Attached files

file filename
EX-10.1 - EXHIBIT 10.1 - UNITED BANCORP INC /MI/exhibit101.htm
EX-31.1 - EXHIBIT 31.1 - UNITED BANCORP INC /MI/exhibit311.htm
EX-32.1 - EXHIBIT 32.1 - UNITED BANCORP INC /MI/exhibit321.htm
EX-10.2 - EXHIBIT 10.2 - UNITED BANCORP INC /MI/exhibit102.htm
EX-10.3 - EXHIBIT 10.3 - UNITED BANCORP INC /MI/exhibit103.htm
EX-31.2 - EXHIBIT 31.2 - UNITED BANCORP INC /MI/exhibit312.htm

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 March 31, 2011
_________________________

Commission File #0-16640

United Bancorp, Inc.
 (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 þ                      No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o   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 o    No þ

As of April 22, 2011, there were outstanding 12,692,111 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", "should", "will", "is likely", or is "probable" to occur or "continue" or "is scheduled" or "on track" or that the Company or its management "anticipates", "believes", "estimates", "plans", "forecasts", "intends", "predicts", "projects", or "expects" a particular result, or is "confident," "optimistic" or has an "opinion" that an event will occur, or other words or phrases such as "ongoing", "future", or "tend" and variations of such words and similar expressions.  Such statements are based upon current beliefs and expectations and involve substantial risks and uncertainties which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These statements include, among others, statements related to real estate valuation, future recognition of income, future levels of non-performing loans, the rate of asset dispositions, future capital levels, capital raising activities, dividends, future growth, future funding sources, future liquidity levels, future profitability levels, our ability to comply with our memorandum of understanding, the effects on earnings of changes in interest rates and the future level of other revenue sources. All of the information concerning interest rate sensitivity is forward-looking.

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. Our ability to fully comply with all of the provisions of our memorandum of understanding, improve regulatory capital ratios, raise additional capital, 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, 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, 2010. 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

Item 1 – Financial Statements

(a)
Condensed Consolidated Balance Sheets
 
In thousands of dollars
 
(unaudited)
       
   
March 31,
   
December 31,
 
Assets
 
2011
   
2010
 
Cash and demand balances in other banks
  $ 11,758     $ 10,623  
Interest bearing balances with banks
    126,227       95,599  
Total cash and cash equivalents
    137,985       106,222  
                 
Securities available for sale
    140,635       124,544  
FHLB Stock
    2,788       2,788  
Loans held for sale
    519       10,289  
                 
Portfolio loans
    578,111       591,985  
Less allowance for loan losses
    25,194       25,163  
Net portfolio loans
    552,917       566,822  
                 
Premises and equipment, net
    11,062       11,241  
Bank-owned life insurance
    13,496       13,391  
Accrued interest receivable and other assets
    26,074       26,413  
Total Assets
  $ 885,476     $ 861,710  
                 
Liabilities
               
Deposits
               
Noninterest bearing
  $ 134,471     $ 113,206  
Interest bearing deposits
    625,762       620,792  
Total deposits
    760,233       733,998  
                 
Federal funds purchased and other short term borrowings
    -       1,234  
FHLB advances payable
    29,321       30,321  
Accrued interest payable and other liabilities
    3,091       3,453  
Total Liabilities
    792,645       769,006  
                 
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
    20,284       20,258  
Common stock and paid in capital, no par value; 30,000,000 shares authorized; 12,692,111 and 12,667,111 shares issued and outstanding, respectively
    85,289       85,351  
Accumulated deficit
    (13,451 )     (13,526 )
Accumulated other comprehensive income, net of tax
    709       621  
Total Shareholders' Equity
    92,831       92,704  
                 
Total Liabilities and Shareholders' Equity
  $ 885,476     $ 861,710  
                 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 



Condensed Consolidated Statements of Operations (unaudited)

   
Three Months Ended
 
In thousands of dollars, except per share data
 
March 31,
 
Interest Income
 
2011
   
2010
 
Interest and fees on loans
  $ 8,204     $ 9,406  
Interest on securities
               
Taxable
    604       454  
Tax exempt
    207       315  
Interest on federal funds sold and balances with banks
    74       73  
Total interest income
    9,089       10,248  
                 
Interest Expense
               
Interest on deposits
    1,410       2,194  
Interest on fed funds and other short term borrowings
    11       -  
Interest on FHLB advances
    266       347  
Total interest expense
    1,687       2,541  
Net Interest Income
    7,402       7,707  
Provision for loan losses
    2,800       4,800  
Net Interest Income after Provision for Loan Losses
    4,602       2,907  
                 
Noninterest Income
               
Service charges on deposit accounts
    503       539  
Wealth Management fee income
    1,263       1,043  
Income from loan sales and servicing
    1,311       892  
ATM, debit and credit card fee income
    513       445  
Income from bank-owned life insurance
    105       113  
Other income
    230       192  
Total noninterest income
    3,925       3,224  
                 
Noninterest Expense
               
Salaries and employee benefits
    4,575       3,938  
Occupancy and equipment expense, net
    1,252       1,336  
External data processing
    320       294  
Advertising and marketing
    160       167  
Attorney, accounting and other professional fees
    433       351  
Director fees
    102       88  
Expenses relating to ORE property
    257       315  
FDIC insurance premiums
    431       437  
Other expenses
    688       733  
Total noninterest expense
    8,218       7,659  
Income (Loss) Before Federal Income Tax
    309       (1,528 )
Federal income tax (benefit)
    (50 )     (719 )
Net Income (Loss)
  $ 359     $ (809 )
                 
Preferred stock dividends and amortization
    (284 )     (282 )
Income (Loss) Available to Common Shareholders
  $ 75     $ (1,091 )
                 
Basic and diluted earnings (loss) per share
  $ 0.01     $ (0.21 )
Cash dividends declared per share of common stock
  $ -     $ -  
                 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 



Condensed Consolidated Statements of Shareholders’ Equity (unaudited)

   
Three Months Ended
 
In thousands of dollars
 
March 31,
 
Total Shareholders' Equity
 
2011
   
2010
 
Balance at beginning of period
  $ 92,704     $ 80,867  
                 
Net income (loss)
    359       (809 )
Other comprehensive income:
               
Net change in unrealized gains on securities available for sale, net of reclass adjustments for realized gains (losses) and related taxes
    88       (9 )
Total comprehensive income (loss)
    447       (818 )
                 
Cash dividends paid on preferred shares
    (258 )     (258 )
Other common stock transactions
    (62 )     38  
Balance at end of period
  $ 92,831     $ 79,829  
                 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 



Condensed Consolidated Statements of Cash Flows (unaudited)

   
Three Months Ended
 
In thousands of dollars
 
March 31,
 
   
2011
   
2010
 
Cash Flows from Operating Activities
           
Net income (loss)
  $ 359     $ (809 )
                 
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
               
Depreciation and amortization
    895       566  
Provision for loan losses
    2,800       4,800  
Gain on sale of loans
    (1,037 )     (649 )
Proceeds from sales of loans originated for sale
    54,185       38,199  
Loans originated for sale
    (43,378 )     (39,802 )
Change in deferred income taxes
    27       (418 )
Stock option expense
    19       38  
Increase in cash surrender value of bank-owned life insurance
    (105 )     (113 )
Change in investment in limited partnership
    (182 )     (123 )
Change in accrued interest receivable and other assets
    1,474       (191 )
Change in accrued interest payable and other liabilities
    (166 )     75  
Net cash from operating activities
    14,891       1,573  
                 
Cash Flows from Investing Activities
               
Securities available for sale
               
Purchases
    (25,692 )     (8,381 )
Maturities and calls
    5,147       1,755  
Principal payments
    4,056       2,142  
Net change in portfolio loans
    9,809       11,738  
Premises and equipment expenditures
    (110 )     (12 )
Net cash from investing activities
    (6,790 )     7,242  
                 
Cash Flows from Financing Activities
               
Net change in deposits
    26,235       (864 )
Net change in fed funds sold and short term borrowings
    (1,234 )     -  
Principal payments on FHLB advances
    (1,000 )     (6,500 )
Proceeds from other common stock transactions
    (81 )     -  
Cash dividends paid on preferred shares
    (258 )     (258 )
Net cash from financing activities
    23,662       (7,622 )
Net change in cash and cash equivalents
    31,763       1,193  
                 
Cash and cash equivalents at beginning of year
    106,222       125,589  
Cash and cash equivalents at end of period
  $ 137,985     $ 126,782  
                 
Supplemental Disclosure of Cash Flow Information:
               
Interest paid
  $ 1,748     $ 2,626  
Loans transferred to other real estate
    1,296       832  
                 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 



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, 2010 has been derived from the audited consolidated balance sheet of the Company as of that date. Operating results for the three month period ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. 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, 2010.

Effective April 1, 2010, the Company completed the consolidation of its subsidiary banks, United Bank & Trust and United Bank & Trust – Washtenaw. Under the consolidation, United Bank & Trust – Washtenaw was consolidated and merged with and into United Bank & Trust, and the consolidated bank operates under the charter and name of United Bank & Trust (“UBT” or the “Bank”).

Note 2 – Allowance for Loan Losses

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 is based on an evaluation of the 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 Company’s past loan loss experience is determined by evaluating the average charge-offs over the most recent eight quarters. The allowance is increased by provisions for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan is confirmed. Subsequent recoveries, if any, are credited to the allowance.

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.

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 the Bank’s loans to the borrower, the loan is evaluated for impairment. Often this is associated with a delay or shortfall of payments of thirty days or more. Loans are generally moved to nonaccrual status when ninety days or more past due or in bankruptcy. These loans are often also considered impaired. Impaired loans, or portions thereof, are charged off 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.

