Edgar Filing: UNITED COMMUNITY FINANCIAL CORP

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

UNITED COMMUNITY FINANCIAL CORP.

(Exact name of the registrant as specified in its charter)

OHIO

0-024399

34-1856319

(State or other jurisdiction

of incorporation)

(Commission

File No.)

(IRS Employer

I.D. No.)

275 West Federal Street, Youngstown, Ohio 44503-1203

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (330) 742-0500

Not Applicable

(Former name or former address, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 32,896,591 common shares as of October 31, 2012.

TABLE OF CONTENTS


		PAGE

Part I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Statements of Financial Condition as of September 30, 2012 (Unaudited) and December 31, 2011		1

	Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011 (Unaudited)		2

	Consolidated Statement of Shareholders’ Equity for the Nine Months ended September 30, 2012 and 2011 (Unaudited)		4

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 (Unaudited)		5

	Notes to Consolidated Financial Statements (Unaudited)		6-49

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		50-63

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		64

Item 4.	Controls and Procedures		65

Part II. OTHER INFORMATION

Item 1.	Legal Proceedings		66

Item 1A.	Risk Factors		66

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		66

Item 3.	Defaults Upon Senior Securities (None)

Item 4.	Mine Safety Disclosures (None)

Item 5.	Other Information		66

Item 6.	Exhibits		66

Signatures			67

Exhibits			68-141

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)


	September 30, 2012			December 31, 2011
	(Dollars in thousands)
Assets:
Cash and deposits with banks	$	20,904		$	26,573
Federal funds sold		36,626			27,563

Total cash and cash equivalents		57,530			54,136
Securities:
Available for sale, at fair value		551,795			459,598
Loans held for sale		9,076			12,727
Loans, net of allowance for loan losses of $20,048 and $42,271		1,100,328			1,379,276
Federal Home Loan Bank stock, at cost		26,464			26,464
Premises and equipment, net		21,355			19,175
Accrued interest receivable		5,660			6,741
Real estate owned and other repossessed assets		20,206			33,486
Core deposit intangible		263			346
Cash surrender value of life insurance		28,626			28,354
Other assets		9,641			10,384

Total assets	$	1,830,944		$	2,030,687

Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Interest bearing	$	1,331,281		$	1,440,448
Noninterest bearing		159,361			148,049

Total deposits		1,490,642			1,588,497
Borrowed funds:
Federal Home Loan Bank advances		50,000			128,155
Repurchase agreements and other		90,603			90,618

Total borrowed funds		140,603			218,773
Advance payments by borrowers for taxes and insurance		14,121			23,282
Accrued interest payable		628			610
Accrued expenses and other liabilities		13,370			10,780

Total liabilities		1,659,364			1,841,942

Shareholders’ Equity:
Preferred stock-no par value; 1,000,000 shares authorized and unissued		—			—
Common stock-no par value; 499,000,000 shares authorized; 37,804,457 shares issued and 32,891,495 and 32,597,762 shares, respectively, outstanding		128,228			128,031
Retained earnings		84,778			110,681
Accumulated other comprehensive income		10,303			5,032
Treasury stock, at cost, 4,912,962 and 5,206,695 shares, respectively		(51,729	)		(54,999	)

Total shareholders’ equity		171,580			188,745

Total liabilities and shareholders’ equity	$	1,830,944		$	2,030,687

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)


	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
	(Dollars in thousands, except per share data)
Interest income
Loans	$	14,567		$	19,558		$	49,182		$	63,489
Loans held for sale		101			163			305			270
Available for sale securities		3,219			3,323			10,253			9,264
Federal Home Loan Bank stock dividends		279			264			859			858
Other interest earning assets		25			13			48			35

Total interest income		18,191			23,321			60,647			73,916
Interest expense
Deposits		2,600			5,972			9,574			18,384
Federal Home Loan Bank advances		535			793			1,880			2,414
Repurchase agreements and other		928			931			2,766			2,781

Total interest expense		4,063			7,696			14,220			23,579

Net interest income		14,128			15,625			46,427			50,337
Provision for loan losses		30,279			11,836			37,223			22,272

Net interest income (loss) after provision for loan losses		(16,151	)		3,789			9,204			28,065

Non-interest income
Non-deposit investment income		478			389			1,525			1,050
Service fees and other charges		793			203			4,011			3,244
Net gains (losses):
Securities available for sale		1,192			1,958			5,161			3,500
Other -than-temporary loss in equity securities
Total impairment loss		—			(35	)		—			(73	)
Loss recognized in other comprehensive income		—			—			—			—

Net impairment loss recognized in earnings		—			(35	)		—			(73	)
Mortgage banking income		2,110			682			5,308			4,432
Real estate owned and other repossessed assets		(1,795	)		(2,627	)		(3,447	)		(4,981	)
Other income		974			1,346			3,234			4,032

Total non-interest income		3,752			1,916			15,792			11,204

Non-interest expense
Salaries and employee benefits		8,634			7,927			25,651			23,297
Occupancy		845			854			2,495			2,615
Equipment and data processing		1,665			1,592			5,074			4,910
Franchise tax		521			370			1,396			1,241
Advertising		134			204			486			466
Amortization of core deposit intangible		26			33			83			106
Prepayment penalty		65			—			803			—
Deposit insurance premiums		1,012			1,111			3,176			3,573
Professional fees		2,219			1,290			4,138			2,545
Real estate owned and other repossessed asset expenses		383			361			1,504			2,125
Other expenses		1,826			827			6,061			6,089

Total non-interest expenses		17,330			14,569			50,867			46,967

Loss before income taxes		(29,729	)		(8,864	)		(25,871	)		(7,698	)
Income tax benefit		(2,838	)		—			(2,838	)		—

Net loss	$	(26,891	)	$	(8,864	)	$	(23,033	)	$	(7,698	)

(Continued)

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)


	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Net loss	$	(26,891	)	$	(8,864	)	$	(23,033	)	$	(7,698	)
Other comprehensive income
Unrealized gains on securities, net		2,729			8,218			5,271			13,919

Comprehensive income	$	(24,162	)	$	(646	)	$	(17,762	)	$	6,221

Loss per share
Basic	$	(0.82	)	$	(0.29	)	$	(0.70	)	$	(0.25	)
Diluted		(0.82	)		(0.29	)		(0.70	)		(0.25	)

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Unaudited)


	Shares Outstanding		Common Stock		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
	(Dollars in thousands, except per share data)
Balance December 31, 2011		32,598	$	128,031	$	110,681		$	5,032		$	(54,999	)	$	188,745
Comprehensive income:
Net loss						(23,033	)								(23,033	)
Other comprehensive income									5,271						5,271
Stock based compensation		293		197		(2,870	)					3,270			597

Balance September 30, 2012		32,891	$	128,228	$	84,778		$	10,303		$	(51,729	)	$	171,580

Balance December 31, 2010		30,938	$	142,318	$	111,049		$	(4,778	)	$	(72,534	)	$	176,055
Comprehensive income:
Net loss						(7,698	)								(7,698	)
Other comprehensive income									13,919						13,919
Stock based compensation		46		376		(448	)					493			421

Balance September 30, 2011		30,984	$	142,694	$	102,903		$	9,141		$	(72,041	)	$	182,697

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30,
	2012			2011
	(Dollars in thousands)
Cash Flows from Operating Activities
Net loss	$	(23,033	)	$	(7,698	)
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		37,223			22,272
Mortgage banking income		(5,308	)		(4,432	)
Net losses on real estate owned and other repossessed assets sold		3,447			4,981
Net gain on available for sale securities sold		(5,161	)		(3,500	)
Net loss on other assets sold		—			161
Other than temporary impairment of securities available for sale		—			73
Amortization of premiums and accretion of discounts		1,016			(405	)
Depreciation and amortization		1,183			1,314
Decrease in interest receivable		1,081			704
Increase (decrease) in interest payable		18			(16	)
Decrease in prepaid and other assets		254			7,308
Decrease in other liabilities		554			(1,948	)
Stock based compensation		597			421
Net principal disbursed on loans originated for sale		(226,708	)		(108,389	)
Proceeds from sale of loans originated for sale		235,667			94,374
Death benefit from bank owned life insurance		1,115			—
Net change in value of interest rate caps		1,423			—

Net cash from operating activities		23,368			5,220
Cash Flows from Investing Activities
Proceeds from principal repayments and maturities of:
Securities available for sale		56,123			27,037
Proceeds from sale of:
Securities available for sale		286,926			201,856
Real estate owned and other repossessed assets		13,830			14,058
Premises and equipment		—			11
Loans held for investment		81,451			110,478
Purchases of:
Securities available for sale		(424,932	)		(268,032	)
Principal disbursed on loans, net of repayments		154,499			55,947
Loans purchased		(289	)		(3,202	)
Purchases of premises and equipment		(1,593	)		(348	)

Net cash from investing activities		166,015			137,805
Cash Flows from Financing Activities
Net increase in checking, savings and money market accounts		76,079			70,566
Net decrease in certificates of deposit		(173,934	)		(72,406	)
Net decrease in advance payments by borrowers for taxes and insurance		(9,161	)		(7,466	)
Proceeds from Federal Home Loan Bank advances		435,551			306,000
Repayment of Federal Home Loan Bank advances		(513,706	)		(420,494	)
Prepayment penalty on Federal Home Loan Bank term advances		(803	)		—
Net change in repurchase agreements and other borrowed funds		(15	)		(7,174	)

Net cash from financing activities		(185,989	)		(130,974	)

Change in cash and cash equivalents		3,394			12,051
Cash and cash equivalents, beginning of period		54,136			37,107

Cash and cash equivalents, end of period	$	57,530		$	49,158

See Notes to Consolidated Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

BASIS OF PRESENTATION

United Community Financial Corp. (United Community or the Company) was incorporated under Ohio law in February 1998 by The Home Savings and Loan Company of Youngstown, Ohio (Home Savings) in connection with the conversion of Home Savings from an Ohio mutual savings and loan association to an Ohio capital stock savings association (the Conversion). Upon consummation of the Conversion on July 8, 1998, United Community became the unitary thrift holding company for Home Savings. Home Savings, a state-chartered savings bank, conducts business from its main office located in Youngstown, Ohio, 34 full-service branches and eight loan production offices located throughout Ohio and western Pennsylvania.

The accompanying consolidated financial statements of United Community have been prepared in accordance with instructions relating to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair statement of results for the interim periods.

The results of operations for the three and nine months ended September 30, 2012, are not necessarily indicative of the results to be expected for the year ending December 31, 2012. The consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2011, contained in United Community’s Form 10-K for the year ended December 31, 2011.

Some items in the prior year financial statements were reclassified to conform to the current presentation. These reclassifications had no effect on prior period net income or shareholders’ equity.

REGULATORY ENFORCEMENT ACTION

United Community is a unitary thrift holding company, and historically was subject to regulation, examination and oversight by the Office of Thrift Supervision (OTS). As a result of the elimination of the OTS pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), on July 21, 2011, United Community ceased to be regulated by the OTS and now is regulated by the Federal Reserve Bank (FRB). On August 8, 2008, the board of directors of United Community approved a Stipulation and Consent to the Issuance of an Order with the OTS (the Holding Company Order). Simultaneously, the board of directors of Home Savings approved a Stipulation and Consent to the Issuance of an Order to Cease and Desist (the Bank Order) with the Federal Deposit Insurance Corporation (FDIC) and the Ohio Division of Financial Institutions (the Ohio Division), which was terminated as of March 30, 2012, and replaced with a Consent Order (the Consent Order), as described below. Although United Community and Home Savings have agreed to the issuance of the Holding Company Order and the Consent Order, respectively, neither has admitted or denied any allegations of unsafe or unsound banking practices, or any legal or regulatory violations. No monetary penalties were assessed by the OTS, the FDIC or the Ohio Division.

The Holding Company Order requires United Community to obtain FRB approval prior to: (i) incurring or increasing its debt position; (ii) repurchasing any United Community stock; or (iii) paying any dividends. The Holding Company Order also required United Community to develop a debt reduction plan and submit the plan to the OTS for approval. The Holding Company Order remains in effect and was amended November 5, 2010. This amendment removed the requirement in the original Holding Company Order to provide the OTS with a debt reduction plan and added a requirement to provide the OTS with a capital plan. The capital plan is consistent with and incorporated into the strategic planning process that Home Savings undertook when the Bank Order was issued. The capital plan was submitted to the OTS in December 2010 and a revised capital plan was submitted to the FRB, FDIC and Ohio Division in December 2011.

On March 30, 2012, Home Savings entered into a consent agreement with the FDIC and the Ohio Division that provided for the issuance of the Consent Order by the FDIC and Ohio Division. Immediately following the issuance of the Consent Order, the FDIC and Ohio Division terminated the previous Bank Order issued by the FDIC and Ohio Division on August 13, 2008.

The Consent Order requires Home Savings, within specified timeframes, to take or refrain from certain actions, including that it shall: (i) continue to retain qualified management; (ii) seek regulatory approval prior to adding any individuals to the board of directors or employing any individual as a senior executive officer of Home Savings; (iii) not extend additional credit to classified borrowers; (iv) revise its plan to reduce its classified assets, and, within six months, reduce total adversely classified assets to 75% of the level of classified assets as of May 31, 2011 (i.e., to $219.0 million by September 30, 2012) and, within twelve months, to 50% of the level of classified assets as of May 31, 2011 (i.e., to $146.0 million by March 31, 2013) (v) establish a comprehensive policy and

methodology for determining the adequacy of the allowance for loan and lease losses (ALLL); (vi) adopt plans to reduce its classified assets and delinquent loans; (vii) adopt a plan to reduce certain loan concentrations; (viii) amend its strategic plan and budget and profit plan; (ix) increase its Tier 1 Leverage Capital Ratio to 9.0% and its Total Risk Based Capital Ratio to 12.0% by June 30, 2012, and revise its capital plan to achieve such capital levels; and (x) seek regulatory approval prior to declaring or paying any cash dividend.

