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EX-24.0 - UNITED BANCORP, INC. EXHIBIT 24 TO FORM 10-K - UNITED BANCORP INC /MI/unitedex24.htm
EX-31.2 - UNITED BANCORP, INC. EXHIBIT 31.2 TO FORM 10-K - UNITED BANCORP INC /MI/unitedex312.htm
EX-99.2 - UNITED BANCORP, INC. EXHIBIT 99.2 TO FORM 10-K - UNITED BANCORP INC /MI/unitedex992.htm
EX-31.1 - UNITED BANCORP, INC. EXHIBIT 31.1 TO FORM 10-K - UNITED BANCORP INC /MI/unitedex311.htm
EX-32.1 - UNITED BANCORP, INC. EXHIBIT 32.1 TO FORM 10-K - UNITED BANCORP INC /MI/unitedex321.htm
EX-99.1 - UNITED BANCORP, INC. EXHIBIT 99.1 TO FORM 10-K - UNITED BANCORP INC /MI/unitedex991.htm
EX-23.0 - UNITED BANCORP, INC. EXHIBIT 23 TO FORM 10-K - UNITED BANCORP INC /MI/unitedex23.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

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

For the fiscal year ended December 31, 2010

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)

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o   No  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes o   No  þ

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 and (2) has been subject to such filing requirements for the past 90 days.Yesþ 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 file).    Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
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 Act).
Yes   o            No   þ

As of June 30, 2010, the aggregate market value of the common stock held by non-affiliates of the registrant was $30,445,000, based on a closing price of $6.25 as reported on the OTC Bulletin Board.

As of January 31, 2011, there were 12,667,111 outstanding shares of registrant's common stock, no par value.


DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement in connection with the 2011 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.

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 levels of non-performing loans, the rate of asset dispositions, future capital levels, future dividends, future growth and 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 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. Our ability to fully comply with all of the provisions of our memorandum of understanding, improve regulatory capital ratios, 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 this report; 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 No.
Description
Page
PART I
 
 1.
 
   
   
 
 
   
   
   
   
 
   
   
 
 
 
4.
 [Removed and Reserved]
30
 
 
 
 
 
 



ITEM 1
BUSINESS

United Bancorp, Inc. (the “Company” or “United”) is a Michigan corporation headquartered in Ann Arbor, Michigan and serves as the holding company for United Bank & Trust (“UBT” or “the Bank”), a Michigan-chartered bank organized over 115 years ago. The Company is a bank holding company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) under the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). The Company's business is concentrated in a single industry segment – commercial banking. The Company has corporate power to engage in activities permitted to business corporations under the Michigan Business Corporation Act, subject to the limitations of the Bank Holding Company Act and regulations of the Federal Reserve System. In general, the Bank Holding Company Act and regulations restrict the Company with respect to its own activities and activities of any subsidiaries to the business of banking or other activities that are closely related to the business of banking.

The Company was formed by Directors of UBT to acquire all of the capital stock of UBT. In November of 2000, the Company filed applications with its regulators for permission to establish a second bank as a subsidiary of the Company. United Bank & Trust – Washtenaw (“UBTW”), headquartered in Ann Arbor, opened for business on April 2, 2001. On January 15, 2010, the Company filed applications with its regulators for permission to consolidate and merge UBTW with and into UBT, with the consolidated bank operating under the charter of UBT. The bank consolidation was completed during the second quarter of 2010. Following the transaction, the consolidated bank continues to operate the same banking offices in the same markets that UBT and UBTW previously operated.

The Company provides services through the Bank's system of sixteen banking offices, one trust office, and twenty automated teller machines, located in Washtenaw, Lenawee and Monroe Counties, Michigan. United’s corporate headquarters are located in Ann Arbor, Michigan. The employment base of Washtenaw County is centered around health care, education and automotive high technology. Economic stability is provided to a great extent by the University of Michigan, which is a major employer and is not as economically sensitive to the fluctuations of the automotive industry. The services and public sectors account for a substantial percentage of total industry employment, in a large part due to the University of Michigan and the University of Michigan Medical Center.

The Bank offers a full range of services to individuals, corporations, fiduciaries and other institutions. Banking services include checking accounts, NOW accounts, savings accounts, time deposit accounts, money market deposit accounts, safe deposit facilities and money transfers. Lending operations provide real estate loans, secured and unsecured business and personal loans, consumer installment loans, credit card and check-credit loans, home equity loans, accounts receivable and inventory financing, and construction financing. We offer our customers a full array of conventional residential mortgage products, including purchase, refinance and construction loans.
 
The Bank maintains correspondent bank relationships with a small number of larger banks, which involve check clearing operations, securities safekeeping, transfer of funds, loan participation, purchase and sale of federal funds and other similar services.



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. United Mortgage Company was the leading residential mortgage lender in Lenawee County and in the City of Ann Arbor for 2009.

The Bank’s Wealth Management Group is a key focus of the Company’s growth and diversification strategy. The Wealth Management Group offers a variety of investment services to individuals, corporations and governmental entities, including services as trustee for personal, pension, and employee benefit trusts. The department provides trust services, financial planning services, investment services, custody services, pension paying agent services and acts as the personal representative for estates. These products help to diversify the Company's sources of income. The Bank offers nondeposit investment products through licensed representatives in its banking offices, and sells credit and life insurance products.

The Bank operates United Structured Finance Company (“USFC”). USFC was established in 2007, and is a finance company that 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. The loans generated by USFC are typically sold on the secondary market, to the extent allowed by the applicable SBA programs. Gains on the sale of those loans are included in income from loan sales and servicing. USFC revenue provides additional diversity to the Company's income stream, and provides additional financing alternatives to clients of the Bank as well as non-bank clients.

Supervision and Regulation

General

The Company and the Bank are extensively regulated and are subject to a comprehensive regulatory framework that imposes restrictions on their activities, minimum capital requirements, lending and deposit restrictions, and numerous other requirements. This system of regulation is primarily intended for the protection of depositors, federal deposit insurance funds and the banking system as a whole, rather than for the protection of shareholders and creditors. Many of these laws and regulations have undergone significant change in recent years and are likely to change in the future. Future legislative or regulatory change, or changes in enforcement practices or court rulings, may have a significant and potentially adverse impact on the Company's operations and financial condition.

The Company

The Company is subject to supervision and regulation by the Federal Reserve System. Its activities are generally limited to owning or controlling banks and engaging in such other activities as the Federal Reserve System may determine to be closely related to banking. Prior approval of the Federal Reserve System, and in some cases various other government agencies, is required for the Company to acquire control of any additional bank holding companies, banks or other operating subsidiaries. The Company is subject to periodic examination by the Federal Reserve System, and is required to file with the Federal Reserve System periodic reports of its operations and such additional information as the Federal Reserve System may require.



The Company is a legal entity separate and distinct from the Bank. There are legal limitations on the extent to which the Bank may lend or otherwise supply funds to the Company. Payment of dividends to the Company by the Bank, the Company's principal source of funds, is subject to various state and federal regulatory limitations. Under the Michigan Banking Code of 1999, the Bank's ability to pay dividends to the Company is subject to the following restrictions:

 
·
A bank may not declare or pay a dividend if a bank's surplus would be less than 20% of its capital after payment of the dividend.
     
 
·
A bank may not declare a dividend except out of net income then on hand after deducting its losses and bad debts.
     
 
·
A bank may not declare or pay a dividend until cumulative dividends on preferred stock, if any, are paid in full.
     
 
·
A bank may not pay a dividend from capital or surplus.

Federal law generally prohibits a bank from making any capital distribution (including payment of a dividend) or paying any management fee to its parent company if the depository institution would thereafter be undercapitalized. The Federal Deposit Insurance Corporation (“FDIC”) may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In addition, the FDIC may prohibit the payment of dividends by a bank if such payment is determined, by reason of the financial conditions of the bank, to be an unsafe and unsound banking practice. UBT is a party to a memorandum of understanding with the FDIC and the Michigan Office of Financial and Insurance Regulation (“OFIR”), described in “Capital Resources” on Page A-26 hereof, which requires the Bank not to declare or pay any dividends without the prior consent of the FDIC and OFIR. In addition, the Federal Reserve Bank of Chicago (the “Reserve Bank”) has restricted the Company from declaration or payment of common or preferred stock dividends without prior written approval of the Reserve Bank.

Additional information on restrictions on payment of dividends by the Company and the Bank may be found in this Item 1 under the heading “Recent Developments”  below, under Item 5 of this report, and under Note 15 on Page A-50 hereof, all of which information is incorporated here by reference.

Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank. In addition, if OFIR deems a Bank's capital to be impaired, OFIR may require the Bank to restore its capital by a special assessment on the Company as the Bank's only shareholder. If the Company fails to pay any assessment, the Company's directors would be required, under Michigan law, to sell the shares of the Bank's stock owned by the Company to the highest bidder at either a public or private auction and use the proceeds of the sale to restore the Bank's capital.

The Federal Reserve Board and the FDIC have established guidelines for risk-based capital by bank holding companies and banks. These guidelines establish a risk-adjusted ratio relating capital to risk-weighted assets and off-balance-sheet exposures. These capital guidelines



primarily define the components of capital, categorize assets into different risk classes, and include certain off-balance-sheet items in the calculation of capital requirements.

The FDIC Improvement Act of 1991 established a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, federal banking regulators have established five capital categories – well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, in which all institutions are placed. The federal banking agencies have also specified by regulation the relevant capital levels for each of the categories.

Federal banking regulators are required to take specified mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Subject to a narrow exception, the banking regulator must generally appoint a receiver or conservator for an institution that is critically undercapitalized. An institution in any of the under-capitalized categories is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. An undercapitalized institution is also generally prohibited from paying any dividends, increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval.

Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and other restrictions on its business. In addition, such a bank would generally not receive regulatory approval of any application that requires the consideration of capital adequacy, such as a branch or merger application, unless the bank could demonstrate a reasonable plan to meet the capital requirement within a reasonable period of time. The capital ratios of the Company and the Bank exceed the regulatory guidelines for an institution to be categorized as “well-capitalized” and the ratios required by the Bank’s memorandum of understanding. Information in Note 18 on Page A-56 hereof provides additional information regarding the Company's and the Bank’s capital ratios, and is incorporated here by reference.

The Bank

The Bank is chartered under Michigan law and is subject to regulation by OFIR. Michigan banking laws place restrictions on various aspects of banking, including permitted activities, loan interest rates, branching, payment of dividends, and capital and surplus requirements.

Substantially all of the deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a matrix that takes into account a bank's capital level and supervisory rating. In addition, the Bank pays Financing Corporation (“FICO”) assessments related to outstanding FICO bonds to the FDIC as collection agent. The FICO is a mixed-ownership government corporation established by the Competitive Equality Banking Act of 1987 whose



sole purpose was to function as a financing vehicle for the now defunct Federal Savings and Loan Insurance Corporation. FICO assessments will continue in the future for the Bank.

The Bank is subject to a number of federal and state laws and regulations, which have a material impact on its business. These include, among others, minimum capital requirements, state usury laws, state laws relating to fiduciaries, the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Expedited Funds Availability Act, the Community Reinvestment Act, the Real Estate Settlement Procedures Act, the USA PATRIOT Act, The Bank Secrecy Act, Office of Foreign Assets Control regulations, electronic funds transfer laws, redlining laws, predatory lending laws, antitrust laws, environmental laws, money laundering laws and privacy laws.  The instruments of monetary policy of authorities, such as the Federal Reserve System, may influence the growth and distribution of bank loans, investments and deposits, and may also affect interest rates on loans and deposits. These policies may have a significant effect on the operating results of banks.

