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, 2012

_________________________

Commission File #0-16640

(Exact name of registrant as specified in its charter)

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

2723 South State Street, Ann Arbor, MI 48104

(Address of principal executive offices, including Zip Code)

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes 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 þNo o

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

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

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

As of May 7, 2012, there were outstanding 12,700,938 shares of the registrant's common stock, no par value.

Page 1

Forward-Looking Statements

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

Management's determination of the provision and allowance for loan losses, the appropriate carrying value of intangible assets (including mortgage servicing rights and deferred tax assets) and other real estate owned and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) involves judgments that are inherently forward-looking. There can be no assurance that future loan losses will be limited to the amounts estimated or that other real estate owned can be sold for its carrying value or at all. Our ability to fully comply with all of the provisions of our memorandum of understanding, 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, 2011. These and other factors are representative of the risk factors that may emerge and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

Page 2

Cross Reference Table

Item	Description		Page
Part I	Financial Information		4
	Item 1	Financial Statements	4
	(a)	Condensed Consolidated Balance Sheets (unaudited)	4
	(b)	Condensed Consolidated Statements of Operations (unaudited)	5
	(c)	Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited)	6
	(d)	Condensed Consolidated Statements of Shareholders’ Equity (unaudited)	6
	(e)	Condensed Consolidated Statements of Cash Flows (unaudited)	7
	(f)	Notes to Condensed Consolidated Financial Statements (unaudited)	8
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
		Background	33
		Other Developments	34
		Executive Summary	35
		Financial Condition	36
		Results of Operations	44
		Liquidity and Capital Resources	53
		Critical Accounting Policies	55
	Item 3	Quantitative and Qualitative Disclosures about Market Risk	55
	Item 4	Controls and Procedures	55
Part II	Other Information		55
	Item 6	Exhibits	55
Signatures			56
Exhibit Index			57

Page 3

Part I – Financial Information

Item 1 – Financial Statements

(a)           Condensed Consolidated Balance Sheets

	(unaudited)
In thousands of dollars	March 31			December 31,
Assets	2012			2011
Cash and demand balances in other banks	$	15,109		$	15,798
Interest bearing balances with banks		96,386			91,428
Federal funds sold		-			366
Total cash and cash equivalents		111,495			107,592
Securities available for sale		183,416			173,197
FHLB Stock		2,571			2,571
Loans held for sale		11,719			8,290
Portfolio loans		575,508			563,702
Less allowance for loan losses		21,048			20,633
Net portfolio loans		554,460			543,069
Premises and equipment, net		10,756			10,795
Bank-owned life insurance		13,923			13,819
Accrued interest receivable and other assets		26,110			25,676
Total Assets	$	914,450		$	885,009
Liabilities
Deposits
Noninterest bearing	$	160,527		$	139,346
Interest bearing deposits		631,970			625,510
Total deposits		792,497			764,856
FHLB advances payable		24,035			24,035
Accrued interest payable and other liabilities		3,653			2,344
Total Liabilities		820,185			791,235
Commitments and Contingent Liabilities		0			0
Shareholders' Equity
Preferred stock, no par value; 2,000,000 shares authorized, 20,600 shares outstanding; liquidation preference $1,000 per share		20,392			20,364
Common stock and paid in capital, no par value; 30,000,000 shares authorized; 12,699,173, and 12,697,265 shares issued and outstanding, respectively		85,544			85,505
Accumulated deficit		(13,189	)		(13,746	)
Accumulated other comprehensive income, net of tax		1,518			1,651
Total Shareholders' Equity		94,265			93,774
Total Liabilities and Shareholders' Equity	$	914,450		$	885,009
The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 4

(b)           Condensed Consolidated Statements of Operations (unaudited)

In thousands of dollars, except per share data	Three Months Ended March 31
Interest Income	2012			2011
Interest and fees on loans	$	7,926		$	8,204
Interest on securities
Taxable		674			604
Tax exempt		179			207
Interest on federal funds sold and balances with banks		54			74
Total interest income		8,833			9,089
Interest Expense
Interest on deposits		1,056			1,410
Interest on fed funds and other short term borrowings		-			11
Interest on FHLB advances		208			266
Total interest expense		1,264			1,687
Net Interest Income		7,569			7,402
Provision for loan losses		2,100			2,800
Net Interest Income after Provision for Loan Losses		5,469			4,602
Noninterest Income
Service charges on deposit accounts		433			503
Wealth Management fee income		1,225			1,263
Gains on securities transactions		4			-
Income from loan sales and servicing		1,904			1,311
ATM, debit and credit card fee income		507			513
Income from bank-owned life insurance		104			105
Other income		581			230
Total noninterest income		4,758			3,925
Noninterest Expense
Salaries and employee benefits		5,001			4,575
Occupancy and equipment expense, net		1,318			1,252
External data processing		247			320
Advertising and marketing		193			160
Attorney, accounting and other professional fees		468			433
Director fees		98			102
Expenses relating to ORE property and foreclosed assets		933			257
FDIC insurance premiums		295			431
Other expenses		616			688
Total noninterest expense		9,169			8,218
Income Before Federal Income Tax		1,058			309
Federal income tax (benefit)		216			(50	)
Net Income	$	842		$	359
Preferred stock dividends and amortization		(285	)		(284	)
Income Available to Common Shareholders	$	557		$	75
Basic and diluted earnings per share	$	0.04		$	0.01
Cash dividends declared per share of common stock	$	-		$	-
The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 5