An analysis of the allowance for loan losses for the year to date periods ended March 31, 2011 and 2010, and the year ended December 31, 2010 follows:

Three Months Ended March 31,
 
2011
       
   
Business &
                               
   
Commercial
         
Residential
                   
 Thousands of dollars
 
Mortgages
   
CLD (1)
   
Mortgage
   
Personal
   
Total
   
2010
 
 Balance, January 1
  $ 16,672     $ 3,248     $ 2,661     $ 2,582     $ 25,163     $ 20,020  
 Provision charged to expense
    1,348       734       737       (19 )     2,800       4,800  
 Losses charged off
    (1,749 )     (693 )     (471 )     (192 )     (3,105 )     (3,562 )
 Recoveries
    164       63       10       99       336       93  
 Balance, March 31
  $ 16,435     $ 3,352     $ 2,937     $ 2,470     $ 25,194     $ 21,351  
                                                 
Ending balance: individually evaluated for impairment
  $ 6,266     $ 1,891     $ 786     $ 280     $ 9,223          
Ending balance: collectively evaluated for impairment
  $ 10,169     $ 1,461     $ 2,151     $ 2,190     $ 15,971          
                                                 
Total Loans:
                                               
Ending balance
  $ 342,119     $ 32,926     $ 90,580     $ 112,486     $ 578,111          
Ending balance: individually evaluated for impairment
  $ 24,855     $ 14,565     $ 3,851     $ 563     $ 43,834          
Ending balance: collectively evaluated for impairment
  $ 317,264     $ 18,361     $ 86,729     $ 111,923     $ 534,277          
 
Year Ended December 31, 2010
 
Business &
                               
   
Commercial
         
Residential
                   
 Thousands of dollars
 
Mortgages
   
CLD
   
Mortgage
   
Personal
   
Total
       
 Balance, January 1
  $ 12,221     $ 5,164     $ 760     $ 1,875     $ 20,020          
 Provision charged to expense
    11,710       3,716       3,655       2,449       21,530          
 Losses charged off
    (7,683 )     (5,919 )     (1,820 )     (1,907 )     (17,329 )        
 Recoveries
    424       287       66       165       942          
 Balance, December 31
  $ 16,672     $ 3,248     $ 2,661     $ 2,582     $ 25,163          
                                                 
Ending balance: individually evaluated for impairment
  $ 6,402     $ 1,765     $ 708     $ 283     $ 9,158          
Ending balance: collectively evaluated for impairment
  $ 10,270     $ 1,483     $ 1,953     $ 2,299     $ 16,005          


Total Loans:
                                   
Ending balance
  $ 354,020     $ 32,924     $ 90,867     $ 114,174     $ 591,985          
Ending balance: individually evaluated for impairment
  $ 26,628     $ 14,699     $ 3,290     $ 566     $ 45,183          
Ending balance: collectively evaluated for impairment
  $ 327,392     $ 18,225     $ 87,577     $ 113,608     $ 546,802          
                                                 
 (1)
Construction and land development 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.
 
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.

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 March 31, 2011 and December 31, 2010 are detailed in the following tables.


 
 
In thousands of dollars
 
At March 31, 2011
 
Commercial & Tax-exempt Loans
 
CLD
   
Owner-Occupied CRE
   
Other CRE
   
Commercial & Industrial
   
Total Commercial
 
Credit Risk Profile by Internally Assigned Rating
 1-4 
Pass
  $ 13,188     $ 79,991     $ 104,884     $ 49,368     $ 247,431  
 5 
Special Mention
    5,534       11,930       20,115       25,652       63,231  
 6 
Substandard
    13,889       10,185       8,664       5,946       38,684  
 7 
Doubtful
    315       399       74       2,260       3,048  
 
 Total
  $ 32,926     $ 102,505     $ 133,737     $ 83,226     $ 352,394  

Consumer Loans
                             
Credit risk profile based on payment activity
 
Residential Mortgage
   
Consumer Construction
   
Home Equity
   
Other Consumer
   
Total Consumer
 
Performing
  $ 102,313     $ 6,514     $ 77,023     $ 23,485     $ 209,335  
Accruing restructured
    3,504       -       -       -       3,504  
Delinquent less than 90 days
    850       -       789       38       1,677  
Nonperforming
    4,714       -       898       53       5,665  
 Total
  $ 110,531     $ 6,514     $ 77,921     $ 23,538     $ 218,504  
 Subtotal
                                  $ 570,898  
Deferred loan fees and costs, overdrafts, in-process accounts
      7,213  
Total Portfolio Loans
    $ 578,111  

In thousands of dollars
 
At December 31, 2010
 
Commercial & Tax-exempt Loans
 
CLD
   
Owner-Occupied CRE
   
Other CRE
   
Commercial & Industrial
   
Total Commercial
 
Credit Risk Profile by Internally Assigned Rating
 1-4 
Pass
  $ 16,246     $ 79,929     $ 106,379     $ 51,751     $ 254,305  
 5 
Special Mention
    5,942       12,556       20,467       22,697       61,662  
 6 
Substandard
    13,381       12,641       10,773       9,350       46,145  
 7 
Doubtful
    427       416       74       120       1,037  
 
 Total
  $ 35,996     $ 105,542     $ 137,693     $ 83,918     $ 363,149  

Consumer Loans
                             
Credit risk profile based on payment activity
 
Residential Mortgage
   
Consumer Construction
   
Home Equity
   
Other Consumer
   
Total Consumer
 
Performing
  $ 105,932     $ 5,558     $ 77,389     $ 24,632     $ 213,511  
Accruing restructured
    2,844       -       -       -       2,844  
Delinquent less than 90 days
    1,854       -       411       125       2,390  
Nonperforming
    4,765       -       762       56       5,583  
 Total
  $ 113,541     $ 5,558     $ 78,151     $ 24,688     $ 221,938  
Subtotal
                                  $ 585,087  
Deferred loan fees and costs, overdrafts, in-process accounts
      6,898  
Total Portfolio Loans
    $ 591,985  

Loan totals in the classifications above are based on categories of loans as classified within the Bank’s regulatory reporting. As a result, they may differ from totals of similar classifications in Note 4 and in the tables above.

Loan Portfolio Aging Analysis

Schedules detailing the loan portfolio aging analysis as of March 31, 2011 and December 31, 2010 follow.


 
As of March 31, 2011
 
Delinquent Loans
                         
 Thousands of dollars
 
30-89 Days Past Due
   
90 Days and Over (a) (1)
   
Total Past Due (b)
   
Current (c-b-d)
   
Total Portfolio Loans (c)
   
Nonaccrual Loans (d)
   
Total Nonper-forming (a+d)
 
Commercial
                                         
Commercial CLD
  $ -     $ 124     $ 124     $ 23,820     $ 32,926     $ 8,982     $ 9,106  
Owner-Occupied CRE
    525       -       525       98,658       102,505       3,322       3,322  
Other CRE
    3,164       -       3,164       127,470       133,737       3,103       3,103  
Commercial & Industrial
    573       1,574       2,147       76,072       83,226       5,007       6,581  
Consumer
                                                       
Residential Mortgage
    850       615       1,465       104,967       110,531       4,099       4,714  
Consumer Construction
    -       -       -       6,514       6,514       -       -  
Home Equity
    789       13       802       76,234       77,921       885       898  
Other Consumer
    38       -       38       23,447       23,538       53       53  
 Subtotal
  $ 5,939     $ 2,326     $ 8,265     $ 537,182     $ 570,898     $ 25,451     $ 27,777  
Deferred loan fees and costs, overdrafts, in-process accounts
      7,213                  
Total Portfolio Loans
    $ 578,111                  
 
As of December 31, 2010
                                     
Commercial
                                         
Commercial CLD
  $ 1,044     $ -     $ 1,044     $ 26,393     $ 35,996     $ 8,559     $ 8,559  
Owner-Occupied CRE
    688       -       688       101,317       105,542       3,537       3,537  
Other CRE
    2,982       -       2,982       128,126       137,693       6,585       6,585  
Commercial & Industrial
    734       142       876       78,204       83,918       4,838       4,980  
Consumer
                                                       
Residential Mortgage
    1,854       441       2,295       106,922       113,541       4,324       4,765  
Consumer Construction
    -       -       -       5,558       5,558       -       -  
Home Equity
    411       -       411       76,978       78,151       762       762  
Other Consumer
    125       -       125       24,507       24,688       56       56  
 Subtotal
  $ 7,838     $ 583     $ 8,421     $ 548,005     $ 585,087     $ 28,661     $ 29,244  
Deferred loan fees and costs, overdrafts, in-process accounts
      6,898                  
Total Portfolio Loans
    $ 591,985                  
(1)
All are accruing.
 