Bank holding companies may acquire banks and other bank holding companies located in any state in the United States without regard to geographic restrictions or reciprocity requirements imposed by state banking law. Banks may also establish interstate branch networks through acquisitions of and mergers with other banks. The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed only if specifically authorized by state law.

Michigan banking laws do not significantly restrict interstate banking. The Michigan Banking Code of 1999 permits, in appropriate circumstances and with the approval of the OFIR, (1) acquisition of Michigan banks by FDIC-insured banks, savings banks or savings and loan associations located in other states, (2) sale by a Michigan bank of branches to an FDIC-insured bank, savings bank or savings and loan association located in a state in which a Michigan bank could purchase branches of the purchasing entity, (3) consolidation of Michigan banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation, (4) establishment of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting a Michigan bank to establish a branch in such jurisdiction, and (5) establishment by foreign banks of branches located in Michigan.  A Michigan bank holding company may acquire a non-Michigan bank and a non-Michigan bank holding company may acquire a Michigan bank.

Recent Developments

Memorandum of Understanding

On January 15, 2010, UBT entered into a Memorandum of Understanding with the FDIC and the Michigan Office of Financial and Insurance Regulation (“OFIR”). On January 11, 2011, we entered into a revised Memorandum of Understanding (“MOU”) with substantially the same requirements as the MOU dated January 15, 2010. The MOU is not a “written agreement” for purposes of Section 8 of the Federal Deposit Insurance Act. The MOU documents an understanding among UBT, the FDIC and OFIR, that, among other things, (i) UBT will not declare or pay any dividend to the Company without the prior consent of the FDIC and OFIR;



 and (ii) UBT will have and maintain its Tier 1 capital ratio at a minimum of 9% for the duration of the MOU, and will maintain its ratio of total capital to risk-weighted assets at a minimum of 12% for the duration of the MOU.

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 7,583,800 shares of common stock. The net proceeds to the Company, after deducting underwriting discounts and commissions and offering expenses, were approximately $17.1 million.

The Company contributed $10 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 the MOU with the FDIC and OFIR at December 31, 2010. At December 31, 2010, the Bank’s Tier 1 capital ratio was 9.21%, and its ratio of total capital to risk-weighted assets was 14.71%.

Competition

The banking business in the Company's service area is highly competitive. In their markets, the Bank competes with a number of community banks and subsidiaries of large multi-state, multi-bank holding companies. In addition, the Bank faces competition from credit unions, savings associations, finance companies, loan production offices and other financial services companies. The principal methods of competition that we face are price (interest rates paid on deposits, interest rates charged on borrowings and fees charged for services) and service (convenience and quality of services rendered to customers).

The Company believes that the market perceives a competitive benefit to an independent, locally controlled commercial bank. Much of the Company's competition comes from affiliates of organizations controlled from outside the area.

Employees

On December 31, 2010, the Company and its subsidiary employed 224 full-time and 31 part-time employees. This compares to 217 full-time and 31 part-time employees at December 31, 2009.



Accounting Standards

Information regarding accounting standards adopted by the Company are discussed beginning on Page A-34 hereof, and is incorporated here by reference.

Available Information

You can find more information about us at our website, located at www.ubat.com. Our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available as soon as reasonably practicable after such forms have been filed with or furnished to the Securities and Exchange Commission (the “SEC”) free of charge on our website through a link to the SEC website.

SELECTED STATISTICAL INFORMATION

Additional statistical information describing our business appears in the following pages and in Management's Discussion and Analysis of Financial Condition and Results of Operations and in our consolidated financial statements and related notes contained in this report.

I
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL:

The information required by these sections are contained on Pages A-1 through A-16 hereof, and is incorporated here by reference.

II            INVESTMENT PORTFOLIO

(A)           Book Value of Investment Securities

The book value of investment securities as of December 31, 2010, 2009 and 2008 are as follows, in thousands of dollars:

In thousands of dollars
 
2010
   
2009
   
2008
 
 U.S. Treasury and government agencies
  $ 99,785     $ 55,381     $ 41,684  
 Obligations of states and political subdivisions
    24,605       34,111       37,889  
 Corporate, asset backed and other debt securities
    126       2,623       2,478  
 Equity securities
    28       31       50  
 
Total Investment Securities
  $ 124,544     $ 92,146     $ 82,101  

 (B)           Carrying Values and Yields of Investment Securities

The following table reflects the carrying values and yields of the Company's investment securities portfolio as of December 31, 2010. Average yields are based on amortized costs and the average yield on tax exempt securities of states and political subdivisions is adjusted to a taxable equivalent basis, assuming a 34% marginal tax rate.



Carrying Values and Yields of Investments
                             
 In thousands of dollars where applicable
                         
 
       
Available For Sale
 
0 - 1 Year
   
1 - 5 Years
   
5 - 10 Years
   
Over 10 Years
   
Total
 
U.S. Treasury and government agencies (1)
  $ 9,933     $ 23,754     $ -     $ -     $ 33,687  
 
 Weighted average yield
    2.89 %     1.43 %     0.00 %     0.00 %     1.85 %
U.S. Agency Mortgage Backed securities
    -       66,098       -       -     $ 66,098  
 
 Weighted average yield
    0.00 %     3.44 %     0.00 %     0.00 %     3.44 %
Obligations of states and political subdivisions
  $ 5,400     $ 13,965     $ 4,627     $ 613     $ 24,605  
 
 Weighted average yield
    5.70 %     5.76 %     6.31 %     7.02 %     5.88 %
Equity and other securities
  $ 154     $ -     $ -     $ -     $ 154  
 
 Weighted average yield
    0.70 %     0.00 %     0.00 %     0.00 %     0.70 %
Total securities
  $ 15,487     $ 103,817     $ 4,627     $ 613     $ 124,544  
 
 Weighted average yield
    3.83 %     3.28 %     6.31 %     7.02 %     3.47 %
                                         
 (1)
Reflects the scheduled amortization and an estimate of future prepayments based on past and current experience of amortizing U.S. agency securities.
 

As of December 31, 2010, the Company's securities portfolio contains no concentrations by any single issuer of securities greater than 10% of shareholders' equity. Additional information concerning the Company's securities portfolio is included on Page A-9, in Note 3 on Pages A-39 through A-41 hereof, and is incorporated here by reference.

III            LOAN PORTFOLIO

(A)           Types of Loans

The tables below show loans outstanding (net of unearned interest) at December 31, and the percentage makeup of the portfolios. All loans are domestic and contain no concentrations by industry or customer.

Thousands of dollars
 
2010
   
2009
   
2008
   
2007
   
2006
 
Personal
  $ 107,399     $ 110,702     $ 112,095     $ 97,456     $ 90,481  
Business and commercial mortgage
    354,340       392,495       410,911       376,431       327,786  
Tax exempt
    2,169       3,005       2,533       2,709       2,841  
Residential mortgage
    86,006       86,417       90,343       86,198       85,789  
Construction & development
    41,554       56,706       80,412       81,086       94,356  
Deferred loan fees and costs
    517       728       725       650       510  
 
Total portfolio loans
  $ 591,985     $ 650,053     $ 697,019     $ 644,530     $ 601,763  
                                         
Personal
    18.1 %     17.0 %     16.1 %     15.2 %     15.1 %
Business and commercial mortgage
    59.9 %     60.4 %     58.9 %     58.3 %     54.4 %
Tax exempt
    0.4 %     0.5 %     0.4 %     0.4 %     0.5 %
Residential mortgage
    14.5 %     13.3 %     13.0 %     13.4 %     14.2 %
Construction & development
    7.0 %     8.7 %     11.5 %     12.6 %     15.7 %
Deferred loan fees and costs
    0.1 %     0.1 %     0.1 %     0.1 %     0.1 %
 
Total portfolio loans
    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %



(B)           Maturities and Sensitivities of Loans to Changes in Interest Rates

The following table presents the maturity of total loans outstanding, other than residential mortgages and personal loans, as of December 31, 2010, according to scheduled repayments of principal.

Thousands of dollars
 
0 - 1 Year
   
1 - 5 Years
   
After 5 Years
   
Total
 
 Business loans - fixed rate
  $ 31,067     $ 98,038     $ 16,628     $ 145,733  
 Business loans - variable rate
    191,974       25,064       12       217,050  
 Tax exempt - fixed rate
    127       990       1,052       2,169  
 
 Total
  $ 223,168     $ 124,092     $ 17,692     $ 364,952  
 Total fixed rate
  $ 31,194     $ 99,028     $ 17,680     $ 147,902  
 Total variable rate
    191,974       25,064       12       217,050  

 (C)             Risk Elements
       Non-Accrual, Past Due and Restructured Loans

Information regarding nonaccrual, past due and restructured loans is shown in the table below as of December 31, 2006 through 2010.

Nonperforming Assets, in thousands of dollars
 
2010
   
2009
   
2008
   
2007
   
2006
 
 Nonaccrual loans
  $ 28,661     $ 26,188     $ 19,328     $ 13,695     $ 5,427  
 Accruing loans past due 90 days or more
    583       5,474       1,504       1,455       855  
 
Total nonperforming loans
  $ 29,244     $ 31,662     $ 20,832     $ 15,150     $ 6,282  
                                         
 Accruing restructured loans
  $ 17,271     $ 15,584     $ 3,283     $ -     $ -  

The following shows the effect on interest revenue of nonaccrual and troubled debt restructured loans as of December 31, 2010, in thousands of dollars:

Gross amount of interest that would have been recorded at original rate
  $ 1,028  
Interest that was included in revenue
    -  
Net impact on interest revenue
  $ 1,028  

Additional information concerning nonperforming loans, the Company's nonaccrual policy, and loan concentrations is provided on Page A-11, in Note 1 on Pages A-34 through A-39, Note 4 on Page A-42  and Note 5 on Page A-42 through A-45 hereof, and is incorporated here by reference.

At December 31, 2010, the Bank had eight loans, other than those disclosed above, for a total of $1.9 million, which cause management to have serious doubts as to the ability of the borrowers to comply with the present loan repayment terms. These loans were included on the Bank’s “watch list” and were classified as impaired; however, payments were current as of the date of this report.


(D)           Other Interest Bearing Assets

As of December 31, 2010, other than $4,278,000 in other real estate, there were no other interest bearing assets that would be required to be disclosed under Item III, Parts (C)(1) or (C)(2) of Industry Guide 3 if such assets were loans.

IV            SUMMARY OF LOAN LOSS EXPERIENCE

(A)           Changes in Allowance for Loan Losses

The table below summarizes changes in the allowance for loan losses for the years 2006 through 2010.
 
