$	7,288		$	7,384		$	7,646		$	7,566
Provision for loan losses		600			1,000			1,700			2,000			2,550
Noninterest income		5,647			5,924			5,891			5,564			5,278
Noninterest expense		9,874			9,486			9,586			9,300			9,148
Federal income tax provision		910			784			543			520			361
Net income		2,087			1,942			1,446			1,390			785
Earnings per common share	$	0.14		$	0.13		$	0.09		$	0.09		$	0.04
Return on average assets (a)		0.92	%		0.87	%		0.64	%		0.62	%		0.36	%
Return on average shareholders' equity (a)		8.44	%		8.07	%		5.94	%		5.79	%		3.35	%
Net interest margin		3.68	%		3.46	%		3.45	%		3.63	%		3.62	%
Efficiency ratio (tax equivalent basis)		72.8	%		71.3	%		71.7	%		69.9	%		70.7	%
Tier 1 leverage ratio		10.7	%		10.5	%		10.2	%		10.1	%		9.9	%
(a)  annualized

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

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

Management believes that PTPP Income and PTPP ROA are useful and consistent measures of the Company's earning capacity, as these financial measures enable investors and others to assess the Company's ability to generate capital to cover credit losses through a credit cycle, particularly in times of economic stress. The Company's strong PTPP Income has been achieved through a substantial core funding base which has resulted in a comparatively strong net interest margin, a diversity of noninterest income sources and expansion of our markets.

Page 45

The Company's PTPP ROA was 1.59% and 1.63%, respectively, for the second quarter and first six months of 2013, compared to 1.67% and 1.55%, 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 six month periods ended June 30, 2013 and 2012.

	Three Months Ended June 30,									Six Months Ended June 30,
In thousands of dollars	2013			2012			Change			2013			2012			Change
Interest income	$	8,595		$	8,758			-1.9	%	$	16,755		$	17,591			-4.8	%
Interest expense		771			1,192			-35.3	%		1,643			2,456			-33.1	%
Net interest income		7,824			7,566			3.4	%		15,112			15,135			-0.2	%
Noninterest income		5,647			5,278			7.0	%		11,571			10,036			15.3	%
Noninterest expense		9,874			9,148			7.9	%		19,360			18,317			5.7	%
Pre-tax, pre-provision income	$	3,597		$	3,696			-2.7	%	$	7,323		$	6,854			6.8	%
Average assets	$	905,384		$	888,830			1.9	%	$	905,367		$	890,911			1.6	%
Pre-tax, pre-provision ROA		1.59	%		1.67	%		-0.08	%		1.63	%		1.55	%		0.08	%
Reconcilement to GAAP income:
Provision for loan losses		600			2,550						1,600			4,650
Income tax		910			361						1,694			577
Net income	$	2,087		$	785					$	4,029		$	1,627

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 $41.7 million in the twelve months ended June 30, 2013 has contributed to this shift in mix and has helped to improve 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, and opened a new loan production office within the City of Monroe, Michigan in July 2012. Both offices have contributed to increased lending activity, and the Monroe office was converted to full-service banking office in July 2013. In addition, loan volumes within the Bank's existing markets have improved modestly.

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 June 30, 2013, and continues to fund its growth primarily with core deposits.

United's net interest margin was 3.68% and 3.57%, respectively, for the three and six month periods ended June 30, 2013, compared to 3.62% and 3.63%, respectively, for the same periods of 2012. Net interest spread on a tax equivalent basis improved from 3.42% for the second quarter of 2012 to 3.55% for the second quarter of 2013. Net interest spread of 3.44% for the first six months of 2013 was substantially unchanged from 3.43% 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 six month periods ended June 30, 2013 and 2012.