On September 21, 2012, Home Savings completed a bulk sale of a substantial amount of the Bank’s troubled loans, along with other assets, to an unrelated party. As a result of the transaction, Home Savings has now exceeded the asset quality targets set forth in its recent Consent Order, as follows:


	Balance as of September 30, 2012		Required Consent Order Threshold by September 30, 2012		Required Consent Order Threshold by March 31, 2013
	(In thousands)
Classified Assets	$	78,579	$	219,150	$	146,100

The Bank’s Tier 1 leverage ratio is 8.27%, after recording the loss from the bulk asset sale. While Home Savings is still operating under a Consent Order requiring a minimum Tier 1 leverage ratio of 9.0%, the Company worked closely with its regulators to keep them informed of the transaction and obtained their concurrence to complete the sale along with the Bank’s commitment to meet the 9.0% requirement by March 31, 2013.

Classified assets include classified loans and real estate owned and other repossessed assets. Refer to Note 6 for a discussion of classified loans. Refer to Note 8 for a discussion of real estate owned and other repossessed assets. In keeping with its capital plan, the Company engaged an investment banking advisory firm in June 2011 to advise the board and management on the Company’s strategic alternatives, including raising outside capital. The majority of any capital raised by United Community will be contributed to Home Savings, with the remainder to be used for general corporate purposes. The type, timing, amount and terms of possible securities that would be issued in such an offering have yet to be finalized.

A failure to comply with the provisions of the Consent Order or the Holding Company Order could result in additional enforcement actions by the FDIC, Ohio Division or the FRB.

The regulators, at their discretion, have the ability to place additional requirements on both Home Savings and United Community.

RECENT ACCOUNTING DEVELOPMENTS

In May 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and International accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this guidance are effective for interim and annual reporting periods beginning after December 15, 2011. The adoption of this guidance did not have a material effect on the Company’s operating results or financial condition.

In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in shareholder’s equity. The amendment requires that comprehensive income be presented either in a single continuous statement or in two separate consecutive statements. The amendments in this guidance are effective as of the beginning of a fiscal reporting year, and interim periods within that year, that begins after December 15, 2011. The adoption of this amendment had no impact on the consolidated financial statements.

STOCK COMPENSATION

Stock Options:

On April 26, 2007, shareholders approved the United Community Financial Corp. 2007 Long-Term Incentive Plan (as amended, the 2007 Plan). The purpose of the 2007 Plan is to promote and advance the interests of United Community and its shareholders by enabling United Community to attract, retain and reward directors, directors emeritus, managerial and other key employees of United Community, including Home Savings, by facilitating their purchase of an ownership interest in United Community. The 2007 Plan provides for the issuance of up to 2,000,000 shares that are to be used for awards of restricted stock, stock options, performance awards, stock appreciation rights (SARs), or other forms of stock-based incentive awards. There were 1,875 stock options granted in

the third quarter of 2012, all of which become exercisable on July 5, 2014. There were 2,757 stock options granted in the second quarter of 2012, all of which become exercisable on April 5, 2014. There were 4,629 stock options granted in the first quarter of 2012, all of which become exercisable on January 5, 2014. There were 3,866 stock options granted in the first quarter of 2011, all of which become exercisable on January 6, 2013. There were 12,746 stock options granted in the second quarter of 2011, 4,000 of which became exercisable on December 31, 2011, 4,000 of which become exercisable on December 31, 2012 and the remaining 4,746 of which become exercisable on April 7, 2013. There were 4,411 stock options granted in the third quarter of 2011, all of which become exercisable on July 7, 2013. There were 4,687 stock options granted in the fourth quarter of 2011, all of which become exercisable on October 6, 2013. The options must be exercised within 10 years from the date of grant.

On July 12, 1999, shareholders approved the United Community Financial Corp. 1999 Long-Term Incentive Plan (as amended, the 1999 Plan). The purpose of the 1999 Plan was the same as the 2007 Plan. The 1999 Plan terminated on May 20, 2009, although the 1999 Plan survives so long as options issued under the 1999 Plan remain outstanding and exercisable.

The 1999 Plan provided for the grant of either incentive or nonqualified stock options. Options were awarded at exercise prices that were not less than the fair market value of the share at the grant date. The maximum number of common shares that could be issued under the 1999 Plan was 3,569,766. Because the 1999 Plan terminated, no additional options may be issued under it. All of the options awarded became exercisable on the date of grant except that options granted in 2009 became exercisable over three years beginning on December 31, 2009. All options expire 10 years from the date of grant.

Expenses related to stock option grants are included with salaries and employee benefits. The Company recognized $4,816 in stock option expenses for the three months ended September 30, 2012. The Company recognized $13,042 in stock option expenses for the nine months ended September 30, 2012. The Company expects to recognize additional expense of $4,659 for the remainder of 2012, $10,311 in 2013, and $2,812 in 2014.

A summary of activity in the plans is as follows:


	For the nine months ended September 30, 2012
	Shares			Weighted average exercise price		Aggregate intrinsic value (in thousands)
Outstanding at beginning of year		1,992,132		$	6.63
Granted		9,261			1.89
Exercised		(1,000	)		3.30
Forfeited		(306,591	)		7.20

Outstanding at end of period		1,693,802			6.50	$	1,105

Options exercisable at end of period		1,657,336			6.61	$	1,032

Information related to the stock option plans for the nine months ended September 30, 2012 follows:


	September 30, 2012
Intrinsic value of options exercised	$	1,200
Cash received from option exercises		2,100
Tax benefit realized from option exercises		—
Weighted average fair value of options granted, per share	$	1.21

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model that uses assumptions including the risk-free interest rate, expected term, expected stock volatility, and dividend yield. Expected volatilities are based on historical volatilities of United Community’s common shares. United Community uses historical data to estimate option exercises and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

The fair value of options granted during the third quarter 2012 was determined using the following weighted-average assumptions as of the grant date.


	July 5, 2012
Risk-free interest rate		0.67	%
Expected term (years)		5
Expected stock volatility		65.8	%
Dividend yield		—	%

Outstanding stock options have a weighted average remaining life of 4.11 years and may be exercised in the range of $1.20 to $12.38.

Restricted Stock Awards:

The 2007 Plan permits the issuance of restricted stock awards to nonemployee directors. Compensation expense is recognized over the vesting period of the awards based on the market value of the shares at the grant date. A total of 395,380 restricted shares have been issued under the 2007 Plan, 292,733 of which were issued in 2012, 62,768 of which were issued in 2011 and 39,879 of which were issued in 2010. The grants in 2012 include 123,532 shares that vested immediately. The remaining 141,600 shares granted in 2012 vest equally over the three quarters ending June 30, 2012, September 30, 2012 and December 31, 2012. Restricted shares aggregating 27,601 shares issued in 2012 and those shares issued in 2011 and 2010 either have or will vest on the first anniversary of the grant date. Expenses related to restricted stock awards are included with salaries and employee benefits. The cost will be recognized over an average period of one year. The Company recognized approximately $103,000 in restricted stock award expenses for the three months ended September 30, 2012. The Company recognized approximately $604,000 in restricted stock award expenses for the nine months ended September 30, 2012. The Company expects to recognize additional expenses of approximately $86,000 for the remainder of 2012, $250,000 in 2013, and $152,000 in 2014.

A summary of changes in the Company’s nonvested restricted shares for the first nine months 2012 is as follows:


	Shares			Weighted average grant date fair value
Nonvested shares at January 1, 2012		59,019		$	1.30
Granted		292,733			1.35
Vested		(277,976	)		1.30

Nonvested shares at September 30, 2012		73,776		$	1.48

SECURITIES

Components of the available for sale portfolio are as follows:


	September 30, 2012
			Gross		Gross
	Amortized		unrealized		unrealized		Fair
	cost		gains		losses		value
	(Dollars in thousands)
Available for Sale
U.S. Treasury and government sponsored entities’ securities	$	85,589	$	2,478	$	—	$	88,067
Equity securities		113		200		—		313
Mortgage-backed GSE securities: residential		452,445		10,970		—		463,415

Total	$	538,147	$	13,648	$	—	$	551,795


	December 31, 2011
			Gross		Gross
	Amortized		unrealized		unrealized		Fair
	cost		gains		losses		value
	(Dollars in thousands)
Available for Sale
U.S. Treasury and government sponsored entities’ securities	$	50,003	$	797	$	—	$	50,800
Equity securities		114		149		—		263
Mortgage-backed GSE securities: residential		403,943		4,592		—		408,535

Total	$	454,060	$	5,538	$	—	$	459,598

Debt securities available for sale by contractual maturity, repricing or expected call date are shown below:


	September 30, 2012
	Amortized cost		Fair value
	(Dollars in thousands)
Due in one year or less	$	—	$	—
Due after one year through five years		—		—
Due after five years through ten years		54,455		56,197
Due after ten years through fifteen years		31,134		31,870
Mortgage-backed GSE securities: residential		452,445		463,415

Total	$	538,034	$	551,482

Securities pledged to collateralize the processing of Visa transactions were approximately $5.8 million at September 30, 2012 and $5.7 million at December 31, 2011. Securities pledged for participation in the Ohio Linked Deposit Program were approximately $419,000 and $418,000 at September 30, 2012 and December 31, 2011, respectively. Securities sold under an agreement to repurchase are secured primarily by mortgage-backed securities with a fair value of approximately $131.5 million at September 30, 2012, and $115.4 million at December 31, 2011.

United Community had no securities available for sale in an unrealized loss position at September 30, 2012, or December 31, 2011.

Proceeds from sales of securities available for sale were $57.5 million and $85.9 million for the three months ended September 30, 2012 and 2011, respectively. Gross gains of $1.2 million and $2.0 million were realized on these sales during the third quarter of 2012 and 2011, respectively.

Proceeds from sales of securities available for sale were $286.9 million and $201.9 million for the nine months ended September 30, 2012 and 2011, respectively. Gross gains of $5.2 million and $3.5 million were realized on these sales during the first nine months of 2012 and 2011, respectively.

The Company evaluates its equity securities for impairment on a quarterly basis. In general, if a security has been in an unrealized loss position for more than twelve months, the Company will realize an Other Than Temporary Impairment (OTTI) charge on the security. If the security has been in an unrealized loss position for less than twelve months, the Company examines the capital levels, nonperforming asset ratios, and liquidity position of the issuer to determine whether or not an OTTI charge is appropriate.

The Company recognized a $35,000 OTTI charge on equity investments with holdings of four other financial institutions in the third quarter of 2011. One financial institution consented to a regulatory enforcement action, diminishing the chance of fair value recovery in the foreseeable future. The other investments were trading below book value and management was not able to determine with reasonable certainty that recovery would occur in the near-term. The Company recognized a $73,000 OTTI charge on equity investments in four other financial institutions in the first nine months of 2011.

LOANS

On September 21, 2012, Home Savings sold assets in a bulk sale transaction, which was comprised primarily of loans. Loans included in the bulk sale had an unpaid principal balance of $146.7 million. These loans had a recorded investment as of the closing date of $113.7 million. Of these loans, $91.6 million were classified, $63.3 million were nonperforming and $53.0 million were noncurrent (all figures are book balance prior to the effect of any reserves). The loans included in the bulk sale had reserves totaling $8.0 million, for a net book balance of $105.7 million.

Portfolio loans consist of the following:


	September 30,			December 31,
	2012			2011
	(Dollars in thousands)
Real Estate:
One-to four-family residential	$	587,220		$	667,375
Multi-family residential		82,518			120,991
Nonresidential		150,693			276,198
Land		16,363			23,222
Construction:
One-to four-family residential and land development		32,483			59,339
Multi-family and nonresidential		4,480			4,528

Total real estate		873,757			1,151,653
Consumer
Home equity		183,570			191,827
Auto		8,198			8,933
Marine		5,047			5,900
Recreational vehicles		23,500			28,530
Other		2,680			3,207

Total consumer		222,995			238,397
Commercial
Secured		19,851			25,120
Unsecured		2,332			5,026

Total commercial		22,183			30,146

Total loans		1,118,935			1,420,196

Less:
Allowance for loan losses		20,048			42,271
Deferred loan costs, net		(1,441	)		(1,351	)

Total		18,607			40,920

Loans, net	$	1,100,328		$	1,379,276

Loan commitments are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments extend over various periods of time with the majority of such commitments disbursed within a sixty-day period. Commitments generally have fixed expiration dates or other termination clauses, may require payment of a fee and may expire unused.

Commitments to extend credit at fixed rates expose Home Savings to some degree of interest rate risk. Home Savings evaluates each customer’s creditworthiness on a case-by-case basis. The type or amount of collateral obtained varies and is based on management’s credit evaluation of the potential borrower. Home Savings normally has a number of outstanding commitments to extend credit.

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2012 and December 31, 2011 and activity for the three and nine months ended September 30, 2012 and 2011.


Allowance For Loan Losses
(Dollars in thousands)

	Permanent Real Estate Loans			Construction Loans			Consumer Loans			Commercial Loans			Unallocated		Total
For the three months ended September 30, 2012
Beginning balance (06/30/12)	$	22,121		$	2,490		$	4,805		$	1,517		$	—	$	30,933
Provision		27,905			1,678			1,288			(592	)		—		30,279
Chargeoffs		(2,267	)		(543	)		(839	)		(233	)		—		(3,882	)
Recoveries		468			139			125			144			—		876
Net (chargeoffs) recovery from asset sale		(35,744	)		(2,134	)		(822	)		542			—		(38,158	)

Net (chargeoffs) recovery		(37,543	)		(2,538	)		(1,536	)		453			—		(41,164	)

Ending balance (09/30/12)	$	12,483		$	1,630		$	4,557		$	1,378		$	—	$	20,048

For the nine months ended September 30, 2012
Beginning balance (12/31/11)	$	31,323		$	4,493		$	4,576		$	1,879		$	—	$	42,271
Provision		32,539			2,293			2,422			(31	)		—		37,223
Chargeoffs		(16,328	)		(3,213	)		(2,198	)		(1,207	)		—		(22,946	)
Recoveries		693			191			579			195			—		1,658
Net (chargeoffs) recovery from asset sale		(35,744	)		(2,134	)		(822	)		542			—		(38,158	)

Net chargeoffs		(51,379	)		(5,156	)		(2,441	)		(470	)		—		(59,446	)

Ending balance (09/30/12)	$	12,483		$	1,630		$	4,557		$	1,378		$	—	$	20,048

Period-end amount allocated to:
Loans individually evaluated for impairment	$	1,281		$	664		$	18		$	166		$	—	$	2,129
Loans collectively evaluated for impairment		11,202			996			4,539			1,212			—		17,919

Ending balance	$	12,483		$	1,630		$	4,557		$	1,378		$	—	$	20,048

Period-end balances:
Loans individually evaluated for impairment	$	41,562		$	9,980		$	5,858		$	1,844		$	—	$	59,244
Loans collectively evaluated for impairment		795,232			26,983			217,137			20,339			—		1,059,691

Ending balance	$	836,794		$	36,963		$	222,995		$	22,183		$	—	$	1,118,935

The ASC 310 reserve, or where applicable the ASC 450 reserve, as it related to loans included in the bulk asset sale were treated as chargeoffs in the ASC 450 methodology of determining loan loss ratios.