Impaired Loans

Information regarding impaired loans as of March 31, 2011 and December 31, 2010 follows:

Impaired Loans at March 31, 2011
                             
 Thousands of dollars
 
Recorded Balance
   
Unpaid Principal Balance
   
Specific Allowance
   
Average Investment in Impaired Loans
   
Interest Income Recognized
 
Loans without a specific valuation allowance
                             
Business & Commercial Mortgage
  $ 5,527     $ 7,114     $ -     $ 5,512     $ 45  
Construction & Land Development
    4,400       9,654       -       4,201       -  
Residential Mortgage
    3,420       4,184       -       3,327       1  
Personal
    843       843       -       828       1  
Subtotal
  $ 14,190     $ 21,795     $ -     $ 13,868     $ 47  



 
Loans with a specific valuation allowance
                             
Business & Commercial Mortgage
  $ 19,328     $ 22,288     $ 6,266     $ 19,526     $ 136  
Construction & Land Development
    10,165       15,907       1,891       10,329       61  
Residential Mortgage
    3,815       3,932       786       3,848       26  
Personal
    330       337       280       333       1  
Subtotal
  $ 33,638     $ 42,464     $ 9,223     $ 34,036     $ 224  
                               
Total Impaired Loans
                             
Business & Commercial Mortgage
  $ 24,855     $ 29,402     $ 6,266     $ 25,038     $ 181  
Construction & Land Development
    14,565       25,561       1,891       14,530       61  
Residential Mortgage
    7,235       8,116       786       7,175       27  
Personal
    1,173       1,180       280       1,161       2  
Total Impaired Loans
  $ 47,828     $ 64,259     $ 9,223     $ 47,904     $ 271  

Impaired Loans at December 31, 2010
                             
 Thousands of dollars
 
Recorded Balance
   
Unpaid Principal Balance
   
Specific Allowance
   
Average Investment in Impaired Loans
   
Interest Income Recognized
 
Loans without a specific valuation allowance
                             
Business & Commercial Mortgage
  $ 5,059     $ 5,865     $ -     $ 4,330     $ 78  
Construction & Land Development
    3,434       8,195       -       3,955       46  
Residential Mortgage
    3,129       3,693       -       4,418       -  
Personal
    509       509       -       1,020       -  
Subtotal
  $ 12,131     $ 18,262     $ -     $ 13,723     $ 124  
                               
Loans with a specific valuation allowance
                             
  Business & Commercial Mortgage
  $ 21,570     $ 26,591     $ 6,402     $ 18,949     $ 619  
  Construction & Land Development
    11,265       19,083       1,765       10,579       168  
  Residential Mortgage
    3,290       3,327       708       2,360       106  
  Personal
    566       570       283       476       18  
  Subtotal
  $ 36,691     $ 49,571     $ 9,158     $ 32,364     $ 911  

Total Impaired Loans
                             
Business & Commercial Mortgage
  $ 26,629     $ 32,456     $ 6,402     $ 23,279     $ 697  
Construction & Land Development
    14,699       27,278       1,765       14,534       214  
Residential Mortgage
    6,419       7,020       708       6,778       106  
Personal
    1,075       1,079       283       1,496       18  
Total Impaired Loans
  $ 48,822     $ 67,833     $ 9,158     $ 46,087     $ 1,035  

Included in the above impaired loan totals were $18.5 million and $17.3 million of loan modifications meeting the definition of a troubled debt restructuring that were accruing interest and performing in accordance with their agreements at March 31, 2011 and December 31, 2010, respectively.
 
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.

Note 3 - 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 March 31, 2011 and December 31, 2010. All securities are classified as available for sale.

At March 31, 2011
 
Amortized Cost
   
Unrealized Gains
   
Unrealized Losses
   
Fair Value
 
U.S. Treasury and agency securities
  $ 45,411     $ 125     $ (321 )   $ 45,215  
Mortgage backed agency securities
    71,212       816       (302 )     71,726  
Obligations of states and political subdivisions
    22,787       786       (33 )     23,540  
Corporate, asset backed and other debt securities
    126       -       -       126  
Equity securities
    26       2       -       28  
Total
  $ 139,562     $ 1,729     $ (656 )   $ 140,635  

At December 31, 2010
                       
U.S. Treasury and agency securities
  $ 33,897     $ 157     $ (367 )   $ 33,687  
Mortgage backed agency securities
    65,714       821       (437 )     66,098  
Obligations of states and political subdivisions
    23,841       817       (53 )     24,605  
Corporate, asset backed and other debt securities
    126       -       -       126  
Equity securities
    26       2       -       28  
Total
  $ 123,604     $ 1,797     $ (857 )   $ 124,544  

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 March 31, 2011 and December 31, 2010.

At March 31, 2011
 
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
  $ 27,192     $ (321 )   $ -     $ -     $ 27,192     $ (321 )
Mortgage backed agency securities
    35,537       (302 )     -       -       35,537       (302 )
Obligations of states and political subdivisions
    1,619       (33 )     -       -       1,619       (33 )
Total
  $ 64,348     $ (656 )   $ -     $ -     $ 64,348     $ (656 )

At December 31, 2010
                                   
U.S. Treasury and agency securities
  $ 22,677     $ (367 )   $ -     $ -     $ 22,677     $ (367 )
Mortgage backed agency securities
    35,933       (437 )     -       -       35,933       (437 )
Obligations of states and political subdivisions
    2,214       (53 )     -       -       2,214       (53 )
Total
  $ 60,824     $ (857 )   $ -     $ -     $ 60,824     $ (857 )

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 2011 or 2010.



The unrealized losses on the Company’s investments in direct obligations of U.S. government agencies were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2011.

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

The entire investment portfolio is classified as available for sale. However, management has no specific intent to sell any securities, and management believes that it is more likely than not that the Company will not have to sell any security before recovery of its cost basis. The Company had no sales activity for securities for the three month periods ended March 31, 2011 and 2010.

The fair value of securities available for sale by contractual maturity as of March 31, 2011 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. Asset-backed securities are included in the “Due in one year or less” category.

In thousands of dollars
 
Amortized Cost
   
Fair Value
 
Due in one year or less
  $ 19,539     $ 19,659  
Due after one year through five years
    115,381       116,130  
Due after five years through ten years
    4,046       4,210  
Due after ten years
    570       608  
Equity securities
    26       28  
Total securities
  $ 139,562     $ 140,635  

Securities carried at $4.69 million as of March 31, 2011 were pledged to secure deposits of public funds, funds borrowed, repurchase agreements, and for other purposes as required by law.

Note 4 – Loans

The following table shows the balances of the various categories of loans of the Company, and the percentage composition of the portfolio by type at March 31, 2011 and December 31, 2010.



 
 
   
March 31, 2011
   
December 31, 2010
 
In thousands of dollars
 
Balance
   
% of total
   
Balance
   
% of total
 
Personal
  $ 107,251       18.6 %   $ 107,399       18.1 %
Business, including commercial mortgages
    344,071       59.4 %     354,340       59.9 %
Tax exempt
    2,135       0.4 %     2,169       0.4 %
Residential mortgage
    84,738       14.7 %     86,006       14.5 %
Construction and development
    39,440       6.8 %     41,554       7.0 %
Deferred loan fees and costs
    476       0.1 %     517       0.1 %
Total portfolio loans
  $ 578,111       100.0 %   $ 591,985       100.0 %

Note 5 - Stock Based Compensation

The Company has stock based compensation plans, as described below. The Company recorded $19,200 and $37,500 in compensation expense related to stock based compensation plans for the three-month periods ended March 31, 2011 and 2010, respectively. The Company has a policy of issuing new shares to satisfy share option exercises, and does not expect to issue any shares during 2011 based on estimates of stock option and stock incentive plan exercises for that period.

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. There were no grants exercisable at March 31, 2011 under the Incentive Plan.

The following table shows activity for the three months ended March 31, 2011 for the Company’s Incentive Plan:

   
SOSAR (1)
   
RSU (2)
   
Restricted Stock
 
   
Awards
   
Weighted Avg.
   
Awards
   
Grant Date
   
Awards
   
Grant Date
 
   
Outstanding
   
Exercise Price
   
Outstanding
   
Fair Value
   
Outstanding
   
Fair Value
 
Balance at January 1
    -     $ -       -     $ -       -     $ -  
Awards granted
    87,250       3.35       28,000       3.35       25,500       3.35  
Awards forfeited
    -               -               (500 )     3.35  
Balance at March 31
    87,250     $ 3.35       28,000     $ 3.35       25,000     $ 3.35  
                                                 
(1)
Stock Only Stock Appreciation Rights
 
(2)
Restricted Stock Units
 

As of March 31, 2011, unrecognized compensation expense related to the Incentive Plan totaled $268,200. Costs for SOSARs are recognized over approximately three years. The compensation costs for RSUs are based on an expected level of achievement of performance targets as determined at the time of each grant, and are expected to be recognized over three years. Compensation costs for restricted stock grants will be recognized over two years.



The fair value of restricted stock grants is considered to be the market price of Company stock at the date of the award grant. The fair value of RSU grants is considered to be the market price of Company stock at the grant date, adjusted for an estimated probability of achieving performance targets. The Company has established three performance targets for 2011 grants. Those targets are based on the Company’s pre-tax, pre-provision return on average assets, return on average assets, and nonperforming assets as a percent of total assets. Each target is weighted equally, and target levels are based on United’s 2011 financial plan.

The fair value of each SOSAR grant is estimated on the grant date using the Black-Scholes option pricing model. Fair value of the March, 2011grant is based on the weighted-average assumptions shown in the table below.

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

The expected life of awards granted represents the period of time that awards are expected to be outstanding. Expected volatility is based on historical volatility of the Company’s stock and other factors. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

At March 31, 2011, the aggregate intrinsic value of SOSAR grants was $34,900. The weighted–average period over which nonvested SOSAR awards are expected to be recognized is 1.93 years.

Stock Options

Through December 31, 2009, the Company granted stock options under its 2005 Stock Option Plan (the "2005 Plan"), which is a non-qualified stock option plan as defined under Internal Revenue Service regulations. The shares of stock that are subject to options are the authorized and unissued shares of common stock of the Company. Under the 2005 Plan, directors and management of the Company and subsidiaries were given the right to purchase stock of the Company at the then-current market price at the time the option was granted. The options have a three-year vesting period, and with certain exceptions, expire at the end of ten years, three years after retirement or ninety days after other separation from the Company. The 2005 Plan expired effective January 1, 2010, and no additional options may be granted under the plan. No stock options were forfeited or exercised during the three-month period ended March 31, 2011. The table below provides information regarding stock options outstanding at March 31, 2011.

   
Options Outstanding
   
Options Exercisable
 
    Number     Weighted Average   Weighted Avg.     Number     Weighted Avg  
 Range of Exercise Prices
 
Outstanding
   
Remaining Contractual Life
 
Exercise Price
   
Outstanding
   
Exercise Price
 
 $6.00 to $32.14
    407,730       5.01  
Years
  $ 21.02       327,444     $ 23.68  



As of the end of the first quarter of 2011, unrecognized compensation expense related to the stock options totaled $46,455 and is expected to be recognized over eighteen months.