Thousands of dollars
 
2010
   
2009
   
2008
   
2007
   
2006
 
 Balance at beginning of period
  $ 20,020     $ 18,312     $ 12,306     $ 7,849     $ 6,361  
 Charge-offs:
                                       
 
Business and commercial mortgage (1)
    7,683       8,257       7,298       3,521       447  
 
Construction and land development
    5,919       14,379       -       -       -  
 
Residential mortgage
    1,820       229       450       176       61  
 
Personal
    1,907       1,503       1,024       593       254  
   
Total charge-offs
    17,329       24,368       8,772       4,290       762  
                                         
Recoveries:
                                       
 
Business and commercial mortgage (1)
    424       185       98       61       13  
 
Construction and land development
    287       -       -       -       -  
 
Residential mortgage
    66       50       11       -       13  
 
Personal
    165       71       62       49       101  
   
Total recoveries
    942       306       171       110       127  
 Net charge-offs
    16,387       24,062       8,601       4,180       635  
 Additions charged to operations
    21,530       25,770       14,607       8,637       2,123  
 Balance at end of period
  $ 25,163     $ 20,020     $ 18,312     $ 12,306     $ 7,849  
 Ratio of net charge-offs to average loans
    2.58 %     3.47 %     1.28 %     0.66 %     0.11 %
 Allowance as % of total portfolio loans
    4.25 %     3.08 %     2.63 %     1.91 %     1.32 %
 (1)
Includes construction and development loans for 2008 and prior
 

The allowance for loan losses is maintained at a level believed adequate by management to absorb losses inherent 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 relevant factors. The provision charged to earnings was $21,530,000 in 2010, $25,770,000 in 2009 and $14,607,000 in 2008.



 (B)           Allocation of Allowance for Loan Losses

The following table presents the portion of the allowance for loan losses applicable to each loan category as of December 31. A table showing the percent of loans in each category to total loans is included in Section III (A), above.

Thousands of dollars
 
2010
   
2009
   
2008
   
2007
   
2006
 
Business and commercial mortgage (1)
  $ 16,672     $ 12,221     $ 16,148     $ 10,924     $ 6,911  
Construction and development loans
    3,248       5,164       -       -       -  
Residential mortgage
    2,661       760       673       368       24  
Personal
    2,582       1,875       1,491       974       889  
Unallocated
    -       -       -       40       25  
 
Total
  $ 25,163     $ 20,020     $ 18,312     $ 12,306     $ 7,849  
                                         
     
 (1)
Includes construction and development loans for 2008 and prior
 

The allocation method used takes into account specific allocations for identified credits and an eight-quarter historical loss average in determining the allocation for the balance of the portfolio.

V            DEPOSITS

The information concerning average balances of deposits and the weighted-average rates paid thereon is included on Page A-15 and A-16 and maturities of time deposits is provided in Note 9 on Page A-47 hereof, and is incorporated here by reference. There were no foreign deposits.

As of December 31, 2010, outstanding time certificates of deposit in amounts of $100,000 or more were scheduled to mature as shown below.

Thousands of dollars
 
As of
 
  Time Certificates maturing:
 
12/31/10
 
  Within three months
  $ 16,344  
  Over three through six months
    13,041  
  Over six through twelve months
    16,619  
  Over twelve months
    41,478  
Total
  $ 87,482  

VI            RETURN ON EQUITY AND ASSETS

Various ratios required by this section and other ratios commonly used in analyzing bank holding company financial statements are included on Page A-16 and A-17 hereof, and are incorporated here by reference.



VII            SHORT-TERM BORROWINGS

All of the information that the Company is required to disclose under this section is contained in Note 10 on Page A-47 hereof, and is incorporated here by reference. The Company is not required to disclose any additional information, as for all reporting periods there were no categories of short-term borrowings for which the average balance outstanding during the period was 30% or more of shareholders' equity at the end of the period.

ITEM 1A                      RISK FACTORS

Risks Related To Our Business

Other than the third quarter of 2010, our results of operations have not been profitable in recent periods and we may incur additional losses during 2011.

We were profitable in the third quarter of 2010, but we had posted a net consolidated loss in each of the seven consecutive quarters prior to that period, and a total consolidated net loss during that time period of $17.2 million. There is no assurance that the Company's results of operations will be  profitable in the short term or at all. We have recorded provisions for loan losses of $21.5 million for the year ended December 31, 2010 and $25.8 million for the year ended December 31, 2009. In light of the current economic environment, significant additional provisions for loan losses may be necessary to supplement the allowance for loan losses in the future. As a result, we may incur significant additional credit costs in 2011 or beyond, which could adversely impact our financial condition, results of operations, and the value of our common stock.

If our nonperforming assets increase, our earnings will be adversely affected.

At December 31, 2010, our nonperforming assets (which consist of non-accruing loans, loans 90 days or more past due, and other real estate owned) totaled $33.5 million, or 3.89% of total assets. At December 31, 2009 and December 31, 2008, our nonperforming assets were $34.5 million and $24.3 million, respectively, or 3.79% and 2.92% of total assets, respectively. Our nonperforming assets adversely affect our net income in various ways:

 
We do not record interest income on nonaccrual loans or other real estate owned.
     
 
We must provide for probable loan losses through a current period charge to the provision for loan losses.
     
 
Non-interest expense increases when we must write down the value of properties in our other real estate owned portfolio to reflect changing market values.
     
 
There are legal fees associated with the resolution of problem assets, as well as carrying costs, such as taxes, insurance, and maintenance fees related to our other real estate owned.
     
 
The resolution of non-performing assets requires the active involvement of management, which can distract them from more profitable activity.



If additional borrowers become delinquent and do not pay their loans and we are unable to successfully manage our nonperforming assets, our losses and troubled assets could increase significantly, which could have a material adverse effect on our results of operations.

The economic conditions in the State of Michigan could have a material adverse effect on our results of operations and financial condition.

Our success depends primarily on the general economic conditions in the State of Michigan and the specific local markets in which we operate. Unlike larger national or other regional banks that are more geographically diversified, we provide banking and financial services to customers primarily in the Lenawee, Monroe and Washtenaw Counties, Michigan. The local economic conditions in these areas have a significant impact on the demand for our products and services as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securities, financial, or credit markets or other factors could impact these local economic conditions and, in turn, have a material adverse effect on our results of operations and financial condition.

Difficult market conditions have adversely affected the financial services industry.

The capital and credit markets have been experiencing unprecedented volatility and disruption for an extended period of time. Dramatic declines in the housing market, falling home prices, increased foreclosures and unemployment have negatively impacted the credit performance of mortgage loans and construction and development loans, and resulted in significant write-downs of asset values by financial institutions. These write-downs have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions.

This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and commercial borrowers and lack of confidence in the financial markets has adversely affected our business, results of operations and financial condition. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry. If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience adverse effects, which may be material, on our ability to access capital and on our business, results of operations and financial condition.

We are subject to lending risk, which could materially adversely affect our results of operations and financial condition.

There are inherent risks associated with our lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the



markets where we operate. Increases in interest rates or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans, which could have a material adverse effect on our results of operations and financial condition.

Business loans may expose us to greater financial and credit risk than other loans.

Our business loan portfolio, including commercial mortgages, was approximately $354.3 million at December 31, 2010, comprising approximately 59.9% of our loan portfolio. Business loans generally carry larger loan balances and can involve a greater degree of financial and credit risk than other loans. Any significant failure to pay on time by our customers would hurt our earnings. The increased financial and credit risk associated with these types of loans are a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the size of loan balances, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans.

We have significant exposure to risks associated with commercial and residential real estate.

A substantial portion of our loan portfolio consists of commercial and residential real estate-related loans, including real estate development, construction and residential and commercial mortgage loans. As of December 31, 2010, we had approximately $243.6 million of commercial real estate loans outstanding, which represented approximately 41.2% of our loan portfolio. As of that same date, we had approximately $86.0 million in residential real estate loans outstanding, or approximately 14.5% of our loan portfolio, and approximately $41.6 million in construction and development loans outstanding, or approximately 7.0% of our loan portfolio. Consequently, real estate-related credit risks are a significant concern for us. The adverse consequences from real estate-related credit risks tend to be cyclical and are often driven by national economic developments that are not controllable or entirely foreseeable by us or our borrowers. General difficulties in our real estate markets have recently contributed to significant increases in our non-performing loans, charge-offs, and decreases in our income.

Our construction and development lending exposes us to significant risks and has resulted in a disproportionate amount of the increase in our provision for loan losses in recent periods.

Our construction and development loan portfolio includes residential and non-residential construction and development loans. Our residential construction and development portfolio consists mainly of loans for the construction, development, and improvement of residential lots, homes, and subdivisions. Our non-residential construction and development 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 sale 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. Additionally, we may



experience significant construction loan losses because independent appraisers or project engineers inaccurately estimate the cost and value of construction loan projects.

Construction and development loans have contributed disproportionately to the increase in our provisions for loan losses in recent periods. As of December 31, 2010, we had approximately $41.6 million in construction and development loans outstanding, or approximately 7.0% of our loan portfolio. Approximately $14.4 million, or 59.8%, of our net charge-offs during 2009 and approximately $5.6 million, or 34.4%, of our net charge-offs during 2010 was attributable to construction and development loans. Further deterioration in our construction and development loan portfolio could result in additional increases in the provision for loan losses and an increase in charge-offs, all of which could have a material adverse effect on our financial condition and results of operations.

Environmental liability associated with commercial lending could result in losses.

In the course of our business, we may acquire, through foreclosure, properties securing loans we have originated or purchased that are in default. Particularly in commercial real estate lending, there is a risk that hazardous substances could be discovered on these properties. In this event, we might be required to remove these substances from the affected properties at our sole cost and expense. The cost of this removal could substantially exceed the value of affected properties. We may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties. These events could have an adverse effect on our business, results of operations and financial condition.

Our allowance for loan losses may not be adequate to cover actual future losses.

We maintain an allowance for loan losses to cover probable incurred loan losses. Every loan we make carries a certain risk of non-repayment, and we make various assumptions and judgments about the collectibility of our loan portfolio including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. Through a periodic review and consideration of the loan portfolio, management determines the amount of the allowance for loan losses by considering general market conditions, credit quality of the loan portfolio, the collateral supporting the loans and performance of customers relative to their financial obligations with us.

The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and these losses may exceed current estimates. We cannot fully predict the amount or timing of losses or whether the loss allowance will be adequate in the future. If our assumptions prove to be incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to the allowance for loan losses. In addition, bank regulatory agencies periodically review the Company's allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different from those of management. Excessive loan losses and significant additions to our allowance for loan losses could have a material adverse impact on our financial condition and results of operations.



As of December 31, 2010 and 2009, our allowance for loan losses was $25.2 million and $20.0 million, respectively. As of the same dates, the ratio of our allowance for loan losses to total nonperforming loans was 86.0% and 63.2% respectively. Nonperforming loans include nonaccrual loans and accruing loans past due 90 days or more and exclude accruing restructured loans. As of the same dates, total accruing restructured loans were $17.3 million and $15.6 million, respectively.

We operate in a highly competitive industry and market area, which may adversely affect our profitability.

We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include a number of community banks, subsidiaries of large multi-state and multi-bank holding companies, credit unions, savings associations and various finance companies and loan production offices. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking.

We compete with these institutions both in attracting deposits and in making loans. Price competition for loans might result in us originating fewer loans, or earning less on our loans, and price competition for deposits might result in a decrease in our total deposits or higher rates on our deposits. In addition, we have to attract our customer base from other existing financial institutions and from new residents. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Due to their size, many competitors may be able to achieve economies of scale and may offer a broader range of products and services as well as better pricing for those products and services than we can.

The recently enacted Dodd-Frank Act may adversely impact the Company's results of operations, financial condition or liquidity.
 
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), was signed into law by President Obama. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, establishes the new federal Bureau of Consumer Financial Protection (the “BCFP”), and will require the BCFP and other federal agencies to implement many new and significant rules and regulations. At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the resulting rules and regulations will impact our business. Compliance with these new laws and regulations will likely result in additional costs, which could be significant, and could adversely impact our results of operations, financial condition or liquidity.