Reserves from loans included in the asset sale mentioned above were treated as charges against the allowance in the third quarter of 2012.


Allowance For Loan Losses
(Dollars in thousands)

	Permanent Real Estate Loans			Construction Loans			Consumer Loans			Commercial Loans			Unallocated		Total
For the three months ended September 30, 2011
Beginning balance (06/30/11)	$	31,371		$	6,529		$	4,544		$	3,779		$	—	$	46,223
Provision		7,065			4,734			1,105			(1,068	)		—		11,836
Chargeoffs		(5,536	)		(6,832	)		(1,000	)		(952	)		—		(14,320	)
Recoveries		168			95			136			24			—		423

Net chargeoffs		(5,368	)		(6,737	)		(864	)		(928	)		—		(13,897	)

Ending balance (09/30/11)	$	33,068		$	4,526		$	4,785		$	1,783		$	—	$	44,162

For the nine months ended September 30, 2011
Beginning balance (12/31/10)	$	28,066		$	8,533		$	5,260		$	9,024		$	—	$	50,883
Provision		17,057			6,285			1,887			(2,957	)		—		22,272
Chargeoffs		(12,709	)		(10,589	)		(2,797	)		(4,481	)		—		(30,576	)
Recoveries		654			297			435			197			—		1,583

Net chargeoffs		(12,055	)		(10,292	)		(2,362	)		(4,284	)		—		(28,993	)

Ending balance (09/30/11)	$	33,068		$	4,526		$	4,785		$	1,783		$	—	$	44,162

December 31, 2011
Period-end amount allocated to:
Loans individually evaluated for impairment	$	8,275		$	3,102		$	236		$	210		$	—	$	11,823
Loans collectively evaluated for impairment		23,048			1,391			4,340			1,669			—		30,448

Ending balance	$	31,323		$	4,493		$	4,576		$	1,879		$	—	$	42,271

Period-end balances:
Loans individually evaluated for impairment	$	115,290		$	30,587		$	3,734		$	3,956		$	—	$	153,567
Loans collectively evaluated for impairment		972,496			33,280			234,663			26,190			—		1,266,629

Ending balance	$	1,087,786		$	63,867		$	238,397		$	30,146		$	—	$	1,420,196

The unpaid principal balance is the total amount of the loan that is due to Home Savings. The recorded investment includes the unpaid principal balance less any chargeoffs or partial chargeoffs applied to specific loans. The unpaid principal balance and the recorded investment both exclude accrued interest receivable and deferred loan costs, both of which are immaterial.

The following table presents loans individually evaluated for impairment by class of loans as of and for the nine months ended September 30, 2012:


Impaired Loans
(Dollars in thousands)
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With no specific allowance recorded
Permanent real estate
One-to four-family residential	$	17,027	$	15,594	$	—	$	25,431	$	424	$	461
Multifamily residential		610		515		—		3,363		—		9
Nonresidential		11,308		11,145		—		23,348		22		62
Land		4,584		3,811		—		5,789		0		3

Total		33,529		31,065		—		57,931		446		535
Construction loans
One-to four-family residential		6,465		2,553		—		8,289		9		21
Multifamily and nonresidential		587		—		—		—		—		—

Total		7,052		2,553		—		8,289		9		21
Consumer loans
Home Equity		5,921		4,956		—		4,365		133		163
Auto		72		52		—		56		—		4
Marine		170		170		—		220		—		9
Recreational vehicle		912		637		—		514		—		37
Other		7		7		—		7		—		1

Total		7,082		5,822		—		5,162		133		214
Commercial loans
Secured		2,298		1,378		—		1,948		18		97
Unsecured		3,066		43		—		344		1		12

Total		5,364		1,421		—		2,292		19		109

Total	$	53,027	$	40,861	$	—	$	73,674	$	607	$	879


Impaired Loans
(Dollars in thousands)
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With a specific allowance recorded
Permanent real estate
One-to four-family residential	$	—	$	—	$	—	$	1,489	$	—	$	—
Multifamily residential		1,026		1,011		57		2,742		—		17
Nonresidential		8,168		7,115		956		25,788		55		74
Land		4,588		2,371		268		3,226		—		12

Total		13,782		10,497		1,281		33,245		55		103
Construction loans
One-to four-family residential		21,648		7,427		664		13,032		15		27
Multifamily and nonresidential		—		—		—		—		—		—

Total		21,648		7,427		664		13,032		15		27
Consumer loans
Home Equity		—		—		—		—		—		—
Auto		—		—		—		—		—		—
Marine		—		—		—		121		—		—
Recreational vehicle		88		36		18		36		—		—
Other		—		—		—		—		—		—

Total		88		36		18		157		—		—
Commercial loans
Secured		798		423		166		488		—		3
Unsecured		—		—		—		19		—		—

Total		798		423		166		507		—		3

Total	$	36,316	$	18,383	$	2,129	$	46,941	$	70	$	133

Total	$	89,343	$	59,244	$	2,129	$	120,615	$	677	$	1,012

The following table presents loans individually evaluated for impairment by class of loans as of and for the quarter ended September 30, 2012:


Impaired Loans
(Dollars in thousands)
	Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With no specific allowance recorded
Permanent real estate
One-to four-family residential	$	22,316	$	194	$	205
Multifamily residential		2,688		—		1
Nonresidential		17,943		9		22
Land		4,804		—		—

Total		47,751		203		228
Construction loans
One-to four-family residential		5,157		3		7
Multifamily and nonresidential		—		—		—

Total		5,157		3		7
Consumer loans
Home Equity		4,953		50		64
Auto		55		—		1
Marine		262		—		4
Recreational vehicle		648		—		16
Other		7		—		—

Total		5,925		50		85
Commercial loans
Secured		1,438		6		28
Unsecured		125		—		3

Total		1,563		6		31

Total	$	60,396	$	262	$	351


Impaired Loans
(Dollars in thousands)
	Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With a specific allowance recorded
Permanent real estate
One-to four-family residential	$	1,802	$	—	$	—
Multifamily residential		3,102		—		—
Nonresidential		15,467		18		22
Land		2,755		—		—

Total		23,126		18		22
Construction loans
One-to four-family residential		9,913		5		8
Multifamily and nonresidential		—		—		—

Total		9,913		5		8
Consumer loans
Home Equity		—		—		—
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		36		—		—
Other		—		—		—

Total		36		—		—
Commercial loans
Secured		504		—		—
Unsecured		—		—		—

Total		504		—		—

Total	$	33,579	$	23	$	30

Total	$	93,975	$	285	$	381

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2011:


Impaired Loans
(Dollars in thousands)
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no specific allowance recorded
Permanent real estate
One-to four-family residential	$	32,372	$	28,566	$	—
Multifamily residential		5,112		4,205		—
Nonresidential		29,120		28,327		—
Land		9,213		7,290		—

Total		75,817		68,388		—
Construction loans
One-to four-family residential		19,081		12,532		—
Multifamily and nonresidential		707		—		—

Total		19,788		12,532		—
Consumer loans
Home Equity		4,908		3,139		—
Auto		80		59		—
Marine		—		—		—
Recreational vehicle		26		11		—
Other		7		7		—

Total		5,021		3,216		—
Commercial loans
Secured		3,875		3,084		—
Unsecured		22,716		371		—

Total		26,591		3,455		—

Total	$	127,217	$	87,591	$	—


Impaired Loans
(Dollars in thousands)
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With a specific allowance recorded
Permanent real estate
One-to four-family residential	$	2,487	$	1,721	$	152
Multifamily residential		4,077		2,387		187
Nonresidential		42,201		38,176		6,127
Land		5,074		4,618		1,809

Total		53,839		46,902		8,275
Construction loans
One-to four-family residential		35,759		18,055		3,102
Multifamily and nonresidential		—		—		—

Total		35,759		18,055		3,102
Consumer loans
Home Equity		—		—		—
Auto		—		—		—
Marine		482		482		218
Recreational vehicle		88		36		18
Other		—		—		—

Total		570		518		236
Commercial loans
Secured		776		427		136
Unsecured		105		74		74

Total		881		501		210

Total		91,049		65,976		11,823

Total	$	218,266	$	153,567	$	11,823

The following table presents the average recorded investment and interest income associated with impaired loans for the three months ended September 30, 2011:


Impaired Loans
(Dollars in thousands)
	Average Recorded Investment		Interest Income Recognized			Cash Basis Income Recognized
With no specific allowance recorded
Permanent real estate
One-to four-family residential	$	24,302	$	177		$	502
Multifamily residential		4,249		—			—
Nonresidential		25,770		206			544
Land		6,678		(30	)		24

Total		60,999		353			1,070
Construction loans
One-to four-family residential		14,976		89			13
Multifamily and nonresidential		—		—			—

Total		14,976		89			13
Consumer loans
Home Equity		1,045		(3	)		5
Auto		72		1			4
Marine		—		—			—
Recreational vehicle		47		—			—
Other		7		—			—

Total		1,171		(2	)		9
Commercial loans
Secured		957		15			21
Unsecured		429		8			126

Total		1,386		23			147

Total	$	78,532	$	463		$	1,239

(Continued)

Impaired Loans

(Dollars in thousands)


	Average Recorded Investment		Interest Income Recognized			Cash Basis Income Recognized
With a specific allowance recorded
Permanent real estate
One-to four-family residential	$	4,589	$	72		$	101
Multifamily residential		2,853		—			133
Nonresidential		39,583		794			864
Land		3,494		370			504

Total		50,519		1,236			1,602
Construction loans
One-to four-family residential		24,858		(9	)		349
Multifamily and nonresidential		—		—			—

Total		24,858		(9	)		349
Consumer loans
Home Equity		—		—			—
Auto		—		—			—
Marine		—		—			—
Recreational vehicle		—		—			—
Other		—		—			—

Total		—		—			—
Commercial loans
Secured		7,242		(107	)		192
Unsecured		869		—			1

Total		8,111		(107	)		193

Total	$	83,488	$	1,120		$	2,144

Total	$	162,020	$	1,583		$	3,383

The following table presents the average recorded investment and interest income associated with impaired loans for the nine months ended September 30, 2011:


Impaired Loans
(Dollars in thousands)


	Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With no specific allowance recorded
Permanent real estate
One-to four-family residential	$	25,002	$	510	$	1,004
Multifamily residential		3,441		—		148
Nonresidential		22,847		524		1,247
Land		6,244		15		126

Total		57,534		1,049		2,525
Construction loans
One-to four-family residential		17,939		219		280
Multifamily and nonresidential		191		—		—

Total		18,130		219		280
Consumer loans
Home Equity		1,194		2		29
Auto		67		1		9
Marine		—		—		—
Recreational vehicle		47		—		2
Other		7		—		—

Total		1,315		3		40
Commercial loans
Secured		1,270		35		43
Unsecured		407		13		163

Total		1,677		48		206

Total	$	78,656	$	1,319	$	3,051

(Continued)


Impaired Loans
(Dollars in thousands)
	Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With a specific allowance recorded
Permanent real estate
One-to four-family residential	$	2,809	$	111	$	168
Multifamily residential		5,175		—		170
Nonresidential		40,139		1,527		1,888
Land		1,960		382		527

Total		50,083		2,020		2,753
Construction loans
One-to four-family residential		25,472		110		694
Multifamily and nonresidential		—		—		—

Total		25,472		110		694
Consumer loans
Home Equity		—		—		—
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—

Total		—		—		—
Commercial loans
Secured		6,146		20		473
Unsecured		2,164		—		37

Total		8,310		20		510

Total		83,865		2,150		3,957

Total	$	162,521	$	3,469	$	7,008

The following tables present the recorded investment in nonaccrual and loans past due over 90 days and still on accrual by class of loans as of September 30, 2012:


Nonaccrual Loans and Loans Past Due Over 90 Days and Still Accruing
As of September 30, 2012
(Dollars in thousands)
	Nonaccrual		Loans past due over 90 days and still accruing
Real Estate Loans
Permanent
One-to four-family residential	$	5,817	$	—
Multifamily residential		1,512		—
Nonresidential		17,484		—
Land		6,228		—

Total		31,041		—

Construction Loans
One-to four-family residential		9,527		—
Multifamily and nonresidential		—		—

Total		9,527		—

Consumer Loans
Home Equity		3,271		47
Auto		118		—
Marine		158		—
Recreational vehicle		1,307		—
Other		20		—

Total		4,874		47

Commercial Loans
Secured		1,055		—
Unsecured		13		—

Total		1,068		—

Total	$	46,510	$	47


Nonaccrual Loans and Loans Past Due Over 90 Days and Still Accruing
As of December 31, 2011
(Dollars in thousands)
	Nonaccrual		Loans past due over 90 days and still accruing
Real Estate Loans
Permanent
One-to four-family residential	$	26,637	$	—
Multifamily residential		5,860		—
Nonresidential		42,902		—
Land		11,142		—

Total		86,541		—

Construction Loans
One-to four-family residential		27,104		—
Multifamily and nonresidential		—		—

Total		27,104		—

Consumer Loans
Home Equity		4,198		39
Auto		170		—
Marine		479		—
Recreational vehicle		1,725		—
Other		9		—