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

	Three Months Ended March 31,
In thousands of dollars	2012			2011
Net income	$	842		$	359
Other comprehensive income (loss) net of tax:
Net change in unrealized gains on securities available for sale		(130	)		88
Reclass adjustment for realized gains and related taxes		(3	)		-
Total comprehensive income	$	709		$	447
The accompanying notes are an integral part of these condensed consolidated financial statements.

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

In thousands of dollars	Three Months Ended March 31
Total Shareholders' Equity	2012			2011
Balance at beginning of period	$	93,774		$	92,704
Net income		842			359
Other comprehensive income (loss)		(133	)		88
Cash dividends paid on preferred shares		(258	)		(258	)
Other common stock transactions		40			(62	)
Balance at end of period	$	94,265		$	92,831
The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 6

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

In thousands of dollars	Three Months Ended March 31
	2012			2011
Cash Flows from Operating Activities
Net income	$	842		$	359
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
Depreciation and amortization		1,258			895
Provision for loan losses		2,100			2,800
Gain on sale of loans		(1,737	)		(1,037	)
Proceeds from sales of loans originated for sale		77,152			54,185
Loans originated for sale		(78,844	)		(43,378	)
Gains on securities transactions		(4	)		-
Change in deferred income taxes		(167	)		27
Stock based compensation expense		38			19
Increase in cash surrender value of bank-owned life insurance		(104	)		(105	)
Change in investment in limited partnership		(254	)		(182	)
Change in accrued interest receivable and other assets		1,091			1,474
Change in accrued interest payable and other liabilities		1,492			(166	)
Net cash from operating activities		2,863			14,891
Cash Flows from Investing Activities
Securities available for sale
Purchases		(27,068	)		(25,692	)
Sales		2,847			-
Maturities and calls		6,000			5,147
Principal payments		6,865			4,056
Net change in portfolio loans		(14,779	)		9,809
Premises and equipment expenditures		(218	)		(110	)
Net cash from investing activities		(26,353	)		(6,790	)
Cash Flows from Financing Activities
Net change in deposits		27,641			26,235
Net change in fed funds sold and short term borrowings		-			(1,234	)
Principal payments on FHLB advances		-			(1,000	)
Other common stock transactions		10			(81	)
Cash dividends paid on preferred shares		(258	)		(258	)
Net cash from financing activities		27,393			23,662
Net change in cash and cash equivalents		3,903			31,763
Cash and cash equivalents at beginning of year		107,592			106,222
Cash and cash equivalents at end of period	$	111,495		$	137,985
Supplemental Disclosure of Cash Flow Information:
Interest paid	$	1,286		$	1,748
Loans transferred to other real estate		1,288			1,296
The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 7

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

Note 1 - Basis of Presentation

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

Note 2 – Allowance for Loan Losses and Credit Risk

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

The Company’s established methodology for evaluating the adequacy of the allowance for loan losses considers both components of the allowance: (1) specific allowances allocated to loans evaluated individually for impairment under the Accounting Standards Codification (“ASC”) Section 310-10-35 of the Financial Accounting Standards Board (“FASB”), and (2) allowances calculated for pools of loans evaluated collectively for impairment under FASB ASC Subtopic 450-20. Until the third quarter of 2011, the Company’s past loan loss experience was determined by evaluating the average charge-offs over the most recent eight quarters.