Legislative or regulatory changes or actions, or significant litigation, could adversely impact us or the businesses in which we are engaged.

The financial services industry is extensively regulated. We are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of our operations.



Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors and the deposit insurance funds, and not to benefit our shareholders. The impact of changes to laws and regulations or other actions by regulatory agencies may negatively impact us or our ability to increase the value of our business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution's allowance for loan losses. Future regulatory changes or accounting pronouncements may increase our regulatory capital requirements or adversely affect our regulatory capital levels. Additionally, actions by regulatory agencies or significant litigation against us could require us to devote significant time and resources to defending our business and may lead to penalties that materially affect us and our shareholders.

We may face increasing pressure from historical purchasers of our residential mortgage loans to repurchase those loans or reimburse purchasers for losses related to those loans.

We generally sell the fixed rate long-term residential mortgage loans we originate on the secondary market and retain adjustable rate mortgage loans for our portfolios. In response to the financial crisis, we believe that purchasers of residential mortgage loans, such as government sponsored entities, are increasing their efforts to seek to require sellers of residential mortgage loans to either repurchase loans previously sold or reimburse purchasers for losses related to loans previously sold when losses are incurred on a loan previously sold due to actual or alleged failure to strictly conform to the purchaser's purchase criteria. As a result, we may face increasing pressure from historical purchasers of our residential mortgage loans to repurchase those loans or reimburse purchasers for losses related to those loans and we may face increasing expenses to defend against such claims. If we are required in the future to repurchase loans previously sold, reimburse purchasers for losses related to loans previously sold, or if we incur increasing expenses to defend against such claims, our financial condition and results of operations would be negatively affected.

We are subject to risks related to the prepayments of loans, which may negatively impact our business.

Generally, our customers may prepay the principal amount of their outstanding loans at any time. The speed at which prepayments occur, and the size of prepayments, are within customers' discretion. If customers prepay the principal amount of their loans, and we are unable to lend those funds to other borrowers or invest the funds at the same or higher interest rates, our interest income will be reduced. A significant reduction in interest income could have an adverse effect impact on our results of operations and financial condition.

Changes in interest rates may negatively affect our earnings and the value of our assets.

Our earnings and cash flows depend substantially upon our net interest income. Net interest income is the difference between interest income earned on interest-earnings assets, such as loans and investment securities, and interest expense paid on interest-bearing liabilities, such as deposits and borrowed funds. Interest rates are sensitive to many factors that are beyond our control, including general economic conditions, competition and policies of various



governmental and regulatory agencies and, in particular, the policies of the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and investment securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect: (i) our ability to originate loans and obtain deposits; (ii) the fair value of our financial assets and liabilities, including our securities portfolio; and (iii) the average duration of our interest-earning assets.  This also includes the risk that interest-earning assets may be more responsive to changes in interest rates than interest-bearing liabilities, or vice versa (repricing risk), the risk that the individual interest rates or rates indices underlying various interest-earning assets and interest-bearing liabilities may not change in the same degree over a given time period (basis risk), and the risk of changing interest rate relationships across the spectrum of interest-earning asset and interest-bearing liability maturities (yield curve risk), including a prolonged flat or inverted yield curve environment.  Any substantial, unexpected, prolonged change in market interest rates could have a material adverse affect on our financial condition and results of operations.

We are subject to liquidity risk in our operations, which could adversely affect our ability to fund various obligations.

Liquidity risk is the possibility of being unable to meet obligations as they come due, capitalize on growth opportunities as they arise, or pay regular dividends because of an inability to liquidate assets or obtain adequate funding on a timely basis, at a reasonable cost and within acceptable risk tolerances. Liquidity is required to fund various obligations, including credit obligations to borrowers, mortgage originations, withdrawals by depositors, repayment of debt, dividends to shareholders, operating expenses and capital expenditures. Liquidity is derived primarily from retail deposit growth and retention, principal and interest payments on loans and investment securities, net cash provided from operations and access to other funding sources. Liquidity is essential to our business.

We must maintain sufficient funds to respond to the needs of depositors and borrowers. An inability to raise funds through deposits, borrowings, the sale or pledging as collateral of loans and other assets could have a material adverse effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or regulatory action that limits or eliminates our access to alternate funding sources. Our ability to borrow could also be impaired by factors that are nonspecific to us, such as severe disruption of the financial markets or negative expectations about the prospects for the financial services industry as a whole, as evidenced by recent turmoil in the domestic and worldwide credit markets.

The soundness of other financial institutions could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions



about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral that we hold cannot be realized upon or is liquidated at prices insufficient to recover the full amount of the loan. We cannot assure you that any such losses would not materially and adversely affect our business, financial condition or results of operations.

A substantial decline in the value of our Federal Home Loan Bank of Indianapolis common stock may adversely affect our financial condition.

We own common stock of the Federal Home Loan Bank of Indianapolis (the “FHLB”), in order to qualify for membership in the Federal Home Loan Bank system, which enables us to borrow funds under the Federal Home Loan Bank advance program. The carrying value of our FHLB common stock was approximately $2.8 million as of December 31, 2010.

Published reports indicate that certain member banks of the Federal Home Loan Bank system may be subject to asset quality risks that could result in materially lower regulatory capital levels. In December 2008, certain member banks of the Federal Home Loan Bank system (including the FHLB) suspended dividend payments and the repurchase of capital stock until further notice. In an extreme situation, it is possible that the capitalization of a Federal Home Loan Bank, including the FHLB, could be substantially diminished or reduced to zero. Consequently, given that there is no market for our FHLB common stock, we believe that there is a risk that our investment could be deemed other-than-temporarily impaired at some time in the future. If this occurs, it may adversely affect our results of operations and financial condition. If the FHLB were to cease operations, or if we were required to write-off our investment in the FHLB, our business, financial condition, liquidity, capital and results of operations may be materially adversely affected.

Impairment of investment securities, other intangible assets, or deferred tax assets could require charges to earnings, which could result in a negative impact on our results of operations.

In assessing the impairment of investment securities, we consider the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuers, whether the market decline was affected by macroeconomic conditions and whether we have the intent to sell the debt security or will be required to sell the debt security before its anticipated maturity.

Under current accounting standards, goodwill and certain other intangible assets with indeterminate lives are no longer amortized but, instead, are assessed for impairment periodically or when impairment indicators are present. As of March 31, 2009, the Company determined that the full amount of the goodwill carried on its financial statements was impaired and, accordingly, a goodwill impairment charge was taken in the first quarter of 2009 for the entire book value of goodwill of $3.5 million.

Deferred tax assets are only recognized to the extent it is more likely than not they will be realized. Should our management determine it is not more likely than not that the deferred tax



assets will be realized, a valuation allowance with a charge to earnings would be reflected in the period. At December 31, 2010, the Company's net deferred tax asset was $9.8 million, of which $4.1 million was disallowed for regulatory capital purposes. Based on the levels of taxable income in prior years, the significant improvement in operating results in 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 December 31, 2010. If the Company is required in the future to take a valuation allowance with respect to its deferred tax asset, its financial condition, results of operations and regulatory capital levels would be negatively affected.

An “ownership change” for purposes of Section 382 of the Internal Revenue Code may materially impair our ability to use our deferred tax assets.

Our ability to use our deferred tax assets to offset future taxable income will be limited if we experience an “ownership change” as defined in Section 382 of the Internal Revenue Code. In general, an ownership change will occur if there is a cumulative increase in our ownership by “5-percent shareholders” (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. A corporation that experiences an ownership change will generally be subject to an annual limitation on the use of its pre-ownership change deferred tax assets equal to the equity value of the corporation immediately before the ownership change, multiplied by the long-term tax-exempt rate.

In the event an “ownership change” was to occur, we could realize a permanent loss of a portion of our U.S. federal deferred tax assets and lose certain built-in losses that have not been recognized for tax purposes. The amount of the permanent loss would depend on the size of the annual limitation (which is a function of our market capitalization at the time of an “ownership change” and the then prevailing long-term tax exempt rate) and the remaining carry forward period (U.S. federal net operating losses generally may be carried forward for a period of 20 years). The resulting loss could have a material adverse effect on our results of operations and financial condition and could also decrease the Bank's regulatory capital. We performed an evaluation of potential impairment at December 31, 2010, and determined that if an “ownership change” had occurred on December 31, 2010, we would have had no impairment of our net deferred tax asset.

If we are required to take a valuation allowance with respect to our mortgage servicing rights, our financial condition and results of operations would be negatively affected.

At December 31, 2010, our mortgage servicing rights had a book value of $4.8 million and a fair value of approximately $5.8 million. Because of the current interest rate environment and the increasing rate and speed of mortgage refinancings, it is possible that we may have to take a valuation allowance with respect to our mortgage servicing rights in the future. If we are required in the future to take a valuation allowance with respect to our mortgage servicing rights, our financial condition and results of operations would be negatively affected.



We may be required to pay additional insurance premiums to the FDIC, which could negatively impact earnings.

Recent insured institution failures, as well as deterioration in banking and economic conditions, have significantly increased FDIC loss provisions, resulting in a decline in the designated reserve ratio to historical lows. The reserve ratio may continue to decline over the next several years. In addition, the limit on FDIC coverage has been permanently increased to $250,000. These developments have caused our FDIC premiums to increase in recent periods.

Further, depending upon any future losses that the FDIC insurance fund may suffer, there can be no assurance that there will not be additional premium increases in order to replenish the fund. The FDIC may need to set a higher base rate schedule or impose special assessments due to future financial institution failures and updated failure and loss projections. Potentially higher FDIC assessment rates than those currently projected could have an adverse impact on our results of operations.

We depend upon the accuracy and completeness of information about customers.

In deciding whether to extend credit to customers, we may rely on information provided to us by our customers, including financial statements and other financial information. We may also rely on representations of customers as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. Our financial condition and results of operations could be negatively impacted to the extent that we extend credit in reliance on financial statements that do not comply with generally accepted accounting principles or that are misleading or other information provided by customers that is false or misleading.

We hold general obligation municipal bonds in our investment securities portfolio. If one or more issuers of these bonds were to become insolvent and default on its obligations under the bonds, it could have a negative effect on our financial condition and results of operations.

Some experts have raised concerns about the financial difficulties that municipalities are experiencing, and the potential for many municipalities to become insolvent.  Municipal bonds held by us totaled $24.6 million at December 31, 2010, and were issued by different municipalities. The municipal portfolio contains a small level of geographic risk, as approximately 2.9% of the investment portfolio is issued by political subdivisions located within Lenawee County, Michigan and 4.1% in Washtenaw County, Michigan. We believe the overall credit quality of the municipalities to be good and expect the municipal bonds to continue to perform in accordance with their terms. However, there can be no assurance that the financial conditions of these municipalities will not be materially and adversely affected by future economic conditions. If one or more of the issuers of these bonds were to become insolvent and default on their obligations under the bonds, it could have a negative effect on our financial condition and results of operations.

We may be a defendant in a variety of litigation and other actions, which may have a material adverse effect on our financial condition and results of operations.

We may be involved from time to time in a variety of litigation arising out of our business. Our insurance may not cover all claims that may be asserted against us, and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation or cause us to incur



unexpected expenses, which could be material in amount. Should the ultimate expenses, judgments or settlements in any litigation exceed our insurance coverage, they could have a material adverse effect on our financial condition and results of operations. In addition, we may not be able to obtain appropriate types or levels of insurance in the future, nor may we be able to obtain adequate replacement policies with acceptable terms, if at all.