Total		6,581		39

Commercial Loans
Secured		2,483		—
Unsecured		347		—

Total		2,830		—

Total	$	123,056	$	39

The following tables present an age analysis of past-due loans, segregated by class of loans as of September 30, 2012:


Past Due Loans
(Dollars in thousands)
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current Loans		Total Loans
Real Estate Loans
Permanent
One-to four-family residential	$	2,425	$	795	$	4,822	$	8,042	$	579,178	$	587,220
Multifamily residential		3,439		—		1,512		4,951		77,567		82,518
Nonresidential		122		20		16,632		16,774		133,919		150,693
Land		—		11		6,221		6,232		10,131		16,363

Total		5,986		826		29,187		35,999		800,795		836,794

Construction Loans
One-to four-family residential		—		—		9,389		9,389		23,094		32,483
Multifamily and nonresidential		—		—		—		—		4,480		4,480

Total		—		—		9,389		9,389		27,574		36,963

Consumer Loans
Home Equity		763		464		2,456		3,683		179,887		183,570
Auto		22		6		87		115		8,083		8,198
Marine		461		6		—		467		4,580		5,047
Recreational vehicle		1,108		175		174		1,457		22,043		23,500
Other		10		—		18		28		2,652		2,680

Total		2,364		651		2,735		5,750		217,245		222,995

Commercial Loans
Secured		—		—		69		69		19,782		19,851
Unsecured		—		—		13		13		2,319		2,332

Total		—		—		82		82		22,101		22,183

Total	$	8,350	$	1,477	$	41,393	$	51,220	$	1,067,715	$	1,118,935

The following table presents an age analysis of past-due loans, segregated by class of loans as of December 31, 2011:


Past Due Loans
(Dollars in thousands)
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current Loans		Total Loans
Real Estate Loans
Permanent
One-to four-family residential	$	2,878	$	1,928	$	20,124	$	24,930	$	642,445	$	667,375
Multifamily residential		1,405		—		4,564		5,969		115,022		120,991
Nonresidential		6,820		971		41,151		48,942		227,256		276,198
Land		167		530		9,705		10,402		12,820		23,222

Total		11,270		3,429		75,544		90,243		997,543		1,087,786

Construction Loans
One-to four-family residential		979		1,718		24,608		27,305		32,034		59,339
Multifamily and nonresidential		—		—		—		—		4,528		4,528

Total		979		1,718		24,608		27,305		36,562		63,867

Consumer Loans
Home Equity		1,485		601		2,749		4,835		186,992		191,827
Auto		73		13		87		173		8,760		8,933
Marine		184		—		479		663		5,237		5,900
Recreational vehicle		867		754		1,044		2,665		25,865		28,530
Other		57		1		7		65		3,142		3,207

Total		2,666		1,369		4,366		8,401		229,996		238,397

Commercial Loans
Secured		554		—		96		650		24,470		25,120
Unsecured		69		—		237		306		4,720		5,026

Total		623		—		333		956		29,190		30,146

Total	$	15,538	$	6,516	$	104,851	$	126,905	$	1,293,291	$	1,420,196

During the period ended September 30, 2012, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. Modifications involving a reduction of the stated interest rate of a loan were for periods ranging from six months to 28 years. Modifications involving an extension of the maturity date were for periods ranging from six months to three years.

Restructured loans were $21.5 million and $50.9 million at September 30, 2012 and December 31, 2011, respectively. The Company has allocated $631,000 of specific reserves to customers whose loan terms were modified in troubled debt restructurings as of September 30, 2012. The Company had allocated $2.0 million of specific reserves to customers whose loan terms were modified in troubled debt restructurings as of December 31, 2011. Troubled debt restructurings are considered impaired and are included in the table above.

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended September 30, 2012:


	Number of loans		Pre-Modification Outstanding Recorded Investment		Post- Modification Recorded Investment
Real Estate Loans
Permanent
One-to four-family		17	$	537	$	537
Multifamily residential		—		—		—
Nonresidential		—		—		—
Land		—		—		—

Total		17		537		537

Construction Loans
One-to four-family residential		—		—		—
Multifamily and nonresidential		—		—		—

Total		—		—		—

Consumer Loans
Home Equity		19		2,711		2,792
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—

Total		19		2,711		2,792

Commercial Loans
Secured		—		—		—
Unsecured		—		—		—

Total		—		—		—

Total Restructured Loans		36	$	3,248	$	3,329

The troubled debt restructurings described above increased the allowance for loan losses by $367,000 but did not result in any chargeoffs during the three months ended September 30, 2012.

The following table presents loans by class modified as troubled debt restructurings that occurred during the nine months ended September 30, 2012:


	Number of loans		Pre-Modification Outstanding Recorded Investment		Post- Modification Recorded Investment
Real Estate Loans
Permanent
One-to four-family		38	$	2,843	$	2,801
Multifamily residential		6		1,439		1,438
Nonresidential		1		424		424
Land		—		—		—

Total		45		4,706		4,663

Construction Loans
One-to four-family residential		3		853		830
Multifamily and nonresidential		—		—		—

Total		3		853		830

Consumer Loans
Home Equity		61		4,494		4,544
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—

Total		61		4,494		4,544

Commercial Loans
Secured		—		—		—
Unsecured		1		446		446

Total		1		446		446

Total Restructured Loans		110	$	10,499	$	10,483

The troubled debt restructurings described above increased the allowance for loan losses by $367,000 but did not result in any chargeoffs during the nine months ended September 30, 2012.

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the period ended September 30, 2012:


	Number of loans		Recorded Investment
Real Estate Loans
Permanent
One-to four-family		7	$	708
Multifamily residential		—		—
Nonresidential		3		1,194
Land		—		—

Total		10		1,902

Construction Loans
One-to four-family residential		4		562
Multifamily and nonresidential		—		—

Total		4		562

Consumer Loans
Home Equity		3		152
Auto		—		—
Marine		—		—
Recreational vehicle		—		—
Other		—		—

Total		3		152

Commercial Loans
Secured		—		—
Unsecured		—		—

Total		—		—

Total Restructured Loans		17	$	2,616

A troubled debt restructuring is considered to be in payment default once it is 30 days contractually past due under the modified terms.

The troubled debt restructurings that subsequently defaulted described above resulted in no chargeoffs during the three and nine months ended September 30, 2012, respectively, and had no effect on the provision for loan losses.

The terms of certain other loans were modified during the period ended September 30, 2012 that did not meet the definition of a troubled debt restructuring. These loans have a total recorded investment as of September 30, 2012 of $2.8 million. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be significant.

In order to determine whether a borrower is experiencing financial difficulty an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed in accordance with the Company’s internal underwriting policy.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes homogeneous loans past due 90 cumulative days, and all non-homogeneous loans including commercial loans and commercial real estate loans. Smaller balance homogeneous loans are primarily monitored by payment status.

Asset quality ratings are divided into two groups: Pass (unclassified) and Classified. Within the unclassified group, loans that display potential weakness are risk rated as special mention. In addition, there are three classified risk ratings: substandard, doubtful and loss. These specific credit risk categories are defined as follows:

Special Mention. Loans classified as special mention have potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Loans may be housed in this category for no longer than 12 months during which time information is obtained to determine if the credit should be downgraded to the substandard category.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Loss. Loans classified as loss are considered uncollectible and of such little value, that continuance as assets is not warranted. Although there may be a chance of recovery on these assets, it is not practical or desirable to defer writing off the asset.

The Company monitors loans on a monthly basis to determine if they should be included in one of the categories listed above. All impaired non-homogeneous credits classified as Substandard, Doubtful or Loss are analyzed on an individual basis for a specific reserve requirement. This analysis is performed on each individual credit at least annually or more frequently if warranted.

As of September 30, 2012 and December 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:


	Loans September 30, 2012
	(Dollars in thousands)
	Unclassified				Classified
	Unclassified		Special Mention		Substandard		Doubtful		Loss		Total Classified		Total Loans
Real Estate Loans
Permanent
One-to four-family residential	$	578,188	$	459	$	8,573	$	—	$	—	$	8,573	$	587,220
Multifamily Residential		67,664		11,376		3,478		—		—		3,478		82,518
Nonresidential		110,218		18,782		21,693		—		—		21,693		150,693
Land		9,797		390		6,176		—		—		6,176		16,363

Total		765,867		31,007		39,920		—		—		39,920		836,794

Construction Loans
One-to four-family Residential		22,288		198		9,997		—		—		9,997		32,483
Multifamily and nonresidential		4,480		—		—		—		—		—		4,480

Total		26,768		198		9,997		—		—		9,997		36,963

Consumer Loans
Home Equity		180,204		—		3,366		—		—		3,366		183,570
Auto		7,843		227		128		—		—		128		8,198
Marine		4,869		8		170		—		—		170		5,047
Recreational vehicle		22,128		—		1,372		—		—		1,372		23,500
Other		2,653		—		27		—		—		27		2,680

Total		217,697		235		5,063		—		—		5,063		222,995

Commercial Loans
Secured		16,683		555		2,613		—		—		2,613		19,851
Unsecured		1,552		—		780		—		—		780		2,332

Total		18,235		555		3,393		—		—		3,393		22,183

Total	$	1,028,567	$	31,995	$	58,373	$	—	$	—	$	58,373	$	1,118,935


	Loans December 31, 2011
	(Dollars in thousands)
	Unclassified				Classified
	Unclassified		Special Mention		Substandard		Doubtful		Loss		Total Classified		Total Loans
Real Estate Loans
Permanent
One-to four-family residential	$	626,072	$	4,094	$	37,209	$	—	$	—	$	37,209	$	667,375
Multifamily residential		90,820		8,392		21,779		—		—		21,779		120,991
Nonresidential		149,314		18,388		108,496		—		—		108,496		276,198
Land		10,475		1,200		11,547		—		—		11,547		23,222

Total		876,681		32,074		179,031		—		—		179,031		1,087,786

Construction Loans
One-to four-family residential		28,396		2,394		28,520		29		—		28,549		59,339
Multifamily and nonresidential		4,528		—		—		—		—		—		4,528

Total		32,924		2,394		28,520		29		—		28,549		63,867

Consumer Loans
Home Equity		187,153		269		4,405		—		—		4,405		191,827
Auto		8,738		12		183		—		—		183		8,933
Marine		5,418		—		482		—		—		482		5,900
Recreational vehicle		26,728		—		1,802		—		—		1,802		28,530
Other		3,192		—		15		—		—		15		3,207

Total		231,229		281		6,887		—		—		6,887		238,397

Commercial Loans
Secured		20,895		263		3,962		—		—		3,962		25,120
Unsecured		2,861		166		1,999		—		—		1,999		5,026

Total		23,756		429		5,961		—		—		5,961		30,146

Total	$	1,164,590	$	35,178	$	220,399	$	29	$	—	$	220,428	$	1,420,196

MORTGAGE BANKING ACTIVITIES

Mortgage loans serviced for others, which are not reported in United Community’s assets, totaled $1.2 billion at September 30, 2012, and $1.1 billion December 31, 2011.

Activity for capitalized mortgage servicing rights, included in other assets, was as follows:


	Nine Months Ended September 30, 2012			Nine Months Ended September 30, 2011
	(Dollars in thousands)
Balance, beginning of year	$	6,375		$	6,400
Originations		1,738			1,409
Amortized to expense		(1,923	)		(1,560	)

Balance, end of period		6,190			6,249
Less valuation allowance		(2,016	)		(1,415	)

Net balance	$	4,174		$	4,834

Activity in the valuation allowance for mortgage servicing rights was as follows:


	Nine Months Ended September 30, 2012			Nine Months Ended September 30, 2011
	(Dollars in thousands)
Balance, beginning of year	$	(1,785	)	$	(285	)
Impairment charges		(1,179	)		(1,357	)
Recoveries		948			227

Balance, end of period	$	(2,016	)	$	(1,415	)

The fair value of mortgage servicing rights as of September 30, 2012, was approximately $5.4 million and at December 31, 2011, was approximately $5.9 million.

Key economic assumptions in measuring the value of mortgage servicing rights at September 30, 2012, and December 31, 2011, were as follows:


	September 30, 2012			December 31, 2011
Weighted average prepayment rate		547 PSA			475 PSA
Weighted average life (in years)		3.86			3.70
Weighted average discount rate		8	%		8	%

OTHER REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS

Real estate owned and other repossessed assets at September 30, 2012 and 2011 were as follows:


	September 30,			September 30,
	2012			2011
	(Dollars in thousands)
Real estate owned and other repossessed assets	$	27,085		$	46,668
Valuation allowance		(6,879	)		(8,352	)

End of period	$	20,206		$	38,316

Activity in the valuation allowance was as follows:


	September 30,			September 30,
	2012			2011
	(Dollars in thousands)
Beginning of year	$	8,764		$	7,332
Additions charged to expense		1,805			4,040
Direct write-downs		(3,690	)		(3,020	)

End of period	$	6,879		$	8,352

In connection with the bulk asset sale, Home Savings sold 10 properties that had a combined carrying value of $1.1 million. The loss realized on those disposals aggregated $413,000.

Expenses related to foreclosed and repossessed assets include:


	For the three months ended September 30,
	2012		2011
	(Dollars in thousands)
Net loss on sales	$	210	$	395
Net loss on sales from bulk asset transaction		413		—
Provision for unrealized losses, net		1,172		2,232
Operating expenses, net of rental income		383		361

Total expenses	$	2,178	$	2,988


	For the nine months ended September 30,
	2012		2011
	(Dollars in thousands)
Net loss on sales	$	1,229	$	941
Net loss on sales from bulk asset transaction		413		—
Provision for unrealized losses, net		1,805		4,040
Operating expenses, net of rental income		1,504		2,125

Total expenses	$	4,951	$	7,106

OTHER POSTRETIREMENT BENEFIT PLANS

Home Savings sponsors a defined benefit health care plan that was curtailed in 2000, but continues to provide postretirement medical benefits for employees who had worked 20 years and attained a minimum age of 60 by September 1, 2000, while in service with Home Savings. The plan is contributory and contains minor cost-sharing features such as deductibles and coinsurance. In addition, postretirement life insurance coverage is provided for employees who were participants prior to December 10, 1976. The life insurance plan is non-contributory. Home Savings’ policy is to pay premiums monthly, with no pre-funding.