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

Page 8

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

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

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

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

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

Page 9

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

	Three Months Ended March 31, 2012
Thousands of dollars	CLD (1)			Owner-Occupied CRE (2)			Other CRE (2)			Commercial & Industrial			Residential Mortgage			Personal Loans			Total
Balance, January 1	$	3,676		$	3,875		$	4,721		$	4,741		$	1,931		$	1,689		$	20,633
Provision charged to expense		1,252			123			483			(138	)		330			50			2,100
Losses charged off		(284	)		(58	)		(854	)		(363	)		(380	)		(284	)		(2,223	)
Recoveries		62			21			20			221			5			209			538
Balance, March 31	$	4,706		$	3,961		$	4,370		$	4,461		$	1,886		$	1,664		$	21,048
Ending balance: individually evaluated for impairment	$	3,878		$	2,509		$	1,520		$	567		$	779		$	47		$	9,300
Ending balance: collectively evaluated for impairment	$	828		$	1,452		$	2,850		$	3,894		$	1,107		$	1,617		$	11,748
Total Loans:
Ending balance	$	41,220		$	102,337		$	147,400		$	91,324		$	88,981		$	104,246		$	575,508
Ending balance: individually evaluated for impairment	$	12,957		$	9,338		$	19,312		$	2,635		$	5,317		$	352		$	49,911
Ending balance: collectively evaluated for impairment	$	28,263		$	92,999		$	128,088		$	88,689		$	83,664		$	103,894		$	525,597

	Three Months Ended March 31, 2011
Thousands of dollars	Business & Commercial Mortgages			CLD (1)			Residential Mortgage			Personal Loans			Total
Balance, January 1	$	16,672		$	3,248		$	2,661		$	2,582		$	25,163
Provision charged to expense		1,348			734			737			(19	)		2,800
Losses charged off		(1,749	)		(693	)		(471	)		(192	)		(3,105	)
Recoveries		164			63			10			99			336
Balance, March 31	$	16,435		$	3,352		$	2,937		$	2,470		$	25,194

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

Page 10

Credit Exposure and Quality Indicators

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

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

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

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

Commercial & Industrial Loans. Commercial and industrial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee.

Page 11

Some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Consumer. Consumer loans consist of two segments – residential mortgage loans and personal loans. For residential mortgage loans that are secured by 1-4 family residences and are generally owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and personal loans are secured by personal assets, such as automobiles or recreational vehicles. Some personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Internal Risk Categories

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

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

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

Page 12

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

In thousands of dollars		At March 31, 2012
Commercial & Tax-exempt Loans		CLD		Owner-Occupied CRE		Other CRE		Commercial & Industrial		Total Commercial
Credit Risk Profile by Internally Assigned Rating
1-4	Pass	$	12,706	$	75,788	$	96,715	$	69,475	$	254,684
5	Special Mention		4,648		15,646		15,442		17,520		53,256
6	Substandard		12,358		6,400		17,887		8,423		45,068
7	Doubtful		862		72		507		445		1,886
8	Loss		-		-		-		-		-
	Total	$	30,574	$	97,906	$	130,551	$	95,863	$	354,894

Consumer Loans
Credit risk profile based on payment activity	Residential Mortgage		Consumer Construction		Home Equity		Other Consumer		Total Consumer
Performing	$	96,970	$	10,646	$	74,171	$	24,187	$	205,974
Accruing restructured		3,293		-		171		-		3,464
Delinquent less than 90 days		2,130		-		137		40		2,307
Nonperforming		2,720		-		98		47		2,865
Total	$	105,113	$	10,646	$	74,577	$	24,274	$	214,610
Subtotal									$	569,504
Deferred loan fees and costs, overdrafts, in-process accounts										6,004
Total Portfolio Loans									$	575,508

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

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

Page 13

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

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

Thousands of dollars	Delinquent Loans						Current (c-b-d)		Total Portfolio Loans (c)		Nonaccrual Loans (d)		Total Nonperforming (a+d)
As of March 31, 2012	30-89 Days Past Due		90 Days and Over (a) (1)		Total Past Due (b)
Commercial
Commercial CLD	$	-	$	-	$	-	$	25,468	$	30,574	$	5,106	$	5,106
Owner-Occupied CRE		596		-		596		92,161		97,906		5,149		5,149
Other CRE		273		-		273		121,082		130,551		9,196		9,196
Commercial & Industrial		553		-		553		91,655		95,863		3,655		3,655
Consumer
Residential Mortgage		2,130		-		2,130		100,263		105,113		2,720		2,720
Consumer Construction		-		-		-		10,646		10,646		-		-
Home Equity		137		13		150		74,342		74,577		85		98
Other Consumer		40		-		40		24,187		24,274		47		47
Subtotal	$	3,729	$	13	$	3,742	$	539,804	$	569,504	$	25,958	$	25,971
Deferred loan fees and costs, overdrafts, in-process accounts										6,004
Total Portfolio Loans									$	575,508