We may face risks related to future expansion and acquisitions or mergers, which include substantial acquisition costs, an inability to effectively integrate an acquired business into our operations, lower than anticipated profit levels and economic dilution to shareholders.

We may seek to acquire other financial institutions or parts of those institutions and may engage in de novo branch expansion in the future. We may incur substantial costs to expand. An expansion may not result in the levels of profits we anticipate. Integration efforts for any future mergers or acquisitions may not be successful, which could have a material adverse effect on our results of operations and financial condition. Also, we may issue equity securities, including our common stock and securities convertible into shares of our common stock, in connection with future acquisitions, which could cause ownership and economic dilution to our current shareholders.

We may not be able to effectively adapt to technological change, which could adversely affect our profitability.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers, all of which could adversely affect our profitability.

Our controls and procedures may fail or be circumvented, which could have a material adverse effect on our business, results of operations and financial condition.

Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.



A failure to fully comply with our memorandum of understanding could subject us to regulatory actions.

The Bank is a party to a Memorandum of Understanding, which documents an understanding among the Bank, the FDIC and OFIR. See the information under “Management's Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources” on Page A-26 of this report, which information is incorporated here by reference. Failure to comply with the terms of the Memorandum of Understanding could result in enforcement orders or penalties from our regulators, under the terms of which we could, among other things, become subject to restrictions on our ability to develop any new business, as well as restrictions on our existing business, and we could be required to raise additional capital, dispose of certain assets and liabilities within a prescribed period of time, or both. The terms of any such enforcement order or action could have a material negative effect on our business, operations, financial condition, results of operations or the value of our common stock.

If we cannot raise additional capital when needed, our ability to further expand our operations through organic growth and acquisitions could be materially impaired.

We are required by federal and state regulatory authorities to maintain specified levels of capital to support our operations. We may need to raise additional capital to support our current level of assets or our growth. Our ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. We cannot assure that we will be able to raise additional capital in the future on terms acceptable to us or at all. If we cannot raise additional capital when needed, our ability to maintain our current level of assets or to expand our operations through organic growth and acquisitions could be materially limited. Additional information on the capital requirements applicable to the Bank may be found under “Management's Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources” on Page A-26 hereof, and is incorporated here by reference.

Loss of our Chief Executive Officer or other executive officers could adversely affect our business.

Our success is dependent upon the continued service and skills of our executive officers and senior management. If we lose the services of these key personnel, it could adversely affect our business because of their skills, years of industry experience and the difficulty of promptly finding qualified replacement personnel. The services of Robert K. Chapman, our President and Chief Executive Officer, would be particularly difficult to replace.

Risks Associated with Our Stock

Our participation in U.S. Treasury's TARP Capital Purchase Program restricts our ability to pay dividends to common shareholders, restricts our ability to repurchase shares of common stock, and could have other negative effects.

On January 16, 2009, we sold to the United States Department of the Treasury $20,600,000 of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A, which will pay cumulative dividends at a rate of 5% for the first five years and 9% thereafter. We also issued to Treasury a 10-year Warrant to purchase 311,492 shares of our common stock at an exercise price of $9.92



per share. We will have the right to redeem the preferred stock at any time after three years. The payment of dividends on the TARP CPP preferred stock will reduce the amount of earnings available to pay dividends to common shareholders. This could negatively affect our ability to pay dividends on our common stock.

Under the TARP CPP, we are subject to restrictions on the payment of dividends to common shareholders and the repurchase of common stock. Until the earlier of January 16, 2012 and the date on which Treasury no longer holds any shares of the TARP CPP preferred stock, we may not, without Treasury's approval, increase common dividends above $0.10 per share per quarter or repurchase any of our common shares (subject to limited exceptions). These restrictions may reduce or prevent payment of dividends to common shareholders that would otherwise be paid if we were not a participant in the TARP CPP and could have an adverse effect on the market price of our common stock.

In addition, we may not pay any dividends at all on our common stock unless we are current on our dividend payments on the TARP CPP preferred stock. If we fail to pay in full dividends on the TARP CPP preferred stock for six dividend periods, whether consecutive or not, the holder of the TARP CPP preferred stock would have the right to elect two directors to our board of directors. This right would terminate only upon us declaring and paying in full all accrued and unpaid dividends for all past dividend periods, including the latest completed dividend period. This right could reduce the level of influence existing common shareholders have in our management policies.

If Treasury (or a subsequent holder) exercised the Warrant and purchased shares of common stock, each common shareholder's percentage of ownership of us would be smaller. As a result, each shareholder might have less influence in our management policies than before exercise of the Warrant. This could also have an adverse effect on the market price of our common stock.

Unless we are able to redeem the TARP CPP preferred stock before January 16, 2014, the cost of this capital will increase on that date, from 5% (approximately $1,030,000 annually) to 9% (approximately $1,854,000 annually). Depending on our financial condition at the time, this increase in dividends on the TARP CPP preferred stock could have a negative effect on our capacity to pay common stock dividends.

Additional restrictions and requirements may be imposed by the Treasury or Congress on us at a later date. These restrictions may apply to us retroactively and their imposition is outside of our control.

Our ability to pay dividends is limited and we may be unable to pay future dividends.

We have suspended payment of dividends on our common stock in order to preserve capital. Our ability to pay dividends is limited by regulatory restrictions and the need to maintain sufficient consolidated capital. The ability of the Bank to pay dividends to the Company is limited by its obligations to maintain sufficient capital and by other general restrictions on dividends that are applicable to banks. If the Company or the Bank does not satisfy these regulatory requirements, we would be unable to pay dividends on our common stock. Additional information on restrictions on payment of dividends by the Company and the Banks may be found in Item 5 of



this report, and under Note 15 on Page A-50 hereof, all of which information is incorporated here by reference.

The market price of our common stock can be volatile, which may make it more difficult to resell our common stock at a desired time and price.

Stock price volatility may make it more difficult for a shareholder to resell our common stock when a shareholder wants to and at prices a shareholder finds attractive or at all. Our stock price can fluctuate significantly in response to a variety of factors. General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of operating results.

Our common stock trading volume may not provide adequate liquidity for our shareholders.

Our common stock is quoted on the OTC Bulletin Board. The average daily trading volume for our common stock is far less than larger financial institutions. Due to this relatively low trading volume, significant sales of our common stock, or the expectation of these sales, may place significant downward pressure on the market price of our common stock.  We may apply for listing of our common stock on the NASDAQ Stock Market or another securities exchange in the future. No assurance can be given that our application will be approved or that we will meet applicable initial listing standards in the future. No assurance can be given that an active trading market in our common stock will develop in the foreseeable future or can be maintained.

We may issue additional shares of our common stock in the future, which could dilute a shareholder's ownership of common stock.

Our articles of incorporation authorize our board of directors, without shareholder approval, to, among other things, issue additional shares of common or preferred stock. The issuance of any additional shares of common or preferred stock could be dilutive to a shareholder's ownership of our common stock. To the extent that we issue options or warrants to purchase common stock in the future and the options or warrants are exercised, our shareholders may experience further dilution. Holders of shares of our common stock have no preemptive rights that entitle holders to purchase their pro rata share of any offering of shares of any class or series and, therefore, shareholders may not be permitted to invest in future issuances of our common or preferred stock. We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations, and the terms of our MOU impose heightened capital requirements on us. Accordingly, regulatory requirements and/or further deterioration in our asset quality may require us to sell common stock to raise capital under circumstances and at prices which result in substantial dilution.

We may issue debt and equity securities that are senior to our common stock as to distributions and in liquidation, which could negatively affect the value of our common stock.

In the future, we may increase our capital resources by entering into debt or debt-like financing or issuing debt or equity securities, which could include issuances of senior notes, subordinated notes, preferred stock or common stock. In the event of our liquidation, our lenders and holders of our debt or preferred securities would receive a distribution of our available assets before



distributions to the holders of our common stock. Our decision to incur debt and issue securities in future offerings will depend on market conditions and other factors beyond its control. We cannot predict or estimate the amount, timing or nature of its future offerings and debt financings. Future offerings could reduce the value of shares of our common stock and dilute a shareholder's interest in us.

Our common stock is not insured by any governmental entity.

Our common stock is not a deposit account or other obligation of any bank and is not insured by the FDIC or any other governmental entity. Investment in our common stock is subject to risk, including possible loss.

Anti-takeover provisions could negatively impact our shareholders.

Our articles of incorporation and the laws of Michigan include provisions which are designed to provide our board of directors with time to consider whether a hostile takeover offer is in the best interests of us and our shareholders. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control. The provisions also could diminish the opportunities for a holder of our common stock to participate in tender offers, including tender offers at a price above the then-current price for our common stock. These provisions could also prevent transactions in which our shareholders might otherwise receive a premium for their shares over then-current market prices, and may limit the ability of our shareholders to approve transactions that they may deem to be in their best interests.

If an entity holds as little as a 5% interest in our outstanding securities, that entity could, under certain circumstances, be subject to regulation as a “bank holding company.”

Any entity, including a “group” composed of natural persons, owning or controlling with the power to vote 25% or more of our outstanding securities, or 5% or more if the holder otherwise exercises a “controlling influence” over us, may be subject to regulation as a “bank holding company” in accordance with the Bank Holding Company Act of 1956, as amended (the “BHC Act”). In addition, (i) any bank holding company or foreign bank with a U.S. presence may be required to obtain the approval of the Federal Reserve Board under the BHC Act to acquire or retain 5% or more of our outstanding securities and (ii) any person not otherwise defined as a company by the BHC Act and its implementing regulations may be required to obtain the approval of the Federal Reserve Board under the Change in Bank Control Act of 1978, as amended, to acquire or retain 10% or more of our outstanding securities. Becoming a bank holding company imposes statutory and regulatory restrictions and obligations, such as providing managerial and financial strength for its bank subsidiaries. Regulation as a bank holding company could require the holder to divest all or a portion of the holder's investment in our securities or those nonbanking investments that may be deemed impermissible or incompatible with bank holding company status, such as a material investment in a company unrelated to banking.

ITEM 1B                      UNRESOLVED STAFF COMMENTS

None



ITEM 2                      PROPERTIES

The Company’s executive offices are located in Ann Arbor, MI. The Company and the Bank operate nineteen properties in Washtenaw, Lenawee and Monroe Counties in Michigan. Five of the properties are leased, and all others are owned. Sixteen properties include banking offices, and all but two of the banking offices offer drive-up banking services. All banking offices also offer ATM service. In addition to banking offices, United operates administrative and support facilities at the Hickman Financial Center, support and training facilities at the Downing Center, a Wealth Management office, and additional training facilities, all in Tecumseh.

ITEM 3                      LEGAL PROCEEDINGS

The Company and its subsidiaries are not involved in any material pending legal proceedings. They are involved in ordinary routine litigation incidental to their business; however, no such proceedings are expected to result in any material adverse effect on the operations or earnings of the Company. Neither the Company nor its subsidiary are involved in any proceedings to which any director, principal officer, affiliate thereof, or person who owns of record or beneficially more than five percent (5%) of the outstanding stock of the Company, or any associate of the foregoing, is a party or has a material interest adverse to the Company.

ITEM 4                      [REMOVED AND RESERVED]

This Item of Form 10-K has been removed and reserved by the Securities and Exchange Commission.
 