Page 46

	Three Months Ended June 30,																		Six Months Ended June 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	$	46,318		$	29			0.25	%	$	67,746		$	43			0.26	%	$	51,529		$	65			0.25	%	$	76,375		$	97			0.25	%
Taxable investments		183,413			727			1.57	%		177,315			696			1.55	%		186,852			1,181			1.26	%		165,609			1,370			1.66	%
Tax exempt securities (b)		17,791			237			5.28	%		17,108			250			5.78	%		16,837			469			5.58	%		20,112			519			5.86	%
Taxable loans		611,029			7,650			5.02	%		586,310			7,833			5.37	%		605,416			15,138			5.04	%		585,067			15,734			5.41	%
Tax exempt loans (b)		3,528			47			5.30	%		1,798			30			6.50	%		3,251			89			5.49	%		1,829			65			7.06	%
Total int. earning assets (b)		862,079			8,690			4.03	%		850,277			8,852			4.17	%		863,885			16,942			3.95	%		848,992			17,785			4.20	%
Less allowance for loan losses		(23,035	)								(21,837	)								(23,059	)								(21,724	)
Other assets		66,340									60,390									64,541									63,643
Total Assets	$	905,384								$	888,830								$	905,367								$	890,911
Liabilities and Shareholders' Equity
NOW and savings deposits	$	404,615			123			0.12	%	$	359,081			148			0.17	%	$	406,101			250			0.12	%	$	363,343			305			0.17	%
Other interest bearing deposits		222,669			557			1.00	%		249,217			837			1.35	%		226,943			1,165			1.04	%		255,047			1,735			1.37	%
Total int. bearing deposits		627,284			680			0.43	%		608,298			985			0.65	%		633,044			1,415			0.45	%		618,390			2,040			0.66	%
Other borrowings		14,461			91			2.52	%		23,818			207			3.50	%		17,402			228			2.61	%		23,926			415			3.43	%
Total int. bearing liabilities		641,745			771			0.48	%		632,116			1,192			0.75	%		650,446			1,643			0.51	%		642,316			2,455			0.77	%
Noninterest bearing deposits		158,414			-						157,192			-						152,825			-						151,428			-
Total including noninterest bearing deposits		800,159			771			0.39	%		789,308			1,192			0.61	%		803,271			1,643			0.41	%		793,744			2,455			0.62	%
Other liabilities		6,067									5,108									3,704									3,093
Shareholders' equity		99,158									94,414									98,392									94,074
Total Liabilities and Shareholders' Equity	$	905,384								$	888,830								$	905,367								$	890,911
Net interest income (b)					7,919									7,660									15,299									15,330
Net spread (b)								3.55	%								3.42	%								3.44	%								3.43	%
Net yield on interest earning assets (b)								3.68	%								3.62	%								3.57	%								3.63	%
Tax equivalent adjustment on interest income					(95	)								(94	)								(187	)								(195	)
Net interest income per income statement				$	7,824								$	7,566								$	15,112								$	15,135
Ratio of interest earning assets to interest bearing liabilities								1.34									1.35									1.33									1.32
(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 47

Provision for Loan Losses

The Company's provision for loan losses for the second quarter and first six months of 2013 was $600,000 and $1.6 million, respectively, down from $2.6 million and $4.7 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 $757,000 in the second quarter of 2013 marginally exceeded the Company's provision for loan losses of $600,000 for the quarter, and were primarily associated with loans for which the Company carried specific reserves at March 31, 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 improved by 7.0% and 15.3%, respectively, for the second quarter and first six months of 2013 compared to the same periods of 2012. The following table summarizes changes in noninterest income by category for the three and six month periods ended June 30, 2013 and 2012.

	Three Months Ended June 30,							Six Months Ended June 30,
In thousands of dollars	2013		2012		Change			2013		2012		Change
Service charges on deposit accounts	$	472	$	449		5.1	%	$	896	$	882		1.6	%
Wealth Management fee income		1,487		1,311		13.4	%		2,891		2,536		14.0	%
Income from loan sales and servicing		2,767		2,592		6.8	%		5,819		4,496		29.4	%
ATM, debit and credit card fee income		561		559		0.4	%		1,057		1,066		-0.8	%
Other income		360		367		-1.9	%		908		1,056		-14.0	%
Total noninterest income	$	5,647	$	5,278		7.0	%	$	11,571	$	10,036		15.3	%

Service charges on deposit accounts were up 5.1% in the second quarter and 1.6% in the first six months of 2013 compared to the same periods a year earlier. Substantially all of the change in 2013 was due to the Company's 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 13.4% in the second quarter and by 14.0% in the first six months of 2013, respectively, compared to the same periods of 2012.

Income from loan sales and servicing includes gains on the sale of residential mortgages and the guaranteed portion of SBA loans sold on the secondary market, along with servicing income resulting from loans sold with servicing retained. Income in this category has continued at elevated levels in 2013, and has increased by 6.8% and 29.4%, respectively, in the second quarter and first six months of 2013 when compared to the same periods of 2012, as a result of continued high levels of residential mortgage loans originated and sold on the secondary market.