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

Page 14

Impaired Loans

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

	March 31, 2012						December 31, 2011
Thousands of dollars	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Recorded Balance		Unpaid Principal Balance		Specific Allowance
Loans without a specific valuation allowance
Commercial
Commercial CLD	$	4,437	$	10,235	$	-	$	5,977	$	15,366	$	-
Owner-Occupied CRE		2,060		2,929		-		1,622		2,502		-
Other CRE		9,009		12,857		-		4,922		8,031		-
Commercial & Industrial		1,418		3,764		-		1,696		3,774		-
Consumer						-
Residential Mortgage		1,832		1,948		-		1,042		1,778		-
Consumer Construction		-		-		-		-		-		-
Home Equity		35		35		-		43		43		-
Other Consumer		141		141		-		189		189		-
Subtotal	$	18,932	$	31,909	$	-	$	15,491	$	31,683	$	-
Loans with a specific valuation allowance
Commercial
Commercial CLD	$	8,520	$	8,520	$	3,878	$	8,509	$	8,594	$	2,907
Owner-Occupied CRE		7,278		8,688		2,509		6,391		7,925		2,344
Other CRE		10,303		12,685		1,520		15,259		17,205		2,085
Commercial & Industrial		1,217		1,326		567		1,335		2,372		785
Consumer
Residential Mortgage		3,485		4,193		779		4,792		5,998		870
Consumer Construction		-		-		-		-		-		-
Home Equity		171		171		42		171		171		35
Other Consumer		5		5		5		5		5		5
Subtotal	$	30,979	$	35,588	$	9,300	$	36,462	$	42,270	$	9,031
Total Impaired Loans
Commercial
Commercial CLD	$	12,957	$	18,755	$	3,878	$	14,486	$	23,960	$	2,907
Owner-Occupied CRE		9,338		11,617		2,509		8,013		10,427		2,344
Other CRE		19,312		25,542		1,520		20,181		25,236		2,085
Commercial & Industrial		2,635		5,090		567		3,031		6,146		785
Consumer
Residential Mortgage		5,317		6,141		779		5,834		7,776		870
Consumer Construction		-		-		-		-		-		-
Home Equity		206		206		42		214		214		35
Other Consumer		146		146		5		194		194		5
Total Impaired Loans	$	49,911	$	67,497	$	9,300	$	51,953	$	73,953	$	9,031

Page 15

Information regarding average investment in impaired loans and interest income recognized on those loans for the three month periods ended March 31, 2012 and 2011 is shown below.

Period ended March 31, 2012	Three Months
Thousands of dollars	Average Investment in Impaired Loans		Interest Income Recognized
Loans without a specific valuation allowance
Commercial
Commercial CLD
Owner-Occupied CRE	$	4,467	$	-
Other CRE		2,063		20
Commercial & Industrial		8,618		69
Consumer		1,418		4
Residential Mortgage
Consumer Construction		1,080		6
Home Equity		-		-
Other Consumer		36		-
Subtotal		166		-
	$	17,848	$	99
Loans with a specific valuation allowance
Commercial
Commercial CLD	$	8,896	$	100
Owner-Occupied CRE		7,279		28
Other CRE		10,329		100
Commercial & Industrial		1,225		13
Consumer
Residential Mortgage		3,924		34
Consumer Construction		-		-
Home Equity		171		1
Other Consumer		5		-
Subtotal	$	31,829	$	276
Total Impaired Loans
Commercial
Commercial CLD	$	13,363	$	100
Owner-Occupied CRE		9,342		48
Other CRE		18,947		169
Commercial & Industrial		2,643		17
Consumer
Residential Mortgage		5,004		40
Consumer Construction		-		-
Home Equity		207		1
Other Consumer		171		-
Total Impaired Loans	$	49,677	$	375

Page 16

Period ended March 31, 2011	Three Months
Thousands of dollars	Average Investment in Impaired Loans		Interest Income Recognized
Loans without a specific valuation allowance
Business & Commercial Mortgage	$	5,512	$	45
Construction & Land Development		4,201		-
Residential Mortgage		3,327		1
Personal		828		1
Subtotal	$	13,868	$	47
Loans with a specific valuation allowance
Business & Commercial Mortgage	$	19,526	$	136
Construction & Land Development		10,329		61
Residential Mortgage		3,848		26
Personal		333		1
Subtotal	$	34,036	$	224
Total Impaired Loans
Business & Commercial Mortgage	$	25,038	$	181
Construction & Land Development		14,530		61
Residential Mortgage		7,175		27
Personal		1,161		2
Total Impaired Loans	$	47,904	$	271

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

Troubled Debt Restructurings

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

Page 17

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

It is the Bank’s policy to have any restructured loans which are on nonaccrual status prior to being restructured, remain on nonaccrual status until six months of satisfactory borrower performance, at which time management would consider its return to accrual status. The balance of nonaccrual restructured loans, which is included in nonaccrual loans, was $11.4 million at March 31, 2012 and $10.7 million at December 31, 2011. If a restructured loan is on accrual status prior to being restructured, it is reviewed to determine if the restructured loan should remain on accrual status. The balance of accruing restructured loans was $20.4 million at March 31, 2012 and $21.8 million at December 31, 2011.