 

ITEM 5                      MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
MARKET FOR COMMON STOCK

The following table shows the high and low bid prices of common stock of the Company for each quarter of 2010 and 2009 as quoted on the OTC Bulletin Board, under the symbol of “UBMI.” The prices listed below are OTC Bulletin Board quotations. They reflect inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions. They also do not include private transactions not involving brokers or dealers. The Company had 1,221 shareholders of record as of December 31, 2010.

   
2010
   
2009
 
               
Cash
               
Cash
 
   
Market Price
   
Dividends
   
Market Price
   
Dividends
 
 Quarter
 
High
   
Low
   
Declared
   
High
   
Low
   
Declared
 
 1st
  $ 8.50     $ 4.35     $ -     $ 10.50     $ 5.50     $ 0.02  
 2nd
    7.00       4.00       -       7.00       5.60       -  
 3rd
    6.25       3.65       -       6.90       4.74       -  
 4th
    4.00       2.65       -       6.50       5.00       -  



The board of directors of the Company suspended payment of cash dividends on its shares of common stock in the second quarter of 2009. The board believes that it is in the Company’s best interest to preserve capital given the severe financial market conditions in Michigan and the United States.

Banking laws and regulations restrict the amount the Bank can transfer to the Company in the form of cash dividends and loans. Those restrictions are discussed in Note 15 on Page A-50, which discussion is incorporated here by reference. In addition, under the CPP, the Company is subject to restrictions on the declaration and payment of dividends to common shareholders. These restrictions are discussed in Part I, Item 1 of this report and Note 15 on Page A-50, which discussion is incorporated here by reference. See also, the risk factor on Page 26 of this report entitled “Our participation in U.S. Treasury's TARP Capital Purchase Program restricts our ability to pay dividends to common shareholders, restricts our ability to repurchase shares of common stock, and could have other negative effects,” which is incorporated here by reference.

The following table provides information regarding equity compensation plans approved by shareholders as of December 31, 2010.
 
 
 
 
 
 
Plan Category
 
Number of securities to be issued upon exercise of outstanding options, and rights
   
Weighted-average exercise price of outstanding options, warrants and rights
   
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
 
 Equity compensation plans approved by security holders
 
(a)
   
(b)
   
(c)
 
 
Stock Option Plans (1)
    407,730     $ 21.02       -  
 
Stock Incentive Plan of 2010
    -       -       500,000  
 
Director Retainer Plan (2)
    63,136    
NA
      39,517  
 
Deferred Bonus Plan (2)
    4,568    
NA
       21,373  
   
Total
    475,434     $ 21.02       560,890  
 
(1)
The Company's 2005 Stock Option Plan expired on January 1, 2010, and no additional options can be issued under the plan.
   
(2)
The number of shares credited to participants under the Director Retainer and Deferred Bonus plans is determined by dividing the amount of each deferral by the market price of stock at the date of that deferral.

The Company has no equity compensation plans not approved by shareholders.

SELECTED FINANCIAL DATA

The following table shows summarized historical consolidated financial data for the Company. The table is unaudited. The information in the table is derived from the Company's audited financial statements for 2006 through 2010. This information is only a summary. You should read it in conjunction with the consolidated financial statements, related notes, Management's Discussion and Analysis of Financial Condition and Results of Operations, and other information included in this report. Information is unaudited; in thousands, except per share data.



Thousands of dollars
                             
FINANCIAL CONDITION
 
2010
   
2009
   
2008
   
2007
   
2006
 
Assets
                             
Cash and demand balances in other banks
  $ 10,623     $ 10,047     $ 12,147     $ 17,996     $ 17,606  
Federal funds sold and equivalents
    95,599       115,542       6,325       11,130       3,770  
Securities available for sale
    124,544       92,146       82,101       83,128       93,141  
Net loans
    577,111       638,012       683,695       637,994       593,914  
Other assets
    53,833       53,581       48,125       45,439       42,558  
Total Assets   $ 861,710     $ 909,328     $ 832,393     $ 795,687     $ 750,989  
                                         
Liabilities and Shareholders' Equity
                                       
Noninterest bearing deposits
  $ 113,206     $ 99,893     $ 89,487     $ 77,878     $ 81,373  
Interest bearing deposits
    620,792       682,908       620,062       593,659       546,629  
 Total deposits
    733,998       782,801       709,549       671,537       628,002  
Short term borrowings
    1,234       -       -       -       77  
Other borrowings
    30,321       42,098       50,036       44,611       40,945  
Other liabilities
    3,453       3,562       3,357       6,572       7,429  
 Total Liabilities
    769,006       828,461       762,942       722,720       676,453  
Shareholders' Equity
    92,704       80,867       69,451       72,967       74,536  
 Total Liabilities and Shareholders' Equity
  $ 861,710     $ 909,328     $ 832,393     $ 795,687     $ 750,989  

RESULTS OF OPERATIONS
                             
Interest income
  $ 39,770     $ 43,766     $ 47,041     $ 51,634     $ 47,056  
Interest expense
    8,687       12,251       17,297       21,873       17,802  
 
Net Interest Income
    31,083       31,515       29,744       29,761       29,254  
Provision for loan losses
    21,530       25,770       14,607       8,637       2,123  
Noninterest income
    16,298       16,899       13,510       13,652       12,175  
Goodwill impairment
    -       3,469       -       -       -  
Other noninterest expense (1)
    32,497       33,647       29,963       27,559       26,914  
 
Loss before federal income tax
    (6,646 )     (14,472 )     (1,316 )     7,217       12,392  
Federal income tax (benefit)
    (2,938 )     (5,639 )     (1,280 )     1,635       3,420  
 
Net loss
  $ (3,708 )   $ (8,833 )   $ (36 )   $ 5,582     $ 8,972  
                                         
Basic and diluted earnings (loss) per share (2) (3)
  $ (0.89 )   $ (1.93 )   $ (0.01 )   $ 1.06     $ 1.69  
Cash dividends paid per common share (3)
    -       0.02       0.70       0.79       0.73  
                                         
 (1)
Excludes 2009 goodwill impairment.
 
 (2)
Earnings per share data is based on average shares outstanding plus average contingently issuable shares.
 
 (3)
Adjusted to reflect stock dividends paid in 2007 and 2006.
 




MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information required by this item is contained on Pages A-1 through A-28 hereof, and is incorporated by reference here.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Selected Quarterly Financial Data – The information required by this item is contained in Note 22 on Page A-61 hereof, and is incorporated by reference here.

Other information required by this item is contained on Pages A-30 through A-62 hereof, and is incorporated by reference here.

INDEX TO FINANCIAL STATEMENTS
 
Page No.
 
    A-29  
         
Consolidated Financial Statements
       
      A-30  
      A-31  
      A-32  
      A-33  
      A-34  

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

CONTROLS AND PROCEDURES

(a)
Our management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 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.
   
(b)
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined under Rules 13a-15(f). The Company's
 
   
   
 
internal control system was designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
   
 
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.
   
 
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's internal control over financial reporting as of the Evaluation Date, and has concluded that, as of the Evaluation Date, the Company's internal control over financial reporting was effective. Management identified no material weakness in the Company's internal control over financial reporting. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of Treadway Commission (“COSO”) in “Internal Control - Integrated Framework.”
   
   
   
 
/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
   
(c)
There has been no change in the Company's internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

OTHER INFORMATION

None.




DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The Company has adopted a Code of Business Conduct and Ethics (the “Code”) that applies to all co-workers, officers and directors of the Company and its subsidiaries. The Code is designed to deter wrongdoing and to promote:

Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
   
Full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with, or submits to, the Commission and in other public communications made by the registrant;
   
Compliance with applicable governmental laws, rules and regulations;
   
Prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and
   
Accountability for adherence to the Code.

A copy of the Code is posted on our website at www.ubat.com.

The information required by this item, other than as set forth above, is contained under the heading “Directors and Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company's 2011 Proxy Statement and is incorporated here by reference.

EXECUTIVE COMPENSATION

The information required by this item is contained under the heading “Compensation of Directors and Executive Officers” and “Compensation Committee Interlocks and Insider Participation” in the Company's definitive Proxy Statement in connection with its 2011 Annual Meeting of Shareholders and is incorporated here by reference.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is contained under the headings “Compensation of Directors and Executive Officers – Equity Compensation Plan Information,” “Security Ownership of Certain Beneficial Owners,” and “Security Ownership of Management,” in the Company's definitive Proxy Statement in connection with its 2011 Annual Meeting of Shareholders and is incorporated here by reference.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is contained under the headings “Directors and Executive Officers,” “Committees and Meetings of the Board of Directors,” and “Directors, Executive



Officers, Principal Shareholders and their Related Interests - Transactions with the Bank” in the Company's definitive Proxy Statement in connection with its 2011 Annual Meeting of Shareholders and in Note 14 on Page A-50 hereof and is incorporated here by reference.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is contained under the heading “Relationship With Independent Public Accountants” in the Company's definitive Proxy Statement in connection with its 2011 Annual Meeting of Shareholders and is incorporated here by reference.


EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)
1.
The information required by this Item is included in Item 8 on Page 34 of this report, and is incorporated here by reference.
     
 
2.
Financial statement schedules are not applicable.
     
(b)
The exhibits filed in response to Item 601 of Regulation S-K are listed in the Exhibit Index, which is incorporated here by reference.
     
(c)
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.





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.
   
       
By
/s/ Robert K. Chapman
 
February 24, 2011
 
Robert K. Chapman, President
and Chief Executive Officer
   


Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons in the capacities and on the dates indicated.

  /s/ Robert K. Chapman  
Director, President and Chief Executive Officer
(Principal Executive Officer)
February 24, 2011
Robert K. Chapman
   
       
  /s/ Randal J. Rabe  
Executive Vice President and Chief Financial Officer (Principal Financial Officer)
February 24 2011
Randal J. Rabe
   
     
   
Director
February24, 2011
Stephanie H. Boyse*
     
       
 
 
Director
February 24, 2011
James D. Buhr *
     
       
   
Director
February 24, 2011
John H. Foss*
     
       
   
Director
February 24, 2011
Norman G. Herbert*
     
       
   
Chairman of the Board
February 24, 2011
David S. Hickman*
     
       
   
Director
February 24, 2011
James C. Lawson*
     
       
   
Director
February 24, 2011
Len M. Middleton*
     



*By
/s/ Robert K. Chapman
 
 
Robert K. Chapman, Attorney-in-Fact
 



Exhibit
 Description
1.1
Underwriting Agreement dated December 13, 2010 by and among United Bancorp, Inc., United Bank & Trust, and Sandler O’Neill & Partners, L.P. as sole underwriter. Previously filed with the Commission on December 14, 2010 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 1.1.  Incorporated here by reference.
 
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 February 27, 2009 in United Bancorp, Inc.'s Annual Report on Form 10-K, 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*
United Bancorp, Inc. Director Retainer Stock Plan. Previously filed with the Commission on February 27, 2009 in United Bancorp, Inc.'s Annual Report on Form 10-K, Exhibit 10.1. Incorporated here by reference.
 
10.2*
United Bancorp, Inc. Senior Management Bonus Deferral Stock Plan. Previously filed with the Commission on February 27, 2009 in United Bancorp, Inc.'s Annual Report on Form 10-K, Exhibit 10.2, as amended by the First Amendment to the Senior Management Bonus Deferral Stock Plan previously filed with the Commission on September 21, 2009 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 10.5. Incorporated here by reference.
 
10.3*
United Bancorp, Inc. 1999 Stock Option Plan. Previously filed with the Commission on February 27, 2009 in United Bancorp, Inc.'s Annual Report on Form 10-K, Exhibit 10.3. Incorporated here by reference.
 