At March 31, 2011, the total options outstanding had no intrinsic value. Intrinsic value was determined by calculating the difference between the Company's closing stock price on March 31, 2011 and the exercise price of each option, multiplied by the number of in-the-money options held by each holder, assuming all option holders had exercised their stock options on March 31, 2011.

Note 6 - Loan Servicing

Loans serviced for others are not included in the accompanying consolidated financial statements. The unpaid principal balance of loans serviced for others was $686.7 million and $655.1 million at March 31, 2011 and December 31, 2010, respectively. The balance of loans serviced for others related to servicing rights that have been capitalized was $683.3 million at March 31, 2011 and $651.6 million at December 31, 2010, respectively.

Unamortized cost of loan servicing rights included in accrued interest receivable and other assets on the consolidated balance sheet, for the three month periods ended March 31, 2011 and 2010 are shown below.

   
Three Months Ended March 31,
 
In thousands of dollars
 
2011
   
2010
 
Balance at beginning of period
  $ 4,763     $ 3,775  
Amount capitalized
    437       287  
Amount amortized
    (196 )     (109 )
Balance at March 31
  $ 5,004     $ 3,953  

Activity in the valuation allowance was as follows:

   
Three Months Ended March 31,
 
In thousands of dollars
 
2011
   
2010
 
Balance at beginning of period
  $ -     $ 1  
Additions
    -       -  
Reductions
    -       (1 )
Balance at March 31
  $ -     $ -  

The fair value of servicing rights was as follows:

In thousands of dollars
 
3/31/11
   
12/31/10
 
Fair value, January 1
  $ 5,806     $ 4,535  
Fair value, end of period
  $ 6,308     $ 5,806  



Note 7 - Common Stock and Earnings Per Share

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

A reconciliation of basic and diluted earnings per share follows:

   
Three Months Endedc March 31,
 
In thousands, except per-share data
 
2011
   
2010
 
Net income (loss)
  $ 359     $ (809 )
Less:
               
Accretion of discount on preferred stock
    (26 )     (24 )
Dividends on preferred stock
    (258 )     (258 )
Income (loss) available to common shareholders
  $ 75     $ (1,091 )
             
Basic income (loss):
           
Weighted avg. common shares outstanding
    12,667       5,068  
Weighted avg. contingently issuable shares
    70       67  
Total weighted avg. shares outstanding
    12,736       5,135  
Basic income (loss) per share
  $ 0.01     $ (0.21 )
             
Diluted income (loss):
           
Weighted avg. common shares outstanding from basic earnings per share
    12,736       5,135  
Dilutive effect of stock incentive plans
    -       -  
Dilutive effect of warrants
    -       -  
Total weighted avg. shares outstanding
    12,736       5,135  
Diluted income (loss) per share
  $ 0.01     $ (0.21 )

A total of 407,730 and 424,803 shares, respectively, for the three month periods ended March 31, 2011 and 2010, subject to stock options granted, and 311,492 shares subject to warrants, are not included in the above calculations as they were non-dilutive as of March 31, 2011 and 2010.

Note 8 – Other Comprehensive Income

Other comprehensive income components and related taxes for the three month periods ended March 31, 2011 and 2010 were as follows:

   
Three Months Ended March 31,
 
In thousands of dollars
 
2011
   
2010
 
Net unrealized gain on securities available for sale
  $ 133     $ (14 )
Tax expense
    (45 )     5  
Other comprehensive income (loss)
  $ 88     $ (9 )



The components of accumulated other comprehensive income included in shareholders’ equity at March 31, 2011 and December 31, 2010 were as follows:

In thousands of dollars
 
3/31/11
   
12/31/10
 
Net unrealized gains on securities available for sale
  $ 1,073     $ 940  
Tax expense
    (364 )     (319 )
Accumulated other comprehensive income
  $ 709     $ 621  

Note 9 - Disclosures About Fair Value of Assets and Liabilities

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

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

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.



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 March 31, 2011 and December 31, 2010:

 
In thousands of dollars
       
Fair Value Measurements Using
 
March 31, 2011
 
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
Available for sale securities:
                       
U.S. Treasury and agency securities
  $ 45,215     $ -     $ 45,215     $ -  
Mortgage backed agency securities
    71,726       -       71,726       -  
Obligations of states and political subdivisions
    23,540       -       23,540       -  
Corporate, asset backed and other debt securities
    126       -       126       -  
Equity securities
    28       28       -       -  
Total available for sale securities
  $ 140,635     $ 28     $ 140,607     $ -  
                                 
December 31, 2010
         
Fair Value Measurements Using
 
Available for sale securities:
 
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
U.S. Treasury and agency securities
  $ 33,687     $ -     $ 33,687     $ -  
Mortgage backed agency securities
    66,098       -       66,098       -  
Obligations of states and political subdivisions
    24,605       -       24,605       -  
Corporate, asset backed and other debt securities
    126       -       126       -  
Equity securities
    28       28       -       -  
Total available for sale securities
  $ 124,544     $ 28     $ 124,516     $ -  

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

 
Impaired Loans (Collateral Dependent)
 
Loans for which it is 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. If the impaired loan is identified as collateral dependent, the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. 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.

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 March 31, 2011 and December 31, 2010:

         
Fair Value Measurements Using
 
In thousands of dollars
 
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
Impaired Loans (Collateral Dependent)
                       
March 31, 2011
  $ 20,540     $ -     $ -     $ 20,540  
December 31, 2010
    33,961       -       -       33,961  



The carrying amounts and estimated fair value of principal financial assets and liabilities at March 31, 2011 and December 31, 2010 were as follows:

   
March 31, 2011
   
December 31, 2010
 
In thousands of dollars
 
Carrying Value
   
Fair Value
   
Carrying Value
   
Fair Value
 
Financial Assets
                       
Cash and cash equivalents
  $ 137,985     $ 137,985     $ 106,222     $ 106,222  
Securities available for sale
    140,635       140,635       124,544       124,544  
FHLB Stock
    2,788       2,788       2,788       2,788  
Loans held for sale
    519       519       10,289       10,289  
Net portfolio loans
    552,917       557,031       566,822       571,830  
Accrued interest receivable
    2,948       2,948       2,777       2,777  
                                 
Financial Liabilities
                               
Total deposits
  $ (760,233 )   $ (764,688 )   $ (733,998 )   $ (738,117 )
Short term borrowings
    -       -       (1,234 )     (1,234 )
FHLB advances
    (29,321 )     (30,508 )     (30,321 )     (31,700 )
Accrued interest payable
    (551 )     (551 )     (612 )     (612 )

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 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.
   
 
Short Term Borrowings – The carrying amounts are reasonable estimates of the fair values of these instruments at the respective balance sheet dates.
   
 
FHLB Advances – The fair value is estimated by discounting future cash flows using current rates on advances with similar maturities.
   
 
 
Off-balance-sheet financial instruments – Commitments to extend credit, standby letters of credit and undisbursed loans are deemed to have no material fair value as such commitments are generally fulfilled at current market rates.

Note 10 – Accounting Developments

ASU No. 2010-20, Receivables (Topic 310):  Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. In July 2010, the Financial Accounting Standards board (“FASB”) issued ASU No. 2010-20, Receivables (Topic 310):  Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 requires that more information be disclosed about the credit quality of a company’s loans and the allowance for loan losses held against those loans. A company is required to disaggregate new and existing disclosure based on how it develops its allowance for loan losses and how it manages credit exposures. Existing disclosures to be presented on a disaggregated basis include a roll-forward of the allowance for loan losses, the related recorded investment in such loans, the nonaccrual status of loans, and impaired loans. Additional disclosure is also required about the credit quality indicators of loans by class at the end of the reporting period, the aging of past due loans, information about troubled debt restructurings, and significant purchases and sales of loans during the reporting period by class. For public companies, ASU 2010-20 requires certain disclosures as of the end of a reporting period effective for periods ending on or after December 15, 2010. Other required disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. The Company adopted the applicable required additional disclosures effective December 31, 2010, and adoption of these additional disclosures did not have a material effect on its financial position or results of operations.

ASU No. 2011-02; A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (“TDR”). In April, 2011, FASB issued ASU No. 2011-02, intended to provide additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. The amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and are to be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. Early adoption is permitted. The Company intends to adopt the methodologies prescribed by this ASU by the date required. Given the recency of this pronouncement, the Company is continuing to evaluate the impact of adoption of this ASU.

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 month periods ended March 31, 2011 and 2010.




United is a Michigan corporation headquartered in Ann Arbor, Michigan and is the holding company for UBT, a Michigan-chartered bank organized over 115 years ago. We are registered as a bank holding company under the Bank Holding Company Act of 1956. At March 31, 2011, we had total assets of approximately $885.5 million, deposits of approximately $760.2 million, and total shareholders' equity of approximately $92.8 million. Our common stock is quoted on the OTC Bulletin Board under the symbol "UBMI."

We have four primary lines of business: banking services, residential mortgage, wealth management and structured finance. Subject to our overall business strategy, each line of business is encouraged to be entrepreneurial in how it develops and implements its business. We believe that these four lines of business provide us with a diverse and strong core revenue stream that is unmatched by our community bank competitors and positions us well for future revenue growth and profitability. During the three month period ended March 31, 2011, our non-interest income equaled 34.7% of our operating revenues and for each of the last five years ended December 31, 2010 approximated 32.3% of our operating revenues. This diverse revenue stream has enabled us to recognize a pre-tax, pre-provision return on average assets of 1.43% for the three month period ended March 31, 2011. For additional information about our pre-tax, pre-provision income, please see "Earnings Summary and Key Ratios” under “Results of Operations” on Page 33.

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

Our mortgage company, United Mortgage Company, 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 have consistently been the most active originator of mortgage loans in our market area.

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 32.2% of our noninterest income for the three months ended March 31, 2011.

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.