Page 48

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				Six Months Ended
	June 30,				June 30,
In thousands of dollars	2013		2012		2013		2012
Residential mortgage sales and servicing	$	1,909	$	1,844	$	4,107	$	3,638
USFC commercial loan sales and servicing		858		748		1,712		858
Total income from loan sales and servicing	$	2,767	$	2,592	$	5,819	$	4,496

ATM, debit and credit card fee income provides a source of noninterest income for the Company. The Bank operates twenty ATMs throughout its market areas, and Bank clients are active users of debit cards. The Bank receives ongoing fee income from credit card referrals and operation of its credit card merchant business. Income from these areas in the three and six month periods ended June 30, 2013 is substantially unchanged from the level achieved in the same periods 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 $95,000 in the second quarter and $315,000 in the first six months of 2013, compared to $98,000 and $388,000, respectively, in the comparable periods of 2012. Total other income was down 1.9% and 14.0%, respectively, in the second quarter and first six months of 2013 compared to the same periods of 2012. The following table shows the trends of various noninterest income categories for the most recent five quarters.

	2013				2012
In thousands of dollars	2nd Qtr		1st Qtr		4th Qtr		3rd Qtr		2nd Qtr
Service charges on deposit accounts	$	472	$	424	$	483	$	496	$	449
Wealth Management fee income		1,487		1,404		1,395		1,319		1,311
Income from loan sales and servicing		2,767		3,052		2,805		2,803		2,592
ATM, debit and credit card fee income		561		496		543		517		559
Other income		360		548		665		429		367
Total noninterest income	$	5,647	$	5,924	$	5,891	$	5,564	$	5,278

Page 49

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	2nd Qtr		1st Qtr		4th Qtr		3rd Qtr		2nd Qtr
Salaries and employee benefits	$	6,223	$	5,877	$	5,796	$	5,464	$	5,221
Occupancy and equipment expense, net		1,357		1,348		1,323		1,350		1,320
External data processing		353		372		349		250		267
Advertising and marketing		292		264		185		190		184
Attorney, accounting and other professional fees		349		411		226		416		770
Expenses relating to ORE property and other foreclosed assets		259		168		395		417		183
FDIC insurance premiums		190		186		250		292		296
Other expenses		851		860		1,062		921		907
Total noninterest expense	$	9,874	$	9,486	$	9,586	$	9,300	$	9,148

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

	Three Months Ended June 30,							Six Months Ended June 30,
In thousands of dollars	2013		2012		Change			2013		2012		Change
Salaries and employee benefits	$	6,223	$	5,221		19.2	%	$	12,100	$	10,222		18.4	%
Occupancy and equipment expense, net		1,357		1,320		2.8	%		2,705		2,638		2.5	%
External data processing		353		267		32.2	%		725		514		41.1	%
Advertising and marketing		292		184		58.7	%		556		377		47.5	%
Attorney, accounting and other professional fees		349		770		-54.7	%		760		1,238		-38.6	%
Director fees		104		97		7.2	%		209		195		7.2	%
Expenses relating to ORE property and  other foreclosed assets		259		183		41.5	%		427		1,116		-61.7	%
FDIC insurance premiums		190		296		-35.8	%		376		591		-36.4	%
Other expenses		747		810		-7.8	%		1,502		1,426		5.3	%
Total noninterest expense	$	9,874	$	9,148		7.9	%	$	19,360	$	18,317		5.7	%

Page 50

Total noninterest expenses were up 7.9% in the second quarter of 2013, and were up 5.7% year to date 2013 compared to the same periods of 2012. A number of categories of noninterest expense declined during the second quarter and first half of 2013 compared to the same periods of 2012. Those included attorney, accounting and other professional fees and FDIC insurance premiums. Expenses relating to ORE property and other foreclosed assets have declined in the first six months of 2013 compared to the same period of 2013, but increased in the second quarter of 2013 compared to the same quarter of 2012.

Salaries and employee benefits for the second quarter and the first six months of 2013 increased by 19.2% and 18.4%, respectively, compared to the same periods one year earlier. The increases 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 six 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 second quarter and the first six months of 2013 increased by 58.7% and 47.5%, 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 more historic spending levels for marketing and advertising expense.