Components of net periodic benefit cost are as follows:


	Three Months Ended September 30,
	2012			2011
	(In thousands)
Service cost	$	—		$	—
Interest cost		19			33
Expected return on plan assets		—			—
Net amortization (accretion) of prior service cost		(20	)		(1	)
Recognized net actuarial gain		(23	)		(19	)

Net periodic benefit cost	$	(24	)	$	13

Assumptions used in the valuations were as follows:
Weighted average discount rate		4.00	%		5.00	%


	Nine Months Ended September 30,
	2012			2011
	(Dollars in thousands)
Service cost	$	—		$	—
Interest cost		57			99
Expected return on plan assets		—			—
Net amortization of prior service cost		(59	)		(1	)
Recognized net actuarial gain		(69	)		(57	)

Net periodic benefit cost	$	(71	)	$	41

Assumptions used in the valuations were as follows:
Weighted average discount rate		4.00	%		5.00	%

10.

FAIR VALUE MEASUREMENT

Fair value is the exchange price that would be received for an asset if paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own beliefs about the assumptions that market participants would use in pricing an asset or liability.

United Community uses the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Available for sale securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2).

Impaired loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other real estate owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Special Assets Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with the independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value.

Mortgage servicing rights: On a quarterly basis, loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value. Fair value is determined at a tranche level, based on market prices for comparable mortgage servicing contracts (Level 1), when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data (Level 2).

Loans held for sale: Loans held for sale are carried at the lower of cost or fair value, which is evaluated on a pool-level basis. The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2).

Interest rate caps: The Company uses an independent third party that performs a market valuation analysis for interest rate caps. The methodology used consists of a discounted cash flow model, all future floating cash flows are projected and both floating and fixed cash flows are discounted to the valuation date. The yield curve utilized for discounting and projecting is built by obtaining publicly available third party market quotes from Reuters, which handle up to 30-year swap maturities (Level 3).

Assets and Liabilities Measured on a Recurring Basis: Assets and liabilities measured at fair value on a recurring basis are summarized below:


			Fair Value Measurements at September 30, 2012 Using:
	September 30,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2012		(Level 1)		(Level 2)		(Level 3)
	(In thousands)
Assets:
Available for sale securities
US Treasury and government sponsored entities’ securities	$	88,067	$	—	$	88,067	$	—
Equity securities		313		313		—		—
Mortgage-backed GSE securities: residential		463,415		—		463,415		—
Interest rate caps		510		—		—		510

			Fair Value Measurements at December 31, 2011 Using:
	December 31,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2011		(Level 1)		(Level 2)		(Level 3)
	(In thousands)
Assets:
Available for sale securities
US Treasury and government sponsored entities’ securities	$	50,800	$	—	$	50,800	$	—
Equity securities		263		263		—		—
Mortgage-backed GSE securities: residential		408,535		—		408,535		—
Interest rate caps		1,933		—		—		1,933

There were no transfers between Level 1 and Level 2 during 2012 or 2011.

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2012, in thousands:


	Interest Rate Caps
	Three Months Ended			Nine Months Ended
	September 30, 2012			September 30, 2012
Balance of recurring Level 3 assets at beginning of period	$	831		$	1,933
Total gains (losses) for the period
Included in other income		(234	)		(1,077	)
Included in other comprehensive income		—			—
Purchases		—			—
Amortization		(87	)		(346	)
Sales		—			—

Balance of recurring Level 3 assets at end of period	$	510		$	510

The Company had no interest rate caps as of September 30, 2011.

There were no transfers between Level 2 and Level 3 during 2012 or 2011.

The following table presents quantitative information about recurring Level 3 fair value measurements at September 30, 2012:


	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range
	(In thousands)
Interest rate caps	$	510	Discounted cash flow	Discount rate	0.47%-1.5%

The fair value of interest rate caps was determined using proprietary models from third-party sources taking into account such factors as size of the transaction, the lack of a quoted market and the custom-tailored nature of the transaction. The fair value is inclusive of interest accruals, as applicable.

Assets and Liabilities Measured on a Non-Recurring Basis: Assets and liabilities measured at fair value on a non-recurring basis are summarized below:


			Fair Value Measurements at September 30, 2012 Using:
	September 30,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2012		(Level 1)		(Level 2)		(Level 3)
	(In thousands)
Assets:
Impaired loans:
Permanent real estate loans	$	40,281	$	—	$	—	$	40,281
Construction loans		9,316		—		—		9,316
Consumer loans		5,840		—		—		5,840
Commercial loans		1,678		—		—		1,678
Mortgage servicing assets		3,728		—		3,728		—
Other real estate owned, net:
Permanent real estate loans		4,448		—		—		4,448
Construction loans		7,167		—		—		7,167


			Fair Value Measurements at December 31, 2011 Using:
	December 31,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2011		(Level 1)		(Level 2)		(Level 3)
	(In thousands)
Assets:
Impaired loans:
Permanent real estate loans	$	38,627	$	—	$	—	$	38,627
Construction loans		14,953		—		—		14,953
Consumer loans		282						282
Commercial loans		291		—		—		291
Mortgage servicing assets		3,921		—		3,921		—
Other real estate owned, net:
Permanent real estate loans		7,586		—		—		7,586
Construction loans		7,581		—		—		7,581

Impaired loans with specific allocations of the allowance for loan losses, carried at fair value, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $57.1 million at September 30, 2012, with a specific valuation allowance of $2.1 million. This resulted in a decrease of the provision for loan losses of $2.3 million during the three months ended September 30, 2012 and a decrease of the provision for loan losses of $794,000 during the nine months ended September 30, 2012. Impaired loans with specific allocations of the allowance for loan losses, carried at fair value, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $86.9 million at September 30, 2011, with a specific valuation allowance of $12.2 million. This resulted in an additional provision for loan losses of $1.8 million during the three months ended September 30, 2011 and $12.6 million for the nine months ended September 30, 2011. Impaired loans with specific allocations of the allowance for loan losses, carried at fair value, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $66.0 million at December 31, 2011, with a specific valuation allowance of $11.8 million, resulting in additional provision for loan losses of $30.8 million during 2011.

The significant unobservable (Level 3) inputs used in the fair value measurement of collateral for collateral dependent impaired loans included in the above table primarily relate to the adjustment between carrying value versus appraised value. During the reported periods, discounts applied to appraisals for estimated selling costs were 10%.

At September 30, 2012, mortgage servicing rights, carried at fair value, totaled $4.2 million, which is made up of the outstanding balance of $6.2 million, net of a valuation allowance of $2.0 million. At December 31, 2011, mortgage servicing rights, carried at fair value, totaled $4.6 million, which was made up of the outstanding balance of $6.4 million, net of a valuation allowance of $1.8 million, resulting in a net charge of $1.5 million for the year ended December 31, 2011. During the third quarter, the Company increased the amount of the valuation allowance by $672,000. Mortgage servicing rights are valued by an independent third party that is active in purchasing and selling these instruments. The value reflects the characteristics of the underlying loans discounted at a market multiple.

At September 30, 2012, other real estate owned, carried at fair value, which is measured for impairment using the fair value of the property less estimated selling costs, had a net carrying amount of $18.5 million, with a valuation allowance of $8.9 million. This resulted in additional expenses of $1.3 million during the three months ended September 30, 2012, and additional expenses of $2.0 million during the nine months ended September 30, 2012. At December 31, 2011, other real estate owned, measured at fair value less costs to sell, had a net carrying amount of $33.5 million, which is made up of the outstanding balance of $42.3 million net of a valuation allowance of $8.8 million resulting in a write-down of $4.8 million for the year ended December 31, 2011.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at September 30, 2012:


	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Average)
	(In thousands)
Impaired loans:
Permanent real estate loans	$	40,281	Sales comparison approach Income approach	Adjustment for differences between comparable sales Adjustment for differences in net operating income Capitalization rate	12.07%-45.44% (28.75%) 7.52%-10.73% (9.49%)
Construction loans		9,316	Sales comparison approach Income approach	Adjustment for differences between comparable sales Adjustment for differences in net operating income Capitalization rate	0.00%-25.00% (9.83%) 10.00%
Consumer loans		5,840	Sales comparison approach	Adjustment for differences between comparable sales	20.00%
Commercial loans		1,678	Sales comparison approach Income approach	Adjustment for differences between comparable sales Adjustment for differences in net operating income Capitalization rate	1.6%-24.18% (11.15%) 8.5%-10% (9.25%)
Foreclosed assets:
Permanent real estate loans		4,448	Sales comparison approach	Adjustment for differences between comparable sales	3.60%-16.47% (10.20%)
Construction loans		7,167	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-47.24% (17.63%)

In accordance with generally accepted accounting principles, the carrying value and estimated fair values of financial instruments at September 30, 2012 and December 31, 2011, were as follows:


				Fair Value Measurements at September 30, 2012 Using:
	September 30, 2012			Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs
	Carrying Value			(Level 1)			(Level 2)			(Level 3)
	(In thousands)
Assets:
Cash and cash equivalents	$	57,530		$	57,530		$	—		$	—
Available for sale securities		551,795			313			551,482			—
Loans held for sale		9,076			—			9,564			—
Loans, net		1,100,328			—			—			1,123,516
FHLB stock		26,464			n/a			n/a			n/a
Accrued interest receivable		5,660			—			230			5,430
Interest rate caps		510			—			—			510
Liabilities:
Deposits:
Checking, savings and money market accounts		(893,161	)		(893,161	)		—			—
Certificates of deposit		(597,481	)		—			(608,873	)		—
FHLB advances		(50,000	)		—			(57,514	)		—
Repurchase agreements and other		(90,603	)		—			(101,979	)		—
Advance payments by borrowers for taxes and insurance		(14,121	)		—			(14,121	)		—
Accrued interest payable		(628	)		(63	)		(565	)		—


	December 31, 2011
	Carrying			Fair
	Value			Value
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	54,136		$	54,136
Available for sale securities		459,598			459,598
Loans held for sale		12,727			13,098
Loans, net		1,379,276			1,402,452
Federal Home Loan Bank stock		26,464			n/a
Accrued interest receivable		6,741			6,741
Interest Rate Caps		1,933			1,933
Liabilities:
Deposits:
Checking, savings and money market accounts		(817,082	)		(817,082	)
Certificates of deposit		(771,415	)		(782,146	)
Federal Home Loan Bank advances		(128,155	)		(136,727	)
Repurchase agreements and other		(90,618	)		(103,719	)
Advance payments by borrowers for taxes and insurance		(23,282	)		(23,282	)
Accrued interest payable		(610	)		(610	)

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

(a) Cash and Cash Equivalents

The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

(b) FHLB Stock

It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

(c) Loans

Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

(d) Deposits

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date resulting in a Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of deposit to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

(e) Short-term Borrowings

The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within 90 days, approximate their fair values resulting in a Level 2 classification.

(f) Other Borrowings

The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

(g) Accrued Interest Receivable/Payable

The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification, depending on the classification of the underlying asset or liability.

(h) Off-balance Sheet Instruments

Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

11.

STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURE

Supplemental disclosures of cash flow information are summarized below.


	For the nine months ended
	September 30, 2012		September 30, 2011
	(In thousands)
Supplemental disclosures of cash flow information
Cash paid (received) during the period for:
Interest on deposits and borrowings	$	14,202	$	23,595
Income taxes		—		(3,537	)
Supplemental schedule of noncash activities:
Loans transferred from portfolio to held for sale		1,214		96,845
Transfers from loans to real estate owned and other repossessed assets		5,743		17,017
Transfers from real estate owned to premises and equipment		1,746		—
Transfers from premises and equipment to other assets		—		1,750

12.

SEGMENT INFORMATION

All of the Company’s financial service operations are considered by management to be aggregated in one reportable operating segment, which is banking services.

13.

EARNINGS PER SHARE

Earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted earnings per share are computed using the weighted average number of common shares determined for the basic computation plus the dilutive effect of potential common shares that could be issued under outstanding stock options. Stock options for 1,658,390 shares were anti-dilutive for the three months ended September 30, 2012. There were 2,049,844 stock options for shares that were anti-dilutive for the three months ended September 30, 2011. Stock options for 1,686,674 shares were anti-dilutive for the nine months ended September 30, 2012. There were 2,049,844 stock options for shares that were anti-dilutive for the nine months ended September 30, 2011.


	Three months ended
	September 30,
	2012			2011
	(Dollars in thousands)
Net loss per consolidated statements of income	$	(26,891	)	$	(8,864	)
Net loss allocated to participating securities		(73	)		(16	)

Net loss allocated to common stock	$	(26,818	)	$	(8,848	)

Basic earnings (loss) per common share computation:
Distributed earnings allocated to common stock	$	—		$	—
Undistributed loss allocated to common stock		(26,818	)		(8,848	)

Net loss allocated to common stock	$	(26,818	)	$	(8,848	)

Weighted average common shares outstanding, including shares considered participating securities		32,847			30,953
Less: Average participating securities		(96	)		(57	)

Weighted average shares		32,751			30,896

Basic loss per common share	$	(0.82	)	$	(0.29	)

Diluted earnings (loss) per common share computation:
Net loss allocated to common stock	$	(26,818	)	$	(8,848	)

Weighted average common shares outstanding for basic earnings per common share		32,751			30,896
Add: Dilutive effects of assumed exercises of stock options		—			—

Weighted average shares and dilutive potential common shares		32,751			30,896

Diluted loss per common share	$	(0.82	)	$	(0.29	)


	Nine months ended
	September 30,
	2012			2011
	(Dollars in thousands)
Net loss per consolidated statements of income	$	(23,033	)	$	(7,698	)
Net loss allocated to participating securities		(43	)		(11	)

Net loss allocated to common stock	$	(22,990	)	$	(7,687	)

Basic earnings (loss) per common share computation:
Distributed earnings allocated to common stock	$	—		$	—
Undistributed loss allocated to common stock		(22,990	)		(7,687	)

Net loss allocated to common stock	$	(22,990	)	$	(7,687	)

Weighted average common shares outstanding, including shares considered participating securities		32,781			30,936
Less: Average participating securities		(66	)		(47	)

Weighted average shares		32,715			30,889

Basic loss per common share	$	(0.70	)	$	(0.25	)

Diluted earnings (loss) per common share computation:
Net loss allocated to common stock	$	(22,990	)	$	(7,687	)

Weighted average common shares outstanding for basic earnings per common share		32,715			30,889
Add: Dilutive effects of assumed exercises of stock options		—			—

Weighted average shares and dilutive potential common shares		32,715			30,889

Diluted loss per common share	$	(0.70	)	$	(0.25	)

14.

OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) included in the Consolidated Statements of Shareholders’ Equity consists of unrealized gains and losses on available for sale securities and reflects no change in unrealized gains and losses on postretirement liability. The change includes reclassification of gains on sales of securities of $5.2 million and no impairment charges at September 30, 2012, and gains on sales of securities of $3.5 million and impairment charges of $78,000 at September 30, 2011.

Other comprehensive income (loss) components and related tax effects for the three and nine month periods are as follows:


	Three months ended
	September 30,			September 30,
	2012			2011
	(Dollars in thousands)
Unrealized holding gain on securities available for sale	$	6,759		$	10,141
Reclassification adjustment for gains realized in income		(1,192	)		(1,923	)

Net unrealized gains		5,567			8,218
Tax effect (35%)		(2,838	)		—

Net of tax amount	$	2,729		$	8,218


	Nine months ended
	September 30,			September 30,
	2012			2011
	(Dollars in thousands)
Unrealized holding gain on securities available for sale	$	13,270		$	17,346
Reclassification adjustment for gains realized in income		(5,161	)		(3,427	)

Net unrealized gains		8,109			13,919
Tax effect (35%)		(2,838	)		—

Net of tax amount	$	5,271		$	13,919

The following is a summary of accumulated other comprehensive income (loss) balances, net of tax:


	Balance at December 31, 2011		Current Period Change		Balance at September 30, 2012
Unrealized gains on securities available for sale	$	3,447	$	5,271	$	8,718
Unrealized gains on post-retirement benefits		1,585		—		1,585

Total	$	5,032	$	5,271	$	10,303

The Company recognized a net loss and had unrealized gains on available for sale securities recorded in other comprehensive income at September 30, 2012. As a result, the tax benefit recognized is equal to the current year to date change in other comprehensive income multiplied by the Company’s statutory tax rate of 35%.

15.

REGULATORY CAPITAL REQUIREMENTS

Home Savings is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on Home Savings and United Community. The regulations require Home Savings to meet specific capital adequacy guidelines and the regulatory framework for prompt corrective action that involve quantitative measures of Home Savings’ assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. Home Savings’ capital classification also is subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation for capital adequacy require Home Savings to maintain minimum amounts and ratios of Tier 1 (or Core) capital (as defined in the regulations) to average total assets (as defined) and of total risk-based capital (as defined) to risk-weighted assets (as defined). Actual and statutory required capital amounts and ratios for Home Savings are presented below.


	As of September 30, 2012
	Actual					Minimum Capital Requirements Per Consent Order
	Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total risk-based capital to risk-weighted assets	$	171,263		15.85	%	$	129,677		12.00	%
Tier 1 capital to risk-weighted assets		157,674		14.59	%		*		*
Tier 1 capital to average total assets		157,674		8.27	%		171,616		9.00	%

	As of September 30, 2012
	Minimum Capital Requirements Per Regulation					To Be Well Capitalized Under Prompt Corrective Action Provisions (1)
	Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total risk-based capital to risk-weighted assets	$	86,451		8.00	%	$	108,064		10.00	%
Tier 1 capital to risk-weighted assets		*		*			64,839		6.00	%
Tier 1 capital to average total assets		76,274		4.00	%		95,342		5.00	%

(1) Home Savings cannot be considered well capitalized while it is under a regulatory order that requires it to maintain a specific capital level.

	As of December 31, 2011
	Actual					Minimum Capital Requirements Per Bank Order
	Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total risk-based capital to risk-weighted assets	$	196,710		14.57	%	$	162,005		12.00	%
Tier 1 capital to risk-weighted assets		179,521		13.30	%		*		*
Tier 1 capital to average total assets		179,521		8.61	%		166,856		8.00	%

	As of December 31, 2011
	Minimum Capital Requirements Per Regulation					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total risk-based capital to risk-weighted assets	$	108,003		8.00	%	$	135,004		10.00	%
Tier 1 capital to risk-weighted assets		*		*			81,002		6.00	%
Tier 1 capital to average total assets		83,428		4.00	%		104,285		5.00	%

*	Amount/Ratio is not required under the Bank Order or regulations.

As of September 30, 2012 and December 31, 2011, respectively, the FDIC and FRB categorized Home Savings as adequately capitalized pursuant to the Consent Order and OTS Order (as amended) discussed in Note 2. Home Savings cannot be considered well capitalized while it is under a regulatory order that requires it to maintain a specific capital level.

Pursuant to the Consent Order issued by the FDIC and Ohio Division, Home Savings will need to maintain a Tier 1 Leverage Ratio greater than 9.0% and a Total Risk-based Capital Ratio greater than 12.0% at the end of every quarter beginning with the quarter ending June 30, 2012. If either ratio falls below its limit at the end of any given quarter, then Home Savings must restore its capital ratios to required levels within 60 days, as more fully disclosed in Note 2.

The Bank’s Tier 1 leverage ratio is 8.27%, after recording loss from the bulk asset sale. While Home Savings is still operating under a Consent Order requiring a minimum Tier 1 leverage ratio of 9.0%, the Company has worked closely with its regulators to keep them informed of the transaction and obtained their concurrence to complete the sale along with the Bank’s commitment to meet the 9.0% requirement by March 31, 2013.

Events beyond management’s control, such as fluctuations in interest rates or a downturn in the economy in areas in which Home Savings’ loans and securities are concentrated, could adversely affect future earnings, and consequently Home Savings’ ability to meet its future capital requirements. Refer to Note 2 for a complete discussion of the regulatory enforcement actions.

16.

INCOME TAXES

The Company recognized a net loss and had unrealized gains on available for sale securities recorded in other comprehensive income for the period ending September 30, 2012, as well as a pretax operating loss. As a result, the tax benefit recognized is equal to the current year to date change in other comprehensive income multiplied by the Company’s statutory tax rate of 35%.

Management recorded a valuation allowance against deferred tax assets at September 30, 2012 and December 31, 2011, based on its estimate of future reversal and utilization. When determining the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded as a benefit, the Company conducts a regular assessment of all available information. This information includes, but is not limited to, taxable income in prior periods, projected future income, and projected future reversals of deferred tax items. Based on these criteria, the Company determined that it was necessary to establish a full valuation allowance against the entire net deferred tax asset, which was in place during all periods presented.

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

UNITED COMMUNITY FINANCIAL CORP.


	At or For the Three						At or For the Nine
	Months Ended						Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Selected financial ratios and other data: (1)
Performance ratios:
Return on average assets (2)		-5.67	%		-1.69	%		-1.56	%		-0.48	%
Return on average equity (3)		-53.53	%		-18.98	%		-15.56	%		-5.61	%
Interest rate spread (4)		3.00	%		2.97	%		3.15	%		3.15	%
Net interest margin (5)		3.17	%		3.18	%		3.34	%		3.36	%
Non-interest expense to average assets		3.66	%		2.78	%		3.45	%		2.94	%
Efficiency ratio (6)		93.62	%		79.67	%		82.61	%		74.27	%
Average interest-earning assets to average interest-bearing liabilities		118.34	%		113.30	%		117.12	%		112.86	%
Capital ratios:
Average equity to average assets		10.60	%		8.90	%		10.02	%		8.60	%
Equity to assets, end of period		9.37	%		8.82	%		9.37	%		8.82	%
Tier 1 leverage ratio		8.27	%		8.13	%		8.27	%		8.13	%
Tier 1 risk-based capital ratio		14.59	%		11.98	%		14.59	%		11.98	%
Total risk-based capital ratio		15.85	%		13.25	%		15.85	%		13.25	%
Asset quality ratios:
Nonperforming loans to total loans at end of period (7)		4.16	%		9.33	%		4.16	%		9.33	%
Nonperforming assets to average assets (8)		3.52	%		8.22	%		3.39	%		8.10	%
Nonperforming assets to total assets at end of period (8)		3.65	%		8.32	%		3.65	%		8.32	%
Allowance for loan losses as a percent of loans		1.79	%		2.98	%		1.79	%		2.98	%
Allowance for loan losses as a percent of nonperforming loans (7)		43.06	%		32.94	%		43.06	%		32.94	%
Texas ratio (9)		34.89	%		76.12	%		34.89	%		76.12	%
Total classified loans as a percent of Tier 1 capital (10)		37.02	%		132.26	%		37.02	%		132.26	%
Total classified loans as a percent of Tier 1 capital and ALLL		32.85	%		105.14	%		32.85	%		105.14	%
Total classified assets as a percent of Tier 1 capital and ALLL (10)		44.21	%		122.93	%		44.21	%		122.93	%
Net charge-offs as a percent of average loans		13.57	%		3.75	%		6.15	%		2.46	%
Total 90+ days past due as a percent of total loans		3.70	%		7.59	%		3.70	%		7.59	%
Office data:
Number of full service banking offices		34			38			34			38
Number of loan production offices		8			7			8			7
Per share data:
Basic earnings (loss) (11)	$	(0.82	)	$	(0.29	)	$	(0.70	)	$	(0.25	)
Diluted earnings (loss) (11)		(0.82	)		(0.29	)		(0.70	)		(0.25	)
Book value (12)		5.22			5.90			5.22			5.90
Tangible book value (13)		5.21			5.88			5.21			5.88

Notes:

1.	Ratios for the three and nine month periods are annualized where appropriate

2.	Net income (loss) divided by average total assets

3.	Net income (loss) divided by average total equity

4.	Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities

5.	Net interest income as a percentage of average interest-earning assets

Noninterest expense, excluding the amortization of core deposit intangible and prepayment penalties, divided by the sum of net interest income and noninterest income, excluding gains and losses on securities, other than temporary impairment charges, gains and losses on foreclosed assets, and gain on the sale of a retail branch

7.	Nonperforming loans consist of nonaccrual loans and loans past due ninety days and still accruing

8.	Nonperforming assets consist of nonperforming loans, real estate owned and other repossessed assets

9.	Nonperforming assets divided by the sum of tangible common equity and the allowance for loan losses

10.	Classified assets include classified loans, real estate owned and other repossessed assets

11.	Net income (loss) divided by the number of basic or diluted shares outstanding

12.	Shareholders’ equity divided by number of shares outstanding

13.	Shareholders’ equity minus core deposit intangible divided by the number of shares outstanding

Forward Looking Statements

When used in this Form 10-Q the words or phrases “will likely result,” “are expected to,” “plan to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including changes in economic conditions in United Community’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in Home Savings’ market area, and competition that could cause actual results to differ materially from results presently anticipated or projected. United Community cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. United Community advises readers that the factors listed above could affect United Community’s financial performance and could cause United Community’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. United Community undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made.

Comparison of Financial Condition at September 30, 2012 and December 31, 2011

Total assets decreased $199.7 million to $1.8 billion at September 30, 2012, compared to December 31, 2011. Contributing to the change was a decrease in net loans of $278.9 million and a decrease in real estate owned and other repossessed assets of $13.3 million, which were offset partially by an increase in available for sale securities of $92.2 million.

The level of assets was affected by Home Savings’ successful completion of a bulk sale of a substantial amount of the Bank’s troubled loans, along with other assets, to an unrelated party on September 30, 2012. Total assets included in the bulk sale had an unpaid principal balance of $147.8 million as of the closing date, comprised of loans with an unpaid principal balance of $146.7 million and other real estate owned with a principal balance of $1.1 million. The loans included in the bulk sale had a book balance as of the closing date of $113.7 million. Of these loans, $91.6 million were classified, $63.3 million were nonperforming and $53.0 million were noncurrent (all figures are book balance prior to the effect of any reserves). The loans included in the bulk sale had reserves totaling $8.0 million, for a net book balance of $105.7 million. Together with the other real estate owned included in the sale, the net book balance of the assets included in the bulk sale totaled $106.8 million. The Bank received $77.4 million in cash for these assets.

In the first nine months of 2012, the Company sold approximately $281.8 million in securities, recognizing $5.2 million in net gains on the sales. The Company also purchased securities with a face value of $424.9 million to replace the securities sold during the period and to replace loan balances that continued to decline. Maturities, paydowns and the change in the unrealized gain on the portfolio also contributed to the change in the size of the securities portfolio.

Net loans decreased $278.9 million during the first nine months of 2012. The primary source of the decrease was a bulk asset sale completed in the third quarter of 2012. The loans associated with this sale had an unpaid principal balance of $113.7 million. Chargeoffs in excess of reserves for this transaction aggregated $30.2 million. The discussion below, including impaired loans, troubled debt restructured loans and nonperforming loans each include the impact of the asset sale.