Memorandum of Understanding

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

For additional information about the capital ratios of UBT, see the information under the heading "Capital Management" below, which information is incorporated here by reference.

Board Leadership

On October 21, 2010, our Board of Directors appointed James C. Lawson as Vice Chairman of the Board of the Company. Mr. Lawson has been identified by our Board of Directors as the intended successor to David S. Hickman as Chairman of the Board of Directors of the Company. Mr. Lawson's appointment is a component of the Board's succession plan to fill the position that will be vacated by Mr. Hickman upon his retirement. To facilitate an orderly transition, Mr. Lawson will work closely with Mr. Hickman, with the intent that he will succeed Mr. Hickman as Chairman of the Board following the 2011 annual meeting of shareholders.

Capital Management

In December, 2010, the Company closed its public offering of common stock. The net proceeds to the Company, after deducting underwriting discounts and commissions and offering expenses, were approximately $17.1 million. The Company has contributed $11.5 million of the net proceeds of the offering to the capital of the Bank to increase the Bank's capital and regulatory capital ratios. As a result of the additional capital, the Bank was in compliance with the capital requirements of its MOU with the FDIC and OFIR at December 31, 2010 and March 31, 2011. At March 31, 2011, the Bank’s Tier 1 leverage capital ratio was 9.17%, and its ratio of total capital to risk-weighted assets was 15.27%.


The Company produced consolidated net income of $359,000 in the first quarter of 2011, compared to a net loss for the first three months of 2010 of $809,000. Net income per share for the first quarter of 2011 was $0.01, compared to a loss of $.21 per share for the first quarter of 2010. Return on average shareholders’ equity for the first quarter of 2011 improved to 1.57% from -2.12% for the fourth quarter of 2010 and -4.05% for the first quarter of 2010.



Net revenue consists of net interest income plus noninterest income. The Company’s net revenue was up 3.6% in the first quarter of 2011 as compared to the same quarter of 2010. Most categories of noninterest income increased in the first quarter of 2011 compared to the same period of 2010, and total noninterest income for the quarter ended March 31, 2011 improved by 21.7% compared to the same quarter of 2010. During the three month period ended March 31, 2011, United’s noninterest income equaled 34.7% of operating revenues.

The Company’s expenses for the three month period ended March 31, 2011 also increased from the same period in 2010, with the largest increases in compensation expense and attorney and professional fees, while several other categories of expense declined. Noninterest expenses were up 7.3% in the first quarter of 2011 compared to the quarter ended March 31, 2010.

The Company’s provision for loan losses of $2.8 million for the first quarter of 2011 was at its lowest level in nine quarters. The Company’s provision for loan losses for the first quarter of 2011 continued its trend of covering net charge-offs.

Total consolidated assets of the Company were $885.5 million at March 31, 2011, up 2.8% from $861.7 million at December 31, 2010, and down 1.7% from $900.8 million at March 31, 2010. Gross portfolio loans of $578.1 million have declined in the first three months of 2011 and over the most recent twelve months as a result of slowing loan demand, charge-offs and the Company’s effective use of loan sales and servicing to mitigate credit and interest rate risk. The Company generally sells its fixed rate long-term residential mortgages on the secondary market, and retains adjustable rate mortgages in its loan portfolio. While the Company’s gross portfolio loans have declined by $55.9 million, or 8.8%, since March 31, 2010, the balance of loans serviced for others has increased by $138.2 million, or 25.4%, during the same time period.

The Company continued to hold elevated levels of investments, federal funds sold and cash equivalents in order to protect the balance sheet during this prolonged period of economic uncertainty. United’s balances in federal funds sold and other short-term investments were $126.2 million at March 31, 2011, compared to $95.6 million at December 31, 2010 and $115.0 million at March 31, 2010. Securities avaiable for sale of $140.6 million at March 31, 2011 were up 12.9% from December 31, 2010 and were up 45.8% from March 31, 2010 levels.

Total deposits of $760.2 million at March 31, 2011 were up $26.2 million, or 3.6%, from $734.0 million at December 31, 2010, with substantially all of the increase in non-interest bearing deposit balances, which accounted for 17.7% of total deposits at March 31, 2011. The majority of the Bank’s deposits are derived from core client sources, relating to long-term relationships with local individual, business and public clients. Public clients include local government and municipal bodies, hospitals, universities and other educational institutions. As a result of its strong core funding, the Company’s cost of interest-bearing deposits was 0.92% for the first quarter of 2011, down from 1.29% for the first quarter of 2010.

The Company’s ongoing proactive efforts to resolve nonperforming loans have contributed to the Company’s improving credit quality trends of the past few quarters. Within the Company’s loan portfolio, $27.8 million of loans were considered nonperforming at March 31, 2011, compared to $29.2 million at December 31, 2010 and $31.6 million as of March 31, 2010. Total nonperforming loans as a percent of total portfolio loans declined from 4.99% at the end of March, 2010 to 4.80% at March 31, 2011. 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 March 31, 2011 and 2010 were $18.5 million and $17.5 million, respectively.

The Company’s ratio of allowance for loan losses to total loans at March 31, 2011 was 4.36%, and covered 90.7% of nonperforming loans, compared to 3.37% and 67.5%, respectively, at March 31, 2010. The Company’s allowance for loan losses increased by $3.8 million, or 18.0%, from March 31, 2010 to March 31, 2011. Net charge-offs of $2.8 million for the first three months of 2011 were 15.0% below the $3.5 million charged off in the first quarter of 2010.

 

Securities

Balances in the securities portfolio increased in recent periods, generally reflecting deposit growth in excess of loan growth. The makeup of the Company’s investment portfolio evolves with the changing price and risk structure, and liquidity needs of the Company. The table below reflects the carrying value of various categories of investment securities of the Company, along with the percentage composition of the portfolio by type as of March 31, 2011 and December 31, 2010.

   
March 31, 2011
   
December 31, 2010
 
In thousands of dollars
 
Balance
   
% of total
   
Balance
   
% of total
 
U.S. Treasury and agency securities
  $ 45,215       32.2 %   $ 33,687       27.0 %
Mortgage backed agency securities
    71,726       51.0 %     66,098       53.1 %
Obligations of states and political subdivisions
    23,540       16.7 %     24,605       19.8 %
Corporate, asset backed, and other debt securities
    126       0.1 %     126       0.1 %
Equity securities
    28       0.0 %     28       0.0 %
Total Investment Securities
  $ 140,635       100.0 %   $ 124,544       100.0 %

Investments in U.S. Treasury and agency securities are considered to possess low credit risk. Obligations of U.S. government agency mortgage-backed securities possess a somewhat higher interest rate risk due to certain prepayment risks. The municipal portfolio contains a small level of geographic risk, as approximately 2.5% of the investment portfolio is issued by political subdivisions located within Lenawee County, Michigan and 3.7% in Washtenaw County, Michigan. The Company's portfolio contains no mortgage-backed securities or structured notes that the Company believes to be “high risk.” The Bank’s investment in local municipal issues also reflects our commitment to the development of the local area through support of its local political subdivisions.

Management believes that the unrealized gains and losses within the investment portfolio are temporary, since they are a result of market 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 (losses) in each category of the portfolio at March 31, 2011 and December 31, 2010.



 
 
Unrealized gains (losses)in thousands of dollars
 
3/31/11
   
12/31/10
   
Change
 
U.S. Treasury and agency securities
  $ (196 )   $ (210 )   $ 14  
Mortgage backed agency securities
    514       384       130  
Obligations of states and political subdivisions
    753       764       (11 )
Equity securities
    2       2       -  
Total investment securities
  $ 1,073     $ 940     $ 133  
 
 
FHLB Stock

The Bank is a member of the Federal Home Loan Bank of Indianapolis (“FHLBI”) and holds a $2.8 million investment in stock of the FHLBI. The investment is carried at par value, as there is not an active market for FHLBI stock. If total Federal Home Loan Bank gross unrealized losses were deemed “other than temporary” for accounting purposes, this would significantly impair the Federal Home Loan Bank capital levels and the resulting value of FHLBI stock. The FHLBI reported a profit of $111 million for 2010, and continues to pay dividends on its stock.1 The Company regularly reviews the credit quality of FHLBI stock for impairment, and determined that no impairment of FHLBI stock was necessary as of March 31, 2011.

Loans

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

   
Year to Date
   
Twelve-Month
 
In thousands of dollars
 
Change
   
Percent
   
Change
   
Percent
 
Personal
  $ (148 )     -0.1 %   $ (3,161 )     -2.9 %
Business, including commercial mortgages
    (10,269 )     -2.9 %     (35,793 )     -9.4 %
Tax exempt
    (34 )     -1.6 %     (841 )     -28.3 %
Residential mortgage
    (1,268 )     -1.5 %     (2,291 )     -2.6 %
Construction and development
    (2,114 )     -5.1 %     (13,607 )     -25.7 %
Deferred loan fees and costs
    (41 )     -7.9 %     (210 )     -30.6 %
Total portfolio loans
  $ (13,874 )     -2.3 %   $ (55,903 )     -8.8 %

Loan balances have declined by $13.9 million, or 2.3%, in the first quarter of 2011, and $55.9 million, or 8.8%, over the twelve months ended March 31, 2011. Personal loans on the Company’s balance sheet included home equity lines of credit, direct and indirect loans for automobiles, boats and recreational vehicles, and other items for personal use. Personal loan balances have declined by 0.1% in the first quarter of 2011 and 2.9% in the past twelve months. Business loan balances were down 2.9% during the three months ended March 31, 2011, and declined by 9.4% over the twelve months ended March 31, 2011. The decline in business loans reflects a reduction in demand, primarily relating to the current economic conditions, as well as write-downs, charge-offs and payoffs.