10.4*
United Bancorp, Inc. 2005 Stock Option Plan. Previously filed with the Commission on September 21, 2009 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 10.3. Incorporated here by reference.
 
 
   
10.5*
Chairman's Agreement, effective February 1, 2010, between United Bancorp, Inc. and David S. Hickman. Previously filed with the Commission on November 2, 2009 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 10.1. Incorporated here by reference.
 
10.6*
Form of Employment Contract, effective as of June 1, 2009. Previously filed with the Commission on June 2, 2009 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 10.1. Incorporated here by reference.
 
10.7
Letter Agreement, dated January 16, 2009, between United Bancorp, Inc. and 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 10.1. Incorporated here by reference.
 
10.8
Form of Waiver. Previously filed with the Commission on January 16, 2009 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 10.2. Incorporated here by reference.
 
10.9*
Form of Consent and Amendments to Benefit Plans. Previously filed with the Commission on January 16, 2009 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 10.3. Incorporated here by reference.
 
10.10*
2009 Management Committee Incentive Compensation Plan. Previously filed with the Commission on September 21, 2009 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 10.1. Incorporated here by reference.
 
10.11*
2009 Stakeholder Incentive Compensation Plan. Previously filed with the Commission on September 21, 2009 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 10.2. Incorporated here by reference.
 
10.12*
Form of Supplemental Executive Retirement Benefits Plan for David S. Hickman. Previously filed with the Commission on February 27, 2009 in United Bancorp, Inc.'s Annual Report on Form 10-K, Exhibit 10.16. Incorporated here by reference.
 
10.13*
Form of 2005 Stock Option Plan Award Agreement. Previously filed with the Commission on September 21, 2009 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 10.4. Incorporated here by reference.
 
21.
Subsidiaries of United Bancorp, Inc. Previously filed with the Commission on February 22, 2008 in United Bancorp., Inc.'s Annual Report on Form 10-K, Exhibit 21. Incorporated here by reference.
 
23.
Consent of Independent Registered Public Accounting Firm.
 
24.
Powers of Attorney.
 
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.
 
99.1
Certification of the Principal Executive Officer Pursuant to Section 111 of the Emergency Economic Stabilization Act of 2008.
 
99.2
Certification of the Principal Financial Officer Pursuant to Section 111 of the Emergency Economic Stabilization Act of 2008.
 

* These documents are management contracts or compensation plans or arrangements required to be filed as exhibits to this Form 10-K.



Management's Discussion and Analysis of
Financial Condition and Results of Operations
and
Consolidated Financial Statements

Table of Contents

   
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
   
   
Consolidated Financial Statements
 
 
 
 
 
 



United Bancorp, Inc. (the "Company" or “United”) is a Michigan bank holding company headquartered in Ann Arbor, Michigan. The Company, through its subsidiary bank, United Bank & Trust ("UBT" or the “Bank”), offers a full range of financial services through a system of sixteen banking offices located in Lenawee, Monroe and Washtenaw Counties. The Bank is 100% owner of United Mortgage Company. United Structured Finance Company is a DBA of the Bank’s structured finance group. While the Company's chief decision makers monitor the revenue streams of the Company’s various products and services, operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of the Company's financial services operations are considered by management to be aggregated in one reportable operating segment – commercial banking.



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 of the Company and the Bank.

 
We are a Michigan corporation headquartered in Ann Arbor, Michigan and serve as 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 December 31, 2010, we had total assets of approximately $861.7 million, deposits of approximately $734.0 million, and total shareholders' equity of approximately $92.7 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 twelve month period ended December 31, 2010, our non-interest income equaled 34.4% 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 1.70% for the 12 month period ended December 31, 2010. Our average pre-tax, pre-provision return on average assets over the last five years ended December 31, 2010 was approximately 1.81%. For additional information about our pre-tax, pre-provision income, please see "Earnings Summary and Key Ratios” under “Results of Operations” on Page A-17 and A-18.

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. United Mortgage Company was the leading residential mortgage lender in Lenawee County and in the City of Ann Arbor for 2009.

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 27.7% of our noninterest income for the twelve months ended December 31, 2010.


Our structured finance group, United Structured Finance Company, offers simple, effective financing solutions to small businesses and commercial property owners, primarily by utilizing various government guaranteed loan programs and other off-balance sheet finance solutions through secondary market sources. For the twelve months ended September 30, 2009, United Structured Finance Company was the leading SBA lender in each of Lenawee, Washtenaw and Livingston Counties. For the twelve months ended September 30, 2010, United Structured Finance Company was the leading SBA lender in Lenawee, Washtenaw and Livingston Counties combined.


Our primary market area is in Washtenaw, Lenawee, and Monroe Counties and generally encompasses the Ann Arbor metropolitan area, which we believe is our primary area for future organic growth.

While Michigan has the fourth highest seasonally-adjusted unemployment rate in the United States (as of December 2010),1 the unemployment rate has shown an improving trend for the past several quarters.2 The Michigan December 2010 seasonally-adjusted unemployment rate of 11.7%3 was the lowest monthly rate since January, 20094 and the December 2010 unadjusted rate of 10.6%5 was the lowest monthly rate since December 2008.6 Michigan lost just 12,900 jobs in all of 2010, representing a significant decrease from the monthly average loss of 16,500 in 2008 and 17,000 in 2009, to an average monthly decline of 1,100 jobs in 2010. University of Michigan economists expect positive job growth in 2011, which would be the first yearly gain in over a decade.7

Washtenaw County had the lowest unadjusted unemployment rate in the state at 6.6% for December 2010.8 It appears that the Michigan housing market is beginning to show signs of stabilization. The Michigan Economic Activity Index equally weighs nine, seasonally adjusted coincident indicators of real economic activity that reflect activity in the construction, manufacturing and service sectors as well as job growth and consumer outlays. The index is measured on a scale of 110. The index rose three points in July 2010 reaching a level of 87, the index's highest value in over two years,9 and held flat in November 2010 at that level, for the fourth time in five months.10 The index has experienced a 16 point growth above the cycle low of 71 reached in July 2009.11


 
1U.S. Bureau of Labor Statistics, Local Area Unemployment Statistics, Unemployment Rates for November 2010.
2 Michigan Labor Market Information, Data Explorer – Unemployment Statistics, Statewide (Monthly Historical).
3 Michigan Labor Market Information, Data Explorer – Unemployment Statistics, Statewide, Adjusted (Monthly Historical).
4 Id.
5 Michigan Labor Market Information, Data Explorer – Unemployment Statistics, Statewide, Unadjusted (Monthly Historical)
6 Id.
7 University of Michigan, Research Seminar in Quantitative Economics, May 27, 2010.
8 Michigan Labor Market Information, Data Explorer – Unemployment Statistics, by County (December 2010).
9 Michigan Economy Flat in November, Reports Comerica Bank's Michigan Economic Activity Index (January 20, 2011).
10 Id.
11 Id.



Washtenaw County had a population of approximately 347,563 for 200912 and is projected to grow by approximately 2.58% from 2009-2020 and approximately 9.38% from 2009-2035.13  Washtenaw County had a median household income of approximately $59,000 for 2008, which was the third highest in the state.14

The economic base of Washtenaw County has a substantial reliance on health care, education and automotive high technology. Economic stability is provided to a great extent by the University of Michigan, which is a major employer and is not as economically sensitive to the fluctuations of the automotive industry. The services and public sectors account for a substantial percentage of total employment, in large part due to the University of Michigan and the University of Michigan Medical Center.
 
The economic base of Lenawee and Monroe Counties is primarily agricultural and light manufacturing, with their manufacturing sectors exhibiting moderate dependence on the automotive industry. Lenawee County had a population of approximately 100,000 for 200915 and a median household income of approximately $51,000 for 2008.16  Monroe County had a population of approximately 153,000 for 200917 and a median household income of approximately $58,000 for 2008.18  Lenawee County had an unadjusted unemployment rate of 12.4% for December 201019 and Monroe County had an unadjusted unemployment rate of 10.6% for that same month.20


Dodd-Frank Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank Act"), was signed into law by President Obama on July 21, 2010. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, establishes the new federal Bureau of Consumer Financial Protection ("BCFP"), and will require the BCFP and other federal agencies to implement many new and significant rules and regulations. At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the resulting rules and regulations will impact the Company's business. Compliance with these new laws and regulations will likely result in additional costs, which could be significant and could adversely impact the Company's results of operations, financial condition or liquidity.


 
12 Michigan State Senate, Senate Fiscal Agency, Michigan Population by County.
14 Michigan Labor Market Information, Data Explorer – Income (2008 Annual).
15 U.S. Census Bureau, Population Finder (Lenawee County).
16 Michigan Labor Market Information, Data Explorer – Income (2008 Annual). See Exhibit Q, supra note 21.
17 U.S. Census Bureau, Population Finder (Monroe County).
18 Michigan Labor Market Information, Data Explorer – Income (2008 Annual). See Exhibit Q, supra note 21.
19 Michigan Labor Market Information, Data Explorer –Unemployment Statistics (August 2010).
20 Id.



Deposit Insurance

On November 9, 2010, the FDIC issued a proposed rule that would change the assessment base, beginning with the second quarter of 2011 and payable at the end of September, 2011, from adjusted domestic deposits to a bank’s average consolidated total assets minus average tangible equity, as required by the Dodd-Frank Act.21 The proposal defines tangible equity as Tier 1 capital. Since the new base is larger than the current base, the FDIC proposal also would lower assessment rates to between 2.5 and 9 basis points on the broader base for banks in the lowest risk category, and 30 to 45 basis points for banks in the highest risk category. Initial assessment rates would be determined by combining supervisory ratings with financial ratios. Under the proposed rule, the Bank would pay 20% to 35% less in FDIC assessments than under the current methodology, at similar risk ratings and balance sheet size.

As a result of provisions of the Dodd-Frank Act, all funds in a "noninterest-bearing transaction account" are insured in full by the FDIC from December 31, 2010, through December 31, 2012. This temporary unlimited coverage is in addition to, and separate from, the general FDIC deposit insurance coverage of up to $250,000 available to depositors. The increase in maximum deposit insurance coverage to $250,000 was made permanent under the Dodd-Frank Act.

Debit Card Interchange Fees and Routing

The Federal Reserve Board on December 16 issued a proposal to implement a provision in the Dodd-Frank Act -- the Durbin amendment -- that requires the Fed to set debit-card interchange fees so they are "reasonable and proportional" to the cost of the transaction.22 Though the rule technically does not apply to institutions with less than $10 billion, there is concern that the price controls will harm community banks such as UBT, which will be pressured by the marketplace to lower their own interchange rates.

Overdraft Protection Rules

On November 24, 2010, the FDIC issued final guidance to address the risks associated with overdraft payment programs. The guidance is intended to ensure robust oversight of automated overdraft programs offered by certain FDIC-insured institutions.

In response to concerns about automated overdraft programs, the FDIC on August 11, 2010, proposed guidance for public comment on how the banking institutions it supervises should monitor and oversee overdraft programs. The final guidance provides information to assist FDIC-supervised institutions in identifying, managing and mitigating risks associated with overdraft payment programs, including risks that could result in serious financial harm to certain consumers.