Loans that are considered TDRs are classified as performing, unless they are on nonaccrual status or greater than 90 days delinquent as of the end of the most recent quarter. All TDRs are considered impaired by the Company. When it is determined that the borrower has met the six month satisfactory performance period (or six payments) under modified terms and the restructuring agreement specified an interest rate greater than or equal to an acceptable rate for a comparable new loan, the loan is considered to be performing. On a quarterly basis, the Company individually reviews all TDR loans to determine if a loan meets both of these criteria.

Accruing restructured loans at March 31, 2012 are comprised of two categories of loans on which interest is being accrued under their restructured terms, and the loans are current or less than ninety days past due. The first category consists of $17.0 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. Within this category are $7.8 million of CLD loans that have been renewed as interest only, generally for a period of up to one year, to assist the borrower.

The Bank does not generally forgive principal or interest on restructured loans. However, when a loan is restructured, principal is generally received on a delayed basis as compared to the original repayment schedule. CLD loans that are restructured are generally modified to require interest-only for a period of time. The Bank does not generally reduce interest rates on restructured commercial loans. The average yield on modified commercial loans was 5.29%, compared to 5.46% earned on the entire commercial loan portfolio in the first quarter of 2012.

The second category included in accruing restructured loans consists of residential mortgage and home equity loans whose terms have been restructured at less than market terms and include rate modifications, extension of maturity, and forbearance. This category consists of seventeen loans for a total of $3.5 million at March 31, 2012. The average yield on modified residential mortgage and home equity loans was 3.98%, compared to 5.36% earned on the entire residential mortgage loan portfolio in the first quarter of 2012.

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

Page 18

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

The following tables present information regarding troubled debt restructurings for the first quarter of 2012.

Newly Classified Accruing Troubled Debt Restructurings	Quarter Ended March 31, 2012
Dollars in thousands	Total Number of Loans		Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
Commercial
Commercial CLD		-	$	-	$	-
Owner-Occupied CRE		4		537		537
Other CRE		2		410		410
Commercial & Industrial		1		190		190
Consumer
Residential Mortgage		2		224		224
Total		9	$	1,361	$	1,361

Troubled Debt Restructurings that Subsequently Defaulted	Quarter Ended March 31, 2012
Dollars in thousands	Number of Loans		Recorded Balance
Commercial
Commercial CLD		1	$	175
Owner-Occupied CRE		1		9
Total		2	$	184

As a result of adopting the amendments in ASU No. 2011-02 in the third quarter of 2011, the Company reassessed all restructurings that occurred on or after the beginning of 2011 to determine whether they are now considered troubled debt restructurings. The Company identified as TDRs certain loans for which the allowance for loan losses had previously been measured under a general allowance methodology. Upon identifying those loans as TDRs, the Company identified them as impaired under the guidance in ASC 310-10-35. The amendments in ASU No. 2011-02 require prospective application of the impairment measurement guidance in ASC 310-10-35 for those loans newly identified as impaired.

Page 19

At the end of the first interim period of adoption (quarter ended September 30, 2011), the recorded investment in loans for which the allowance was previously measured under a general allowance methodology and are now impaired under ASC 310-10-35 was $4.0 million, and the allowance for loan losses associated with those loans, on the basis of a current evaluation of loss, was $1.5 million.

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, 2012 and December 31, 2011. All securities are classified as available for sale.

At March 31, 2012, in thousands of dollars	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. Treasury and agency securities	$	41,282	$	286	$	(13	)		41,555
Mortgage-backed agency securities		119,999		1,647		(486	)		121,160
Obligations of states and political subdivisions		19,683		861		-			20,544
Corporate, asset backed and other debt securities		126		-		-			126
Equity securities		26		5		-			31
Total	$	181,116	$	2,799	$	(499	)	$	183,416

At December 31, 2011, in thousands of dollars
U.S. Treasury and agency securities	$	48,999	$	385	$	(18	)	$	49,366
Mortgage-backed agency securities		101,855		1,321		(479	)		102,697
Obligations of states and political subdivisions		19,690		1,287		0			20,977
Corporate, asset backed and other debt securities		126		-		-			126
Equity securities		26