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


 
1 Federal Home Loan Bank of Indianapolis, Form 10-K for the year ended December 31, 2010.


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. The Bank continues to experience significant volume in residential real estate mortgage financing, and this included the refinancing of some portfolio loans and sale of those loans on the secondary market. Portfolio balances of residential mortgages decreased by 1.5% in the first quarter of 2011 and 2.6% in the twelve months ended March 31, 2011.

The Bank’s loan portfolio includes $8.0 million of purchased participations in loans originated by other institutions. These participations represent 1.4% of total loans. Of those participation loans, 81.3% of the outstanding balances are the result of participations purchased from other Michigan community banks.

Outstanding balances of loans for construction and development declined by $2.1 million, or 5.1%, in the first quarter of 2011 and $13.6 million, or 25.7%, since March 31, 2010. The change in balances reflects a decrease in the amount of individual construction loan volume, the shift of some construction loans to permanent financing, and the payoff or charge-off of a number of construction and development loans. Residential construction loans generally convert to residential mortgages to be retained in the Bank's portfolios or to be sold in the secondary market, while commercial construction loans generally will be converted to commercial mortgages.

Credit Quality

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
 
3/31/11
   
12/31/10
   
9/30/10
   
6/30/10
   
3/31/10
 
Nonaccrual loans
  $ 25,451     $ 28,661     $ 27,680     $ 30,319     $ 29,712  
Accruing loans past due 90 days or more
    2,326       583       1,926       1,557       1,930  
Total nonperforming loans
    27,777       29,244       29,606       31,876       31,642  
Nonperforming loans % of total portfolio loans
    4.80 %     4.94 %     4.90 %     5.12 %     4.99 %
Allowance coverage of nonperforming loans
    90.7 %     86.0 %     79.3 %     73.3 %     67.5 %
                                         
Other assets owned
    4,641       4,304       3,686       3,080       3,353  
Total nonperforming assets
  $ 32,418     $ 33,548     $ 33,292     $ 34,956     $ 34,995  
Nonperforming loans % of total assets
    3.66 %     3.89 %     3.90 %     4.12 %     3.88 %
                                         
Loans delinquent 30-89 days
  $ 5,939     $ 7,838     $ 10,019     $ 11,048     $ 11,369  

Accruing restructured loans
                             
Business, including commercial mortgages
  $ 10,551     $ 10,382     $ 11,275     $ 11,425     $ 11,546  
Construction and development
    4,401       4,045       4,058       4,058       4,086  
Residential mortgage
    3,504       2,844       1,911       1,916       1,885  
Total accruing restructured loans
  $ 18,456     $ 17,271     $ 17,244     $ 17,399     $ 17,517  



Total nonaccrual loans have decreased by $3.2 million, or 11.2%, since the end of 2010, while accruing loans past due 90 days or more have increased by $1.7 million for the same period. The decrease in nonaccrual loans principally reflects the payoff or charge-off of some nonperforming loans, net of the move of some loans to nonaccrual status. Loan workout and collection efforts continue with all delinquent clients, in an effort to bring them back to performing status.

Total nonperforming loans declined by $1.5 million, or 5.0%, since December 31, 2010 and $3.9 million, or 12.2% since March 31, 2010. Total nonperforming loans as a percent of total portfolio loans improved from 4.99% at March 31, 2010 and 4.94% at the end of 2010 to 4.80% at March 31, 2011, and the allowance coverage of nonperforming loans improved from 67.5% at March 31, 2010 and 86.0% at December 31, 2010 to 90.7% at March 31, 2011. The continued decline in nonperforming loans is a result of the Company’s ongoing proactive efforts to resolve nonperforming loans by bringing borrowers current.

Other assets owned includes other real estate owned and other repossessed assets, including automobiles, boats and other personal property. Holdings of other assets owned increased by $337,000 since the end of 2010 as the Bank has assumed ownership of an increased number of properties. At March 31, 2011, other real estate owned included thirty-nine properties that were acquired through foreclosure or in lieu of foreclosure. The properties included twenty-five commercial properties, eight of which were the result of out-of-state loan participations, and fourteen residential properties. One commercial property is leased, and all are for sale. Also included in these totals at March 31, 2011 are other assets owned of $12,000, consisting of one boat and one vehicle, both of which are also for sale.

The following table reflects the changes in other assets owned during 2011.

In thousands of dollars
 
ORE
   
Other Assets
   
Total
 
 Balance at January 1
  $ 4,278     $ 26     $ 4,304  
 Additions
    1,296       50       1,346  
 Sold
    (895 )     (66 )     (961 )
 Gains (losses) on sale and (write-downs)
    (50 )     2       (48 )
 Balance at March 31
  $ 4,629     $ 12     $ 4,641  
 
Accruing restructured loans of $18.5 million at March 31, 2011 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 $15.0 million 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. This category also includes $4.4 million of construction and development loans that have been renewed as interest only, generally for a period of up to one year, to assist the borrower. The average yield on modified commercial loans was 5.96%, compared to 5.63% earned on the entire commercial loan portfolio in the first quarter of 2011.

The second category included in accruing restructured loans consists of residential mortgage loans whose terms have been restructured at less than market terms and include rate modifications and forbearance. This category consist of fifteen loans for a total of $3.5 million at


March 31, 2011, all of which are the result of residential mortgage loans modified as part of United’s mortgage modification program implemented in 2010.

Additional information regarding accruing restructured loans is included in Note 2, Allowance for Loan Losses, to the consolidated financial statements.

The Company’s allowance for loan losses increased by $31,000 during the first three months of 2011 and $3.8 million over the twelve months ended March 31, 2011. A significant portion of the increase occurred in the second quarter of 2010, primarily as a result of increases in certain loss factors assumed in the Company’s general valuation allowance analysis. The allowance as a percent of total loans has increased from 3.37% at March 31, 2010 and 4.25% at December 31, 2010 to 4.36% at March 31, 2011. Management believes that the Company's allowance for loan losses provides for currently estimated losses inherent in its portfolio.

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, $47.8 million of impaired loans have been identified as of March 31, 2011, down from $48.8 million as of December 31, 2010, and the specific allowance for impaired loans was $9.2 million at March 31, 2011, relatively unchanged from December 31, 2010. 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 the provision made in connection with impaired loans reflects the amount management believes to be necessary to maintain the allowance for loan losses at an adequate level, based upon the Bank’s current analysis of losses inherent in its loan portfolios.

Business loans carry the largest balances per loan, and therefore, 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.

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

The Bank’s portfolio of residential mortgages consists of loans to finance 1-4 family residences, second homes, vacation homes, and residential investment properties. In the second quarter of 2010, the Company began recognizing losses on specific residential mortgage loans in the process of foreclosure at an earlier point in the foreclosure process, in accordance with recently provided regulatory guidance. This resulted in an increase in the portion of the Company’s


allowance for loan losses determined by measurement of the impairment in groups of loans with similar characteristics, and resulted in a corresponding increase in the Company’s provision for loan losses during 2010 of approximately $667,000.

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 consist of loans for automobiles, boats and manufactured housing, and make up a small percent of the personal loans.

Deposits

United internally funds its operations through a large, stable base of core deposits that provides cost-effective funding for its lending operations. The majority of deposits are derived from core client sources, relating to long term relationships with local individual, business and public clients. Public clients include local governments and municipal bodies, hospitals, universities and other educational institutions. At March 31, 2011, core deposits accounted for 98.0% of total deposits, as compared to 97.3% at December 31, 2010 and 95.2% at March 31, 2010. For this presentation, core deposits consist of total deposits less national certificates of deposit and brokered deposits. Core deposits include CDARS deposits as they represent deposits originated in the Bank’s market area.

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

In thousands of dollars
 
Change this Quarter
   
12-Month Change
 
Noninterest bearing
  $ 21,265       18.8 %   $ 32,630       32.0 %
Interest bearing deposits
    4,970       0.8 %     (54,333 )     -8.0 %
Total deposits
  $ 26,235       3.6 %   $ (21,703 )     -2.8 %

Deposit balances have grown by $26.2 million, or 3.6%, in the first quarter of 2011, but have declined by $21.7 million, or 2.8%, during the twelve months ended March 31, 2011. Of that, substantially all of the decline was in the second quarter of 2010. In the most recent quarter, demand deposit balances increased by $21.3 million, while all other categories of deposits grew by $5.0 million.

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. The Bank's deposit rates are consistently competitive with other banks in its market areas.

Noninterest bearing deposits made up 17.7% of total deposits at March 31, 201, compared to 15.4% at December 31, 2010. The table below shows the makeup of the Company’s deposits at March 31, 2011 and December 31, 2010.



 
 
Percentage Makeup of Deposit Portfolio
 
3/31/11
   
12/31/10
 
Noninterest bearing
    17.7 %     15.4 %
Interest bearing deposits
    82.3 %     84.6 %
Total deposits
    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 also 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.

At December 31, 2010, the Company’s balance sheet included short-term borrowings representing the secured borrowing portion of SBA 7a loans held for sale, as a result of adoption of ASU 2009-16 in 2010. Qualifying loans were carried as loans held for sale, while the sold portion of the loans was carried as secured borrowing for a 90-day period. In the first quarter of 2011, the Company modified its SBA 7a loan sales contract to eliminate a 90-day warranty period to the purchaser of the loans, eliminating the requirement to record a liability for the sold portion of the loans, and the Company’s balance sheet included no short term borrowings related to SBA loans at March 31, 2011.

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

 

Earnings Summary and Key Ratios

The Company achieved consolidated net income of $359,000 in the first quarter of 2011, as a result of strong pre-tax, pre-provision income and reduced levels of provision to the Company’s allowance for loan losses. This compares to a consolidated net loss for the first three months of 2010 of $809,000.

Net interest margin declined from 3.69% for the quarter ended March 31, 2010 to 3.62% for the quarter ended March 31, 2011. For the first three months of 2011, net interest income of $7.4 million was down 4.0% compared to the same period of 2010. Noninterest income of $3.9 million for the most recent quarter improved by 21.7% compared to the first quarter of 2010, and noninterest income represented 34.7% of the Company’s net revenues for the first quarter of 2011, compared to 29.5% for the same period of 2010.