Expenses related to ORE and other foreclosed properties increased by $76,000 in the second quarter of 2013 compared to the same quarter of 2012, but have declined by $689,000 in the first six 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 six months of 2012, the Company recorded $770,000 of probable incurred expenses relating to residential mortgages previously sold on the secondary market that subsequently defaulted, and $200,000 of probable incurred expenses was recorded in the first six months of 2013. FDIC insurance premiums declined by 35.8% and 36.4%, respectively, during the three and six months ended June 30, 2013 compared to the same periods of 2012 as a result of lower base charges.

Attorney, accounting and other professional fees in the second quarter and first six months of 2013 declined by 54.7% and 38.6%, 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 Preferred Shares by the U.S. Treasury.

Page 51

Federal Income Tax

The table below shows the Company's effective tax rates for the three and six month periods ended June 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		30.4	%		31.5	%		29.6	%		26.2	%

The Company's net deferred tax asset was $8.8 million at June 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 considered more likely than not that all or part of the benefit related to such assets will not be realized. The following lists the evidence considered in determining whether a valuation allowance was necessary for deferred tax assets:

Negative Evidence

As a result of cumulative losses from 2009 to 2011, the Company had a tax Net Operating Loss ("NOL") of $1.6 million as of December 31, 2012.

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 is 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 $5.7 million for the first half 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 $1.6 million for the first half 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 June 30, 2013 or December 31, 2012.

Page 52

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 $35.9 million at June 30, 2013, compared to $56.8 million at December 31, 2012 and $57.6 million at June 30, 2012. Balances of investments held for sale were $195.1 million at June 30, 2013, compared to $206.1 million at December 31, 2012 and $191.9 million at June 30, 2012. The Company continued to maintain high levels of liquidity, with investments, federal funds and cash equivalents held to improve the liquidity of the balance sheet during this prolonged period of economic uncertainty. The Company expects to maintain higher than normal levels of liquidity until economic conditions improve and more attractive investment opportunities emerge.

The Bank also has the ability to utilize short-term advances from the FHLBI and borrowings at the discount window of the Federal Reserve Bank as additional short-term funding sources. Short-term advances and discount window borrowings were not utilized during 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 six months of 2013, the Bank procured no new advances, and repaid $10.0 million of matured borrowings. In the twelve months ended June 30, 2013, maturities and principal payments on advances have reduced outstanding balances by $11.8 million.

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.

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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 9.80% at June 30, 2013, after payment of a $2.0 million dividend to the Company in the second quarter of 2013.

The following table shows information about the Company's and the Banks' capital levels compared to regulatory and Board resolution requirements at June 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 June 30, 2013
Tier 1 Capital to Average Assets
Consolidated	$	96,594		10.7	%	$	36,106		4.0	%		N/A		N/A			N/A		N/A
Bank		88,061		9.8	%		35,949		4.0	%		44,937		5.0	%		76,392		8.5	%
Tier 1 Capital to Risk Weighted Assets
Consolidated		96,594		15.2	%		25,402		4.0	%		N/A		N/A			N/A		N/A
Bank		88,061		13.9	%		25,383		4.0	%		38,075		6.0	%		N/A		N/A
Total Capital to Risk Weighted Assets
Consolidated		104,706		16.5	%		50,804		8.0	%		N/A		N/A			N/A		N/A
Bank		96,167		15.2	%		50,766		8.0	%		63,458		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.

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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, increases the minimum Tier 1 capital ratio requirement from 4% to 6%.

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

· 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 June 30, 2013 exceeded the minimum capital requirements of the interim final rule assuming they were applicable as of June 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 quarter ended June 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 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.

July 26, 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. Previously filed with the Commission on December 9, 2009 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 3.1. Incorporated here by reference.
3.3		Certificate of Designations for Fixed Rate Cumulative Perpetual Preferred Stock, Series A. Previously filed with the Commission on January 16, 2009 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 3.1. Incorporated here by reference.
4.1		Restated Articles of Incorporation of United Bancorp, Inc. Exhibit 3.1 is incorporated here by reference.
4.2		Amended and Restated Bylaws of United Bancorp, Inc. Exhibit 3.2 is incorporated here by reference.
4.3		Form of Certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A. Previously filed with the Commission on January 16, 2009 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 4.1. Incorporated here by reference.
4.4		Certificate of Designations for Fixed Rate Cumulative Perpetual Preferred Stock, Series A. Exhibit 3.3 is incorporated here by reference.
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification pursuant to 18 U.S.C. Section 1350.

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