The following table summarizes the trend in the allowance for loan losses as of September 30, 2012:


	Allowance For Loan Losses
	(In thousands)
	12/31/2011		Provision			Recovery		Chargeoff			Net (Chargeoffs) Recovery from Bulk Asset Sale			9/30/2012
Real Estate Loans
Permanent
One-to four-family residential	$	7,802	$	15,784		$	117	$	(2,099	)	$	(14,752	)	$	6,852
Multifamily residential		2,689		4,887			263		(1,377	)		(5,174	)		1,288
Nonresidential		16,801		12,114			274		(10,868	)		(14,382	)		3,939
Land		4,031		(246	)		39		(1,984	)		(1,436	)		404

Total		31,323		32,539			693		(16,328	)		(35,744	)		12,483

Construction Loans
One-to four-family residential		4,400		2,367			71		(3,209	)		(2,134	)		1,495
Multifamily and nonresidential		93		(74	)		120		(4	)		—			135

Total		4,493		2,293			191		(3,213	)		(2,134	)		1,630

Consumer Loans
Home Equity		2,026		2,231			280		(649	)		(759	)		3,129
Auto		77		(28	)		10		(8	)		—			51
Marine		509		16			10		(113	)		(57	)		365
Recreational vehicle		1,888		80			52		(1,157	)		—			863
Other		76		123			227		(271	)		(6	)		149

Total		4,576		2,422			579		(2,198	)		(822	)		4,557

Commercial Loans
Secured		654		240			31		(225	)		(1	)		699
Unsecured		1,225		(271	)		164		(982	)		543			679

Total		1,879		(31	)		195		(1,207	)		542			1,378

Total	$	42,271	$	37,223		$	1,658	$	(22,946	)	$	(38,158	)	$	20,048

The allowance for loan losses is a valuation allowance for probable incurred credit losses established through a provision for possible loan losses charged to expense. The allowance for loan losses decreased to $20.0 million at September 30, 2012, from $42.3 million at December 31, 2011, a decrease of $22.2 million. The allowance for loan losses as a percentage of loans was 1.79% at September 30, 2012, compared to 2.79% at December 31, 2011. However, the allowance for loan losses as a percentage of nonperforming loans was 43.06% at September 30, 2012, compared to 34.34% at December 31, 2011, due to the decrease in nonperforming loans following the bulk asset sale described above. Loan losses are charged against the allowance when the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are added back to the allowance. Home Savings’ allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables,” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies”. Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade applied to specific risk pools, plus specific loss allocations and adjustments for current events and conditions. Reserves from loans included in the asset sale mentioned above were treated as charges against the allowance in the third quarter of 2012. The ASC 310 reserve, or where applicable the ASC 450 reserve, as it related to loans included in the bulk asset sale were treated as chargeoffs in the ASC 450 methodology of determining loan loss ratios. Home Savings’ process for determining the appropriate level of the allowance for possible loan losses is designed to account for credit deterioration as it occurs. The provision for possible loan losses reflects loan quality trends, including the levels of and trends related to nonaccrual loans, past due loans, classified loans and net chargeoffs or recoveries, among other factors.

The decrease in the allowance for loan losses in the first nine months of 2012 was primarily a result of net chargeoffs associated with loans sold in the bulk asset sale and more specifically, nonresidential real estate. At September 30, 2012, the allowance assigned to the permanent nonresidential real estate portfolio aggregated $3.9 million, a decrease of $12.9 million from the previous year-end.

During the nine months ended September 30, 2012, the level of net loans charged off, excluding chargeoffs from the bulk asset sale, exceeded the loan loss provision by approximately $18.2 million. Timing differences can exist between the period in which an initial provision is recognized and the subsequent period in which the loss is confirmed and the resulting chargeoff recognized. As a result, in any given period, it is possible to have chargeoffs exceed the provision for loan losses in the various loan categories. All major categories had the level of chargeoffs exceed the provision recognized in the first nine months of 2012. In the first nine months of 2012, certain loans were charged off where reserves were established in a previous period.

Net chargeoffs exceeded the loan loss provision by $12.9 million in the nonresidential real estate category. This was impacted by the level of outstanding loans in the category, which declined by $125.5 million since December 31, 2011, thereby reducing the needed level of the allowance for loan losses. The primary reason for this decline in loans was the bulk asset sale mentioned above. Also affecting the comparison was the resolution of one commercial loan relationship consisting of seven loans, which represented the Company’s largest classified loan relationship, in the second quarter of 2012. Five of the seven loans in this relationship were nonresidential loans. The resolution of this loan relationship resulted in a $20.8 million decline in loan principal balances. Based on facts and circumstances that occurred in the second quarter of 2012, a chargeoff of $5.9 million in nonresidential loans was recognized in the second quarter as a part of this resolution. Reserves of $1.1 million were established on these specific loans in prior periods, resulting in a net loss of $4.8 million in the second quarter. Of the remaining $5.1 million in nonresidential chargeoffs, reserves of $7.9 million had been established in prior periods.

Accordingly, as a result of adequate reserves being established in previous periods, a decline in principal balances outstanding and changes in historical loss factors at September 30, 2012, the required level of allowance for loan loss and provision for loan loss has declined. The following table summarizes the affect the bulk loan sale had on the loan portfolio.


Asset Quality Measure ⁽¹⁾	June 30, 2012 (As Reported)			September 30, 2012 (As Reported)			Change
	(In thousands)
Classified Loans	$	171,839		$	58,373		$	(113,466	)
Other Real Estate Owned and Other Repossessed Assets	$	24,778		$	20,206		$	(4,572	)
Total Classified Assets	$	196,617		$	78,579		$	(118,038	)
Classified Assets/(Tier 1 + ALLL)		91.41	%		43.75	%		-47.66	%
Total Nonperforming Loans	$	114,529		$	46,557		$	(67,972	)
Allowance for Loan Losses	$	30,933		$	20,048		$	(10,885	)
Reserves/Nonperforming Loans		27.01	%		43.06	%		16.05	%
Nonperforming Assets/Total Assets		7.31	%		3.65	%		-3.66	%
Noncurrent Loans (30 + Days Delinquent)	$	109,785		$	51,220		$	(58,565	)
Texas Ration ⁽²⁾		62.59	%		34.89	%		-27.70	%

(1)	Dollar amounts in thousands. All dollar amounts shown are book balance prior to any reserves

(2)	Texas Ratio is defined as nonperforming assets divided by the sum of tangible common equity and the allowance for loan losses

A non-homogeneous loan is considered impaired when, based on current information and events, it is probable that Home Savings will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the strength of guarantors (if any). Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the facts and circumstances surrounding the loans and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by the fair value of the collateral if the loan is collateral dependent, or, in rare cases, by the present value of expected future cash flows discounted at the loan’s effective interest rate or the market value of the loan. The following table summarizes the change in impaired loans during the first nine months of 2012.


Impaired Loans
(Dollars in thousands)
	September 30, 2012		December 31, 2011		Change
Real Estate Loans
Permanent
One-to four-family residential	$	15,594	$	30,287	$	(14,693	)
Multifamily residential		1,526		6,592		(5,066	)
Nonresidential		18,260		66,503		(48,243	)
Land		6,182		11,908		(5,726	)

Total		41,562		115,290		(73,728	)

Construction Loans
One-to four-family residential		9,980		30,587		(20,607	)
Multifamily and nonresidential		—		—		—

Total		9,980		30,587		(20,607	)

Consumer Loans
Home Equity		4,956		3,139		1,817
Auto		52		59		(7	)
Boat		170		482		(312	)
Recreational vehicle		673		47		626
Other		7		7		—

Total		5,858		3,734		2,124

Commercial Loans
Secured		1,801		3,511		(1,710	)
Unsecured		43		445		(402	)

Total		1,844		3,956		(2,112	)

Total Impaired Loans	$	59,244	$	153,567	$	(94,323	)

The decrease in impaired loans can be largely attributed to the bulk asset sale and, to a lesser extent, the resolution of loans through principal payments, charge offs, sale of the loan or collateral, or by Home Savings taking possession of the collateral. The decline in impaired loans attributable to the bulk asset sale aggregated $76.1 million.

Included in impaired loans above are certain loans Home Savings considers to be troubled debt restructurings (TDR). A loan is considered a TDR if Home Savings grants a concession to the debtor that it would otherwise not consider. The concession either stems from an agreement between the creditor and the debtor or is imposed by law or a court. If the debtor is not currently experiencing financial difficulties, but would probably be in payment default in the future without the modification, then this type of restructure also could be considered a TDR.

A TDR may include, but is not necessarily limited to, one or a combination of the following:

•

Modification of the terms of a debt, such as one or a combination of:

•

Reduction of the stated interest rate for the remaining original life of the loan;

•

Extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk;

•

Reduction of the face amount or maturity amount of the loan as stated in the instrument or other agreement; or

•

Reduction of accrued interest.

•

Transfer from the borrower to Home Savings of receivables from third parties, real estate, or other assets to fully or partially satisfy a debt (including a transfer resulting from foreclosure or repossession).

•

Issuance or other granting of an equity interest to Home Savings by the borrower to satisfy fully or partially a loan unless the equity interest is granted pursuant to existing terms for converting the debt into an equity interest.

A debt restructuring is not necessarily a TDR for purposes of this definition even if the borrower is experiencing some financial difficulties. A TDR is not involved if:

•

the fair value of cash, other assets, or an equity interest accepted by Home Savings from a borrower in full satisfaction of its loan at least equals the recorded investment in the loan;

•

the fair value of cash, other assets, or an equity interest transferred by a borrower to Home Savings in full settlement of its loan at least equals the carrying amount of the loan;

•

Home Savings reduces the effective interest rate on the loan primarily to reflect a decrease in market interest rates in general or a decrease in the risk so as to maintain a relationship with a borrower that can readily obtain funds from other sources at the current market interest rate; or

•

Home Savings issues, in exchange for the original loan, a new marketable loan having an effective interest rate based on its market price that is at or near the current market interest rates of loans with similar maturity dates and stated interest rates issued by other banks.

The change in TDRs for the nine months ended September 30, 2012 is as follows:


Troubled Debt Restructurings
	September 30, 2012		December 31, 2011		Change
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family	$	13,244	$	16,648	$	(3,404	)
Multifamily residential		—		3,273		(3,273	)
Nonresidential		1,262		19,666		(18,404	)
Land		162		3,325		(3,163	)

Total		14,668		42,912		(28,244	)

Construction Loans
One-to four-family residential		1,285		2,936		(1,651	)
Multifamily and nonresidential		—		—		—

Total		1,285		2,936		(1,651	)

Consumer Loans
Home Equity		4,181		1,895		2,286
Auto		—		21		(21	)
Marine		—		—		—
Recreational vehicle		—		—		—
Other		7		7		—

Total		4,188		1,923		2,265

Commercial Loans
Secured		1,362		3,073		(1,711	)
Unsecured		30		54		(24	)

Total		1,392		3,127		(1,735	)

Total Restructured Loans	$	21,533	$	50,898	$	(29,365	)

The decline in the level of TDR loans during the nine months ended September 30, 2012 was attributable primarily to the bulk asset sale. TDR loans sold in that sale aggregated $12.8 million.

Once a restructured loan has fallen into nonaccrual status, the restructured loan will remain on nonaccrual status for a period of at least six months until the borrower has demonstrated a willingness and ability to make the restructured loan payments. TDR loans that were on nonaccrual status aggregated $4.5 million and $17.8 million at September 30, 2012 and December 31, 2011, respectively. Such loans are considered nonperforming loans. TDR loans that were accruing according to their terms aggregated $17.0 million and $33.1 million at September 30, 2012 and December 31, 2011, respectively.

Nonperforming loans consist of nonaccrual loans and loans past due 90 days and still accruing. Nonperforming loans were $76.5 million, or 4.23% of net loans, at September 30, 2012, compared to $123.1 million, or 9.00% of net loans, at December 31, 2011.

The schedule below summarizes the change in nonperforming loans for the first nine months of 2012.


Nonperforming Loans
(Dollars in thousands)
	September 30, 2012		December 31, 2011
	September 30, 2012		December 31, 2011		Change
Real Estate Loans
Permanent
One-to four-family residential	$	5,817	$	26,637	$	(20,820	)
Multifamily residential		1,512		5,860		(4,348	)
Nonresidential		17,484		42,902		(25,418	)
Land		6,228		11,142		(4,914	)

Total		31,041		86,541		(55,500	)

Construction Loans
One-to four-family residential		9,527		27,104		(17,577	)
Multifamily and nonresidential		—		—		—

Total		9,527		27,104		(17,577	)

Consumer Loans
Home Equity		3,318		4,237		(919	)
Auto		118		170		(52	)
Marine		158		479		(321	)
Recreational vehicle		1,307		1,725		(418	)
Other		20		9		11

Total		4,921		6,620		(1,699	)

Commercial Loans
Secured		1,055		2,483		(1,428	)
Unsecured		13		347		(334	)

Total		1,068		2,830		(1,762	)

Total Nonperforming Loans	$	46,557	$	123,095	$	(76,538	)

The bulk asset sale that Home Savings completed in the third quarter of 2012 was comprised primarily of nonperforming loans. Therefore, the change identified in the schedule above is primarily the result of that sale. Nonperforming loans sold in that sale aggregated $63.3 million.

Loans held for sale decreased $3.7 million, or 28.7%, to $9.1 million at September 30, 2012, compared to $12.7 million at December 31, 2011. The change was primarily attributable to the timing of sales during the period. Home Savings continues to sell a portion of newly originated mortgage loans into the secondary market as part of its risk management strategy and anticipates continuing to do so in the future.

FHLB stock remained at $26.5 million for September 30, 2012 and December 31, 2011. During the first nine months of 2012, the FHLB paid a cash dividend in lieu of a stock dividend to its member banks.

Real estate owned and other repossessed assets decreased $13.3 million, or 39.7%, during the nine months ended September 30, 2012. The following table summarizes the activity in real estate owned and other repossessed assets during the period:


	Real Estate Owned			Repossessed Assets			Total
				(In thousands)
Balance at December 31, 2011	$	32,946		$	540		$	33,486
Acquisitions		4,763			980			5,743
Transfer to fixed assets		(1,746	)		—			(1,746	)
Sales		(14,426	)		(1,046	)		(15,472	)
Provision for unrealized losses		(1,805	)		—			(1,805	)

Balance at September 30, 2012	$	19,732		$	474		$	20,206

The following table depicts the type of property secured in the satisfaction of loans and the valuation allowance associated with each type as of September 30, 2012:


	Balance		Valuation Allowance			Net Balance
	(In thousands)
Real estate owned
One-to four-family	$	7,635	$	(843	)	$	6,792
Multifamily residential		752		(295	)		457
Nonresidential		1,250		(93	)		1,157
One-to four-family residential construction		16,150		(5,585	)		10,565
Land		824		(63	)		761

Total real estate owned		26,611		(6,879	)		19,732
Repossessed assets
Marine		146		—			146
Recreational vehicle		328		—			328

Total repossessed assets		474		—			474

Total real estate owned and other repossessed assets	$	27,085	$	(6,879	)	$	20,206

In connection with the bulk asset sale, Home Savings sold 10 properties that had a combined carrying value of $1.1 million. The loss realized on those disposals aggregated $413,000.