Total noninterest expense for the first quarter of 2011 was substantially unchanged from the fourth quarter of 2010, but was up 7.3% over the first three months of 2010. Contributing to the increase were higher costs associated with salaries and employee benefits, and professional fees and expenses related to nonperforming loans. Salaries and employee benefit costs for the first three months of 2011 reflected in part, the reinstatement of the Company’s 401(k) match effective January 1, 2011, and commission costs relating to an increased volume of loans originated and sold on the secondary market during the quarter.

The Company’s provision for loan losses of $2.8 million in the first quarter of 2011 was down from $4.8 million for the first quarter of 2010 and $4.9 million for the fourth quarter of 2010. Return on average assets (“ROA”) for the first quarter of 2011 was 0.17%, compared to -0.36% for the first quarter of 2010. Return on average shareholders’ equity (“ROE”) for the most recent quarter was 1.57%, compared to -4.05% for the same quarter of 2010.

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.

   
2011
   
2010
 
in thousands of dollars, where appropriate
 
1st Qtr
   
4th Qtr
   
3rd Qtr
   
2nd Qtr
   
1st Qtr
 
Net interest income
  $ 7,402     $ 7,735     $ 7,964     $ 7,677     $ 7,707  
Provision for loan losses
    2,800       4,930       3,150       8,650       4,800  
Noninterest income
    3,925       4,553       4,812       3,709       3,224  
Noninterest expense
    8,218       8,225       8,315       8,298       7,659  
Federal income tax provision
    (50 )     (440 )     284       (2,063 )     (719 )
Net income (loss)
    359       (427 )     1,027       (3,499 )     (809 )
Earnings (loss) per common share
  $ 0.01     $ (0.11 )   $ 0.14     $ (0.74 )   $ (0.21 )
Return on average assets (a)
    0.17 %     -0.20 %     0.47 %     -1.60 %     -0.36 %
Return on average shareholders' equity (a)
    1.57 %     -2.12 %     5.25 %     -17.56 %     -4.05 %
Net interest margin
    3.62 %     3.81 %     3.97 %     3.76 %     3.69 %
Efficiency Ratio (On tax equivalent basis)
    71.8 %     66.3 %     64.5 %     72.1 %     69.0 %
                                         
 (a)
annualized
                                       

In an attempt to evaluate the trends of net interest income, noninterest income and noninterest expense, the Company calculates pre-tax, pre-provision income and return on average assets. This calculation adjusts net income before tax by the amount of the Company’s provision for loan losses. While this information is not consistent with, or intended to replace, presentation under generally accepted accounting principles, it is presented here for comparison.

The Company's pre-tax, pre-provision ROA declined slightly from 1.44% for the first quarter of 2010 to 1.43% for the quarter ended March 31, 2011. The following table shows the calculation and trend of pre-tax, pre-provision income and return on average assets for the three month periods ended March 31, 2011 and 2010.



 
   
Three Months Ended March 31,
 
In thousands of dollars
 
2011
   
2010
   
Change
 
 Interest income
  $ 9,089     $ 10,248       -11.3 %
 Interest expense
    1,687       2,541       -33.6 %
Net interest income
    7,402       7,707       -4.0 %
 Noninterest income
    3,925       3,224       21.7 %
 Noninterest expense
    8,218       7,659       7.3 %
 Pre-tax, pre-provision income
    3,109       3,272       -5.0 %
 Pre-tax, pre-provision ROA
    1.43 %     1.44 %     -0.01 %
Reconcilement to GAAP income:
 
 Provision for loan losses
    2,800       4,800          
 Income tax benefit
    (50 )     (719 )        
 Net income (loss)
  $ 359     $ (809 )        

Net Interest Income

Declining interest rates over the past two years have reduced the Company’s yield on earning assets, but have also resulted in a reduction in its cost of funds. Interest income of $9.0 million decreased by 11.3% in the first quarter of 2010 compared to the same periods in 2010, while interest expense of $1.7 million decreased 33.6% for the same period. This resulted in a decline in net interest income of 4.0% for the first quarter of 2011 when compared to the comparable period of 2010.

The Company’s yield on earning assets and its cost of funds both declined in the first quarter of 2011 compared to the quarter ended March 31, 2010. Yields on loans are generally lower, and the Company’s average balances in loans decreased, while taxable investments increased compared to the comparable quarter of 2010. At the same time, the Bank has continued to reduce its average balances of FHLB advances and higher-cost deposits. Net interest margin of 3.62% for the first quarter of 2011 was down from 3.69% for the first quarter of 2010.

The following tables provide a summary of the various components of net interest income, as well as the results of changes in balance sheet makeup that have resulted in the changes in spread and net interest margin for the three month periods ended March 31, 2011 and 2010.

   
Three Months Ended March 31,
 
   
2011
   
2010
 
Dollars in thousands
 
Average Balance
   
Interest (b)
   
Yield/ Rate (c)
   
Average Balance
   
Interest (b)
   
Yield/ Rate (c)
 
Assets
 
Interest earning assets (a)
                                   
Federal funds & equivalents
  $ 118,251     $ 74       0.25 %   $ 116,811     $ 73       0.25 %
Taxable investments
    109,758       604       2.23 %     62,722       454       2.93 %
Tax exempt securities (b)
    23,841       310       5.19 %     31,271       471       6.02 %
Taxable loans
    587,822       8,174       5.64 %     651,945       9,365       5.83 %
Tax exempt loans (b)
    2,152       44       8.13 %     2,990       62       8.34 %
Total int. earning assets (b)
    841,824       9,206       4.43 %     865,739       10,425       4.88 %
Less allowance for loan losses
    (25,290 )                     (20,948 )                
Other assets
    63,161                       64,406                  
Total Assets
  $ 879,695                     $ 909,197                  



   
Three Months Ended March 31,
 
   
2011
   
2010
 
dollars in thousands
 
Average Balance
   
Interest (b)
   
Yield/ Rate (c)
   
Average Balance
   
Interest (b)
   
Yield/ Rate (c)
 
Liabilities and Shareholders' Equity
 
NOW and savings deposits
  $ 351,703       262       0.30 %   $ 358,764       402       0.45 %
Other interest bearing deposits
    269,955       1,148       1.72 %     329,454       1,791       2.20 %
Total int. bearing deposits
    621,658       1,410       0.92 %     688,218       2,193       1.29 %
Short term borrowings
    763       11       6.00 %     -       -       0.00 %
Other borrowings
    30,199       266       3.57 %     36,981       347       3.81 %
Total int. bearing liabilities
    652,620       1,687       1.05 %     725,199       2,540       1.42 %
Noninterest bearing deposits
    131,066                       99,076                  
Other liabilities
    3,185                       3,850                  
Shareholders' equity
    92,824                       81,072                  
Total Liabilities and
                                               
Shareholders' Equity
  $ 879,695                     $ 909,197                  
Net interest income (b)
            7,519                       7,885          
Net spread (b)
              3.38 %                     3.46 %
Net yield on interest earning assets (b)
              3.62 %                     3.69 %
Tax equivalent adjustment on interest income
      (117 )                     (178 )        
Net interest income per income statement
    $ 7,402                     $ 7,707          
Ratio of interest earning assets to interest bearing liabilities
      1.29                       1.19  
 
(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
 

The Company’s tax-equivalent yield on interest-earning assets decreased from 4.88% for the first quarter of 2010 to 4.43% for the quarter ended March 31, 2011. At the same time, the Company’s cost of funds decreased from 1.42% to 1.05% in the same periods, resulting in a reduction in net spread from 3.46% for the first quarter of 2010 to 3.38% for the three months ended March 31, 2011.

Provision for Loan Losses

The Company’s provision for loan losses for the first quarter of 2011 was $2.8 million, down 41.7% from $4.8 million for the first quarter of 2010. For both of these periods, the Company’s provision for loan losses exceed its net charge offs during the period. The provision provides for probable incurred losses inherent in the current portfolio.

While the local real estate markets and the economy in general have experienced some signs of stabilization, the loan portfolio of the Bank is affected by loans to a number of residential real estate developers that continue to struggle to meet their financial obligations. Loans in the Bank's residential land development and construction portfolios are secured by unimproved and improved land, residential lots, and single-family homes and condominium units. In addition, loans secured by commercial real estate are continuing to experience stresses resulting from the current economic conditions.


Generally, lot sales by the developers/borrowers continue to take place at a greatly reduced pace and at reduced prices. As home sales volumes have declined, income of residential developers, contractors and other real estate-dependent borrowers has also been reduced. 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 provision for loan losses is included in the “Credit Quality” discussion above.

Noninterest Income
Total noninterest income improved by 21.7% for the first quarter of 2011 compared to the same period of 2010. The following table summarizes changes in noninterest income by category for the three month periods ended March 31, 2011 and 2010.

   
Three Months Ended March 31,
 
In thousands of dollars
 
2011
   
2010
   
Change
 
Service charges on deposit accounts
  $ 503     $ 539       -6.7 %
Wealth Management fee income
    1,263       1,043       21.1 %
Income from loan sales and servicing
    1,311       892       47.0 %
ATM, debit and credit card fee income
    513       445       15.3 %
Income from bank-owned life insurance
    105       113       -7.1 %
Other income
    230       192       19.8 %
Total noninterest income
  $ 3,925     $ 3,224       21.7 %

Service charges on deposit accounts were down 6.7% in the first quarter of 2011compared to the same period a year earlier. Substantially all of the decline was due to a reduction in non-sufficient funds and overdraft fees collected.

The Wealth Management Group of UBT provides a relatively large component of the Company's noninterest income. Wealth Management Group income includes trust and investment management fee income and income from the sale of non-deposit investment products within the Bank’s offices. Wealth Management Group income was improved by 21.1% in the first quarter of 2010 compared to 2010.