The guidance focuses on automated overdraft programs and encourages banks to offer less costly alternatives if, for example, a borrower overdraws his or her account on more than six occasions where a fee is charged in a rolling twelve-month period. Additionally, to avoid reputational and


 
21 FDIC Notice of Proposed Rulemaking and Request for Comment, November 9, 2010
22 American Bankers Association at aba.com;  “Issues and Advocacy”, Debit Card Interchange Fees and Routing



other risks, the FDIC expects institutions to institute appropriate daily limits on customer costs and ensure that transactions are not processed in a manner designed to maximize the cost to consumers, such as by processing checks from the largest to the smallest.

In order to give institutions sufficient time to review, consider and respond to the expectations set out in the final guidance, the FDIC expects any additional efforts to mitigate risks to be in place by July 1, 2011. 23 The Bank is currently evaluating its alternatives with regard to this guidance, and has not determined the potential impact on its financial statements.

Small Business Lending Fund

The Small Business Jobs Act of 2010 was enacted on September 27, 2010, and created the Small Business Lending Fund (“SBLF”). The SBLF authorizes the U.S. Treasury Department (“Treasury”) to invest up to a total of $30 billion in institutions with assets below $10 billion that meet certain supervisory conditions and that present an acceptable small business lending plan.

Treasury has authority to make investments from the SBLF until September 27, 2011. The deadline for banks to apply for the SBLF is generally March 31, 2011. Treasury stresses that Boards of directors of institutions that participate in the SBLF Program should ensure that small business lending policies are consistent with the safe and sound lending practices outlined in the banking agencies' interagency guidance.24

The Company is evaluating the program for utilization as a potential vehicle for refinancing its TARP preferred shares.


Memorandum of Understanding

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


 
23 FDIC Press Release dated November 24, 2010
24 American Bankers Association at aba.com; “Issues and Advocacy,” Small Business Lending Fund



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 7,583,800 shares of common stock. The net proceeds to the Company, after deducting underwriting discounts and commissions and offering expenses, were approximately $17.1 million. The Company contributed $10 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. At December 31, 2010, the Bank’s Tier 1 capital ratio was 9.21%, and its ratio of total capital to risk-weighted assets was 14.71%.


The Company achieved consolidated net income of $600,000 in the second six months of 2010, following losses of $4.3 million in the first half of the year, as a result of strong pre-tax, pre-provision income and improving credit quality. United’s pre-tax, pre-provision return on average assets (“PTPP ROA”) for the twelve month period ended December 31, 2010 of 1.70% was improved from 1.67% for the twelve month period ended December 31, 2009. The Company’s net loss for 2010 of $3.708 million was an improvement from the net loss of $8.833 million incurred during 2009.

Net interest income for 2010 was 1.4% lower than achieved in 2009, as earning assets have declined. At the same time, the Company’s net interest margin continued to be very stable in spite of a decline in loan balances and continued elevated levels of short-term liquid assets. United’s full year 2010 net interest margin of 3.79% was substantially unchanged from 3.80% for all of 2009.

Noninterest income was down $600,000, or 3.6%, in 2010 compared to 2009. Wealth management revenues improved by $448,000, or 11.0%, in 2010 compared to 2009, but that increase was offset by decreases in deposit service charges, fee income and income from loan sales and servicing.

Total noninterest expenses declined 3.4% for all of 2010 compared to 2009, when excluding the first quarter 2009 goodwill impairment charge. Most categories of expenses were lower in 2010 than in 2009, reflecting cost containment and reduction measures. Professional fees and expenses related to nonperforming loans were higher in 2010 than in 2009, reflecting the continuing costs



associated with working through problem loans. The Company’s provision for loan losses of $21.5 million for the twelve months of 2010 was 16.5% lower than the provision expense of $25.8 million for the same period of 2009.

Total consolidated assets of the Company were $861.7 million at December 31, 2010, down 5.2% from $909.3 million at December 31, 2009. Gross portfolio loans have declined in 2010 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 portfolio loans have declined by $58.1 million, or 8.9%, since December 31, 2009, the balance of loans serviced for others has increased by $132.6 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 $95.6 million at December 31, 2010, compared to $115.5 million at December 31, 2009.

United generally did not replace maturing wholesale deposits in 2010, resulting in a decline in deposit balances. Total deposits of $734.0 million at December 31, 2010 were down $48.8 million, or 6.2% over the twelve months of 2010. 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 deposits was 1.13% for all of 2010, down from 1.60% for 2009.

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, $29.2 million of loans were considered nonperforming at December 31, 2010, compared to $31.7 million as of December 31, 2009. Total nonperforming loans as a percent of total portfolio loans moved from 4.87% at the end of 2009 to 4.94% at December 31, 2010. 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 December 31, 2010 and 2009 were $17.3 million and $15.6 million, respectively.

The Company’s ratio of allowance for loan losses to total loans at December 31, 2010 was 4.25%, and covered 86.0% of nonperforming loans, compared to 3.08% and 63.2%, respectively, at December 31, 2009. The Company’s allowance for loan losses increased by $5.1 million, or 25.7%, from December 31, 2009 to December 31, 2010. Net charge-offs of $16.4 million for 2010 were 31.9% below the $24.1 million charged off in 2009.




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 the end of 2010 and 2009.

At December 31,
 
2010
   
2009
 
In thousands of dollars
 
Balance
   
% of total
   
Balance
   
% of total
 
 U.S. Treasury and agency securities
  $ 33,687       27.0 %   $ 32,239       35.0 %
 Mortgage backed agency securities
    66,098       53.1 %     23,142       25.1 %
 Obligations of states and political subdivisions
    24,605       19.8 %     34,111       37.0 %
 Corporate, asset backed and other securities
    126       0.1 %     2,623       2.8 %
 Equity securities
    28       0.0 %     31       0.0 %
 
Total Investment Securities
  $ 124,544       100.0 %   $ 92,146       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 2.9% of the investment portfolio is issued by political subdivisions located within Lenawee County, Michigan and 4.1% 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 the end of 2010 and 2009.

In thousands of dollars
    2010       2009    
Change
 
 U.S. Treasury and agency securities
  $ (210 )   $ 393     $ (603 )
 Mortgage backed agency securities
    384       685       (301 )
 Obligations of states and political subdivisions
    764       856       (92 )
 Corporate, asset backed and other securities
    -       (5 )     5  
 Equity securities
    2       5       (3 )
 
 Total Investment Securities
  $ 940     $ 1,934     $ (994 )




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 $70.2 million for the first nine months of 201025, and continues to pay dividends on its stock. The Company regularly reviews the credit quality of FHLBI stock for impairment, and determined that no impairment of FHLBI stock was necessary as of December 31, 2010.

Loans

As a full service lender, the Bank offers a variety of loan products in its markets. Portfolio loan balances declined by 8.9% in 2010, with the declines across all major categories of the portfolio.

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 declined by 3.0% for the year.

Business loan balances were down 9.7% during 2010, following a decline of 4.5% in 2009. The decline in loans to commercial enterprises 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 mortgages on the secondary market, and retains high credit quality mortgage loans that are not otherwise eligible to be sold on the secondary market and shorter-term adjustable rate mortgages in their portfolios. As a result, the mix of mortgage production for any given year will have an impact on the amount of mortgages held in the portfolios of the Bank. Refinancing activity has resulted in a decline in residential mortgage balances on the Bank's portfolios of 0.5% in 2010 and 4.3% in 2009.

The Bank’s loan portfolio includes $7.5 million of purchased participations in business loans originated by other institutions. These participations represent 1.3% of total portfolio loans. Of those participation loans, 70.1% of the outstanding balances are the result of participations purchased from other Michigan banks.

Outstanding balances of loans for construction and development declined by approximately $15.2 million, or 26.7%, during 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.


 
25 Federal Home Loan Bank of Indianapolis, Form 10-Q for the third quarter of 2010



The following table shows the balances of the various categories of loans of the Company, along with the percentage change of the portfolio by type as of the end of 2010 and 2009.

 
 
December 31, 2010
   
December 31, 2009
 
In thousands of dollars
 
Balance
   
% of total
   
Balance
   
% of total
 
Personal
  $ 107,399       18.1 %   $ 110,702       17.0 %
Business, including commercial mortgages
    354,340       59.9 %     392,495       60.4 %
Tax exempt
    2,169       0.4 %     3,005       0.5 %
Residential mortgage
    86,006       14.5 %     86,417       13.3 %
Construction and development
    41,554       7.0 %     56,706       8.7 %
Deferred loan fees and costs
    517       0.1 %     728       0.1 %
 
Total portfolio loans
  $ 591,985       100.0 %   $ 650,053       100.0 %

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 at December 31 for each of the past two years.

   
December 31,
   
Change
 
 Nonperforming Assets, in thousands of dollars
 
2010
   
2009
     Amount       Percent  
 Nonaccrual loans
  $ 28,661     $ 26,188     $ 2,473       9.4 %
 Accruing loans past due 90 days or more
    583       5,474       (4,891 )     -89.3 %
 
Total nonperforming loans
    29,244       31,662       (2,418 )     -7.6 %
 Other assets owned
    4,304       2,803       1,501       53.5 %
 
Total nonperforming assets
  $ 33,548     $ 34,465     $ (917 )     -2.7 %
 Percent of nonperforming loans to total loans
    4.94 %     4.87 %     0.07 %        
 Percent of nonperforming assets to total assets
    3.89 %     3.79 %     0.10 %        
 Allowance coverage of nonperforming loans
    86.0 %     63.2 %     22.81 %        
                                 
 Loans delinquent 30-89 days
  $ 7,838     $ 7,814     $ 24       0.3 %

Accruing restructured loans (1)
                       
 
Business, including commercial mortgages
  $ 10,382     $ 11,268     $ (886 )     -7.9 %
 
Construction and development
    4,045       3,281       764       23.3 %
 
Residential mortgage
    2,844       1,035       1,809       174.8 %
   
Total accruing restructured loans
  $ 17,271     $ 15,584     $ 1,687       10.8 %
                                 
(1)
Prior period amounts have been revised to reflect the retrospective application of more definitive regulatory guidance.
 




Total nonaccrual loans have increased by $2.5 million, or 9.4%, since the end of 2009, while accruing loans past due 90 days or more have declined by $4.9 million. The increase in nonaccrual loans reflects the move of some loans to nonaccrual status, net of payoff or charge-off of some nonperforming loans. The decrease in accruing loans past due 90 days or more reflects the move of some delinquent borrowers to nonaccrual status and the move of some clients to current 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 $2.4 million, or 7.6%, since December 31, 2009. Total nonperforming loans as a percent of total portfolio loans moved from 4.87% at the end of 2009 to 4.94% at December 31, 2010, and the allowance coverage of nonperforming loans improved from 63.2% at December 31, 2009 to 86.0% at December 31, 2010. The 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 include other real estate owned and other repossessed assets. Holdings of other assets owned increased by $1.5 million since the end of 2009 as the Bank has assumed ownership of an increased number of properties. At December 31, 2010, other real estate owned included forty-two properties that were acquired through foreclosure or in lieu of foreclosure. The properties included twenty-five commercial properties, seven of which were the result of out-of-state loan participations, and seventeen residential properties. Three commercial properties are leased, and all are for sale. This compares to fourteen commercial properties and one residential home at December 31, 2009. Also included in these totals at December 31, 2010 are other assets owned of $26,000, consisting of two boats, which are also for sale.

The table below reflects the changes in other assets owned during 2010:

In thousands of dollars
 
Other Real Estate
   
Other Assets
   
Total
 
 Balance at January 1
  $ 2,774     $ 29     $ 2,803  
 Additions
    3,379       118       3,497  
 Sold