Income from loan sales and servicing continued at elevated levels during the first quarter of 2011, and was 47.0% above the levels achieved in the first quarter of 2010. While the Company’s volume of rate-driven refinancing of residential mortgages had varied over the past eighteen months, mortgage origination and sale activity was strong in the first quarter of 2011, resulting in improved levels of income from the sales and servicing of residential mortgage loans for the quarter. 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 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. Loans serviced consist primarily of residential mortgages sold on the secondary market. The Bank also originates, sells and


services SBA loans through its structured finance group, United Structured Finance Company (“USFC”). SBA loan origination volume increased in 2011, resulting in an increase in the Company’s income from the origination, sales and servicing of SBA loans. During the first quarter of 2011, fee income of $143,200 that would previously have been deferred to the second quarter of 2011 under ASU 2009-16 was recognized, as a result of the elimination of the 90-day warranty period to borrowers in its sales contracts for SBA 7a loans.

The guaranteed portion of SBA loans originated by 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 following table shows the breakdown of income from loan sales and servicing between residential mortgages and USFC.

   
Three Months Ended March 31,
 
In thousands of dollars
 
2011
   
2010
 
Residential mortgage sales and servicing
  $ 1,009     $ 864  
USFC commercial loan sales and servicing
    302       28  
Total income from loan sales and servicing
  $ 1,311     $ 892  

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 was up 15.3% in the first quarter of 2011 compared to the same period of 2010. Other income includes income from various fee-based banking services, such as sale of official checks, wire transfer fees, safe deposit box income, sweep account and other fees, as well as income from bank-owned life insurance. Total other income was up 19.8% in the first quarter of 2011 compared to 2010, although the dollar amount of the increase is relatively small.

Noninterest Expense

The following table summarizes changes in the Company's noninterest expense by category for the three month periods ended March 31, 2011 and 2010.

   
Three Months Ended March 31,
 
In thousands of dollars
 
2011
   
2010
   
Change
 
Salaries and employee benefits
  $ 4,575     $ 3,938       16.2 %
Occupancy and equipment expense, net
    1,252       1,336       -6.3 %
External data processing
    320       294       8.8 %
Advertising and marketing
    160       167       -4.2 %
Attorney, accounting and other professional fees
    433       351       23.4 %
Director fees
    102       88       15.9 %
Expenses relating to ORE property
    257       315       -18.4 %
FDIC insurance premiums
    431       437       -1.4 %
Other expenses
    688       733       -6.1 %
Total noninterest expense
  $ 8,218     $ 7,659       7.3 %



While several categories of noninterest expense declined during the first quarter of 2011 compared to the same period of 2010, total noninterest expense increased by 7.3%. The largest noninterest expense increase was in salaries and employee benefits, which increased by 16.2% over the three month period one year earlier. The increase reflects, in part, the reinstatement of the Company’s match portion of its 401(k) effective January 1, 2011, increased health and life insurance premiums, and 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 future anticipated growth.

Occupancy and equipment expenses were down in the first quarter of 2011 compared to the same period of 2011. External data processing costs increased, while advertising and marketing expenses decreased by 4.2% for the first quarter of 2011 compared to the same period last year. Attorney, accounting and other professional fees were up 23.4% for the first quarter of 2011 compared to the same period of 2010. A significant portion of the increase represents attorney and appraisal fees related to resolution of the Bank’s credit issues.

Expenses related to ORE property continue to make up a significant portion of the Company’s expenses. However, the level of those expenses declined during the first quarter of 2011, decreasing by 18.4% compared to the first quarter of 2010. 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. Deterioration in the value of these properties resulted in losses of $49,700 in the first quarter of 2011. Assets were written down to their estimated fair value as a result of a decline in prevailing real estate prices and the Bank’s experience with increased foreclosures resulting from the weakened economy.

FDIC insurance costs for the first quarter of 2011 were relatively unchanged compared to the first quarter of 2010. Other expenses were down 6.1% in the first three months of 2011 compared to the same period of 2010, with those expenses including shareholder and compliance expense, among others.

Federal Income Tax

The Company’s pre-tax income was positive for the first quarter of 2011, but was less than its tax exempt income, resulting in a small tax benefit for the quarter. The effective tax rate of 47.1% for the first quarter of 2010 was a calculated benefit based upon a pre-tax loss. The differences between the effective rates and the Company’s expected tax rate were primarily due to the benefit from tax-exempt income

The Company’s net deferred tax asset was $9.6 million at March 31, 2011. 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. Based on the levels of taxable income in prior years, the significant improvement in operating results in the first quarter of 2011 and full-year 2010 compared to 2009, and the Company’s expectation of a return to profitability in future years as a result of strong core earnings, Management has determined that no valuation allowance was required at March 31, 2011.




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 2011 and 2010, 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 $126.2 million at March 31, 2011, compared to $95.6 million at December 31, 2010 and $115.0 million at March 31, 2010. 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 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 2011 or 2010.

The Company’s balance sheet at December 31, 2010 included short-term borrowings representing the secured borrowing portion of SBA 7a loans held for sale, as a result of adoption of ASU 2009-16 in 2010. Qualifying loans are carried as loans held for sale, while the sold portion of the loans was carried as secured borrowing for a 90-day period. In the first quarter of 2011, the Company eliminated the 90-day warranty period to borrowers in its sales contracts for SBA 7a loans, and there were no short-term borrowings on the books of the Company at March 31, 2011.

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. During 2011, the Bank procured no new advances and repaid $1.0 million in matured borrowings, resulting in a decrease in total FHLBI borrowings outstanding for the first quarter of the year.

Regulatory Capital

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


the Company and the Bank to maintain minimum ratios of Total and Tier I capital to risk-weighted assets and of Tier I capital to average assets.

UBT is party to the MOU as described under “Other Developments – Memorandum of Understanding” on Page 25 hereof. The Bank has continued to maintain its ratio of total capital to risk-weighted assets above the prescribed minimum level of 12%. The Bank did not reach the Tier 1 leverage capital ratio level required to comply with the MOU dated January 15, 2010 within the timeframe provided, but was in compliance with all capital ratio requirements at December 31, 2010 and March 31, 2011.

The following table shows information about the Company's and the Banks' capital levels compared to regulatory requirements at March 31, 2011 and December 31, 2010.
 
   
Actual
   
Regulatory Minimum for Capital Adequacy (1)
   
Regulatory Minimum to be Well Capitalized (2)
   
Required by MOU (3)
 
    $ 000    
%
    $ 000    
%
    $ 000    
%
    $ 000    
%
 
As of March 31, 2011
 
Tier 1 Capital to Average Assets
 
 
Consolidated
  $ 87,460       10.0 %   $ 35,001       4.0 %     N/A       N/A       N/A       N/A  
 
Bank
    80,170       9.2 %     34,971       4.0 %     43,714       5.0 %     78,684       9.0 %
                                                                 
Tier 1 Capital to Risk Weighted Assets
 
 
Consolidated
    87,460       15.2 %     22,955       4.0 %     N/A       N/A       N/A       N/A  
 
Bank
    80,170       14.0 %     22,938       4.0 %     34,407       6.0 %     N/A       N/A  
                                                                 
Total Capital to Risk Weighted Assets
 
 
Consolidated
    94,856       16.5 %     45,911       8.0 %     N/A       N/A       N/A       N/A  
 
Bank
    87,561       15.3 %     45,876       8.0 %     57,345       10.0 %     68,814       12.0 %
                                                                 
As of December 31, 2010
 
Tier 1 Capital to Average Assets
 
 
Consolidated
  $ 88,022       10.2 %   $ 34,380       4.0 %     N/A       N/A       N/A       N/A  
 
Bank
    78,806       9.2 %     34,232       4.0 %     42,791       5.0 %     77,023       9.0 %
                                                                 
Tier 1 Capital to Risk Weighted Assets
 
 
Consolidated
    88,022       15.0 %     23,510       4.0 %     N/A       N/A       N/A       N/A  
 
Bank
    78,806       13.4 %     23,491       4.0 %     35,237       6.0 %     N/A       N/A  
                                                                 
Total Capital to Risk Weighted Assets
 
 
Consolidated
    95,589       16.3 %     47,020       8.0 %     N/A       N/A       N/A       N/A  
 
Bank
    86,367       14.7 %     46,982       8.0 %     58,728       10.0 %     70,474       12.0 %
                                                                 
 (1)
Represents minimum required to be categorized as adequately capitalized under Federal regulatory requirements.
 
 (2)
Represents minimum generally required to be categorized as well-capitalized under Federal regulatory prompt corrective action provisions. The bank is currently subject to higher requirements by its regulators.
 
 (3)
Represents requirements by the Bank's regulators under terms of the MOU.
 
 
 

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-34 of the Company's Annual Report on Form 10-K for the year ended December 31, 2010. Certain policies are considered critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the Company’s financial statements. See “Forward-Looking Statements.”

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4 – Controls and Procedures

Internal Control

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

There have been no changes in the Company's internal control over financial reporting that occurred during the quarter ended March 31, 2011 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.


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.




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.

April 22, 2011


  /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)



 
Exhibit
 Description
2.1   
Agreement of Consolidation. Previously filed with the Commission on January 15, 2010 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 2.1. Incorporated here by reference.
 
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   
Warrant, dated January 16, 2009, issued to the United States Department of the Treasury. Previously filed with the Commission on January 16, 2009 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 4.2. Incorporated here by reference.
 
4.5   
Certificate of Designations for Fixed Rate Cumulative Perpetual Preferred Stock, Series A. Exhibit 3.3 is incorporated here by reference.
 
10.1   
Form of Restricted Stock Agreement
 
10.2   
Form of Restricted Stock Unit Agreement
 
10.3   
Form of Stock Only Stock Appreciation Rights Agreement
 
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.