Home Savings has made the decision to move all mortgage, credit and commercial operations/staff from their former leased location in Beachwood, Ohio to a building in Willoughby, Ohio that is owned by Home Savings. The building in Willoughby, Ohio was acquired in resolution of a nonresidential real estate loan in March 2010, and was held in Home Savings’ real estate owned portfolio. This move will save occupancy expenses as compared to the use of the Beachwood location.

Property acquired in the settlement of loans is recorded at the lower of (a) the loan’s acquisition balance less cost to sell or (b) the fair market value of the property secured less costs to sell. Appraisals are obtained at least annually on properties that exceed $1.0 million in value. Based on current appraisals, a valuation allowance may be established to reflect properly the asset at fair market value. The increase in the valuation allowance on property acquired in relation to one-to four-family residential construction loans was due to the decline in market value of those properties.

Total deposits decreased $97.9 million to $1.5 billion at September 30, 2012, compared to December 31, 2011. The primary cause for the decrease in deposits was due to the overall decline in certificates of deposit due to the maturity of the Company’s Step CDs. Primarily in the third quarter of 2008, Home Savings offered a 42-month time deposit product (Step CDs) to its customers in order to maintain adequate levels of liquidity as Home Savings entered into the Bank Order with regulators. While the Step CDs offered a blended rate over the 42-month term consistent with other 42-month certificates of deposit being offered in Home Savings’ market at that time, the interest rate paid on Step CDs increased in regular intervals over the life of the deposit, such that in the final six months of the deposit prior to maturity, the rate paid was 6.50%. This product generated approximately $140.0 million in deposits, $12.6 million

of which were sold in the branch sale announced in the fourth quarter of 2011 and $126.5 million of which matured in the first quarter of 2012. As these and other certificates of deposit matured, the Company was able to retain successfully most of these deposits in other interest-bearing non-time deposit accounts at substantially lower rates. As of September 30, 2012, Home Savings had no brokered deposits.

FHLB advances decreased $78.2 million during the first nine months of 2012, primarily as a result of the paydown of overnight advances and the prepayment of term advances. Home Savings used funds from security sales to prepay $25.7 million in term advances and offset the prepayment penalties associated with the paydowns of these advances with the gains recognized on these security sales. Proceeds from loan payoffs were used to reduce overnight advances, which accounted for the remainder of the change. Home Savings had approximately $245.5 million in unused borrowing capacity at the FHLB at September 30, 2012.

Advance payments by borrowers for taxes and insurance decreased $9.2 million during the first nine months of 2012. Remittance of real estate taxes and property insurance made on behalf of customers of Home Savings accounted for $3.0 million of the decrease. In addition, funds held for payments received on loans sold where servicing was retained by Home Savings decreased $6.2 million.

Home Saving agreed to certain indemnification provisions with the bulk asset sale. Management believes there is no liability associated with those provisions, and, as such, has not accrued for any future liabilities for those provisions. Furthermore, there are no recourse obligations associated with the agreement.

During the first nine months of 2012, Home Savings received requests for reimbursements from investors for the purpose of making the investor whole on certain loans sold in the secondary market. These loans have certain identified weakness such that, in the opinion of management, a settlement to the investor is most appropriate. For the nine months ended September 30, 2012, Home Savings incurred expenses of $593,000 associated with such repurchases. Home Savings has included in other liabilities a reserve for future make-whole settlements aggregating $368,000 at September 30, 2012. Management believes this reserve is appropriate given the historical losses incurred to date and the probability future losses will be deemed certain.

In keeping with its capital plan, the Company engaged an investment banking advisory firm in June 2011 to advise the board and management on the Company’s strategic alternatives, including raising outside capital. The majority of any capital raised by United Community will be contributed to Home Savings, with the remainder to be used for general corporate purposes. Home Savings may then utilize the capital to accelerate the disposition of certain performing and nonperforming loans and meet the capital requirements of the Consent Order. The type, timing, amount and terms of possible securities that would be issued in such an offering have yet to be finalized.

Shareholders’ equity decreased $17.2 million to $171.6 million at September 30, 2012, from $188.7 million at December 31, 2011. The change occurred primarily due to the net loss incurred by the Company in the period as a result of the bulk sale, offset by the adjustment to other comprehensive income for the valuation of available for sale securities during the period.

Comparison of Operating Results for the Three Months Ended

September 30, 2012 and September 30, 2011

Net Income. United Community recognized a net loss for the three months ended September 30, 2012, of $26.9 million, or $(0.82) per diluted share, compared to a net loss of $8.9 million, or $(0.29) per diluted share, for the three months ended September 30, 2011. The primary cause of the change was higher provision for loan losses recognized during the third quarter of 2012. Compared with the third quarter of 2011, net interest income decreased $1.5 million, the provision for loan losses increased $18.4 million, non-interest income increased $1.8 million and noninterest expense increased $2.8 million. United Community’s annualized return on average assets and return on average equity were -5.67% and -53.53%, respectively, for the three months ended September 30, 2012. The annualized return on average assets and return on average equity for the comparable period in 2011 were -1.69% and -18.98%, respectively.

Net Interest Income. Net interest income for the three months ended September 30, 2012 and September 30, 2011, was $14.1 million and $15.6 million, respectively. Total interest income decreased $5.1 million in the third quarter of 2012 compared to the third quarter of 2011, primarily as a result of a decrease of $270.1 million in the average balance of outstanding loans. United Community also experienced a decrease in the yield on net loans of 47 basis points. Home Savings’ construction and segments of its commercial real estate loan portfolios declined as a result of executing its strategic objective of reducing specific concentrations in these portfolios in the current economic environment.

Total interest expense decreased $3.6 million for the quarter ended September 30, 2012, as compared to the same quarter last year. The change was due primarily to reductions of $3.4 million in interest paid on deposits. The overall decrease in interest expense was attributable to the maturity of the Step CDs as described above and a shift in deposit balances from certificates of deposit to relatively less expensive non-time deposits. Between September 30, 2011 and September 30, 2012, the average outstanding balance of certificates of deposit declined by $224.8 million, while non-time deposits increased by $39.2 million. The decrease in deposit balances between September 30, 2011 and September 30, 2012 can also be attributable to the sale of four of the Bank’s branches, which took place in the fourth quarter of 2011. Also contributing to the decrease was a reduction of 114 basis points in the cost of certificates of deposit, as well as a decrease in the cost of non-time deposits of 19 basis points.

The following table shows the impact of interest rate and outstanding balance (volume) changes compared to the third quarter of last year. The interest rate spread for the three months ended September 30, 2012, increased to 3.00% compared to 2.97% for the quarter ended September 30, 2011. The net interest margin decreased one basis point to 3.17% for the three months ended September 30, 2012 compared to 3.18% for the same quarter in 2011.


	For the Three Months Ended September 30,
	2012 vs. 2011
	Increase						Total
	(decrease) due to						increase
	Rate			Volume			(decrease)
	(In thousands)
Interest-earning assets:
Loans	$	(1,643	)	$	(3,348	)	$	(4,991	)
Loans held for sale		(21	)		(41	)		(62	)
Investment securities:
Available for sale		(2,386	)		2,282			(104	)
FHLB stock		15			—			15
Other interest-earning assets		9			3			12

Total interest-earning assets	$	(4,026	)	$	(1,104	)	$	(5,130	)

Interest-bearing liabilities:
Savings accounts		(27	)		5			(22	)
NOW and money market accounts		(182	)		33			(149	)
Certificates of deposit		(2,020	)		(1,181	)		(3,201	)
Federal Home Loan Bank advances		180			(438	)		(258	)
Repurchase agreements and other		17			(20	)		(3	)

Total interest-bearing liabilities	$	(2,032	)	$	(1,601	)	$	(3,633	)

Change in net interest income							$	(1,497	)

Provision for Loan Losses. A provision for loan losses is charged to income to bring the total allowance for loan losses to a level considered by management to be adequate, based on management’s evaluation of such factors as the delinquency status of loans, current economic conditions, the net realizable value of the underlying collateral, changes in the composition of the loan portfolio and prior loan loss experience. The provision for loan losses increased to $30.3 million in the third quarter of 2012, compared to $11.8 million in the third quarter of 2011. This $18.4 million increase in the provision for loan losses is primarily a result of a bulk asset sale that was completed on September 21, 2012. As a result of the sale, an additional provision of $30.2 million was required in September. This was the result of loans charged off in excess of specific reserves on loans included in the sale, as mentioned above.

Noninterest Income. Noninterest income increased in the third quarter of 2012 to $3.8 million, as compared to noninterest income for the third quarter of 2011 of $1.9 million. Noninterest income increased as a result of higher mortgage banking income recognized in the third quarter of 2012 as compared to the same quarter in 2011. The increase was due to an overall increase in the volume of loans originated for sale in the current quarter. In the third quarter of 2012, Home Savings sold approximately $76.3 million of loans and subsequently recognized a $1.4 million gain. These sales were exclusive of the loans sold in the bulk asset sale. Further impacting the comparison, Home Savings recognized lower losses on the disposal of real estate owned and other repossessed assets in the third quarter of 2012, as compared to the third quarter of 2011. In addition, higher service fees and other charges were recognized, compared to the third quarter of 2011. This change was a result of a lower valuation adjustment recognized on deferred mortgage servicing rights in the third quarter of 2012 as compared to the same period in 2011.

Noninterest Expense. Noninterest expense was $17.3 million in the third quarter of 2012, compared to $14.6 million in the third quarter of 2011. In the third quarter of 2012, salaries and employee benefits were up as a result of the recognition of expenses associated with the Executive Incentive Plan and, to a lesser extent, the reinstatement of a matching contribution to the 401(k) plan. Professional fees, including legal and other consultants, were higher during the third quarter of 2012 due to the engagement of professionals hired to assist management in completing the bulk sale. Professional fees specifically associated with the bulk asset sale aggregated $1.2 million. These fees included investment banking fees and legal fees paid to attorneys assisting with the transaction. The change in noninterest expense for the third quarter of 2012 as compared to the third quarter of 2011 was also affected by an increase in other expenses incurred by the Company. Other expenses were higher as the Bank recognized an additional $1.8 million in expenses for the payment of delinquent real estate taxes on properties used as collateral that were part of the bulk asset sale.

Comparison of Operating Results for the Nine Months Ended

September 30, 2012 and September 30, 2011

Net Income. United Community recognized a net loss for the nine months ended September 30, 2012, of $23.0 million, or $(0.70) per diluted share, compared to a net loss of $7.7 million, or $(0.25) per diluted share, for the nine months ended September 30, 2011. The primary cause of the change was the higher provision for loan losses recognized during the first nine months of 2012. Compared with the first nine months of 2011, net interest income decreased $3.9 million, the provision for loan losses increased $15.0 million; non-interest income increased $4.6 million and non-interest expense increased $3.9 million. United Community’s annualized return on average assets and return on average equity were -1.56% and -15.56%, respectively, for the nine months ended September 30, 2012. The annualized return on average assets and return on average equity for the comparable period in 2011 were -0.48% and -5.61%, respectively.

Net Interest Income. Net interest income for the nine months ended September 30, 2012 and September 30, 2011, was $46.4 million and $50.3 million, respectively. Total interest income decreased $13.3 million in the first nine months of 2012 compared to the first nine months of 2011, primarily as a result of a decrease of $283.7 million in the average balance of outstanding loans. United Community also experienced a decrease in the yield on net loans of 30 basis points. Home Savings’ construction and segments of its commercial real estate loan portfolios declined as a result of executing its strategic objective of reducing specific concentrations in these portfolios in the current economic environment.

Total interest expense decreased $9.4 million for the nine months ended September 30, 2012, as compared to the same period last year. The change was due primarily to reductions of $8.8 million in interest paid on deposits. The overall decrease in interest expense was attributable to the maturity of the Step CDs as described above and a shift in deposit balances from certificates of deposit to relatively less expensive non-time deposits. Between September 30, 2011 and September 30, 2012, the average outstanding balance of certificates of deposit declined by $212.0 million, while non-time deposits increased by $45.9 million. The decrease in deposit balances between September 30, 2011 and September 30, 2012 can also be attributable to the sale of four of the Bank’s branches, which took place in the fourth quarter of 2011. Also contributing to the decrease in interest expense was a reduction of 84 basis points in the cost of certificates of deposit, as well as a decrease in the cost of non-time deposits of 29 basis points.

The following table shows the impact of interest rate and outstanding balance (volume) changes compared to the first nine months of last year. The interest rate spread for the nine months ended September 30, 2012 and 2011 was 3.15%. The net interest margin decreased two basis points to 3.34% for the nine months ended September 30, 2012 compared to 3.36% for the first nine months of 2011.


	For the Nine Months Ended September 30,
	2012 vs. 2011
	Increase						Total
	(decrease) due to						increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	(3,343	)	$	(10,964	)	$	(14,307	)
Loans held for sale		(34	)		69			35
Investment securities:
Available for sale		(1,052	)		2,041			989
FHLB stock		1			—			1
Other interest-earning assets		4			9			13

Total interest-earning assets	$	(4,424	)	$	(8,845	)	$	(13,269	)

Interest-bearing liabilities:
Savings accounts		(199	)		29			(170	)
NOW and money market accounts		(662	)		132			(530	)
Certificates of deposit		(4,762	)		(3,348	)		(8,110	)
Federal Home Loan Bank advances		(223	)		(311	)		(534	)
Repurchase agreements and other		556			(571	)		(15	)

Total interest-bearing liabilities	$	(5,290	)	$	(4,069	)	$	(9,359	)

Change in net interest income							$	(3,910	)

Provision for Loan Losses. A provision for loan losses is charged to income to bring the total allowance for loan losses to a level considered by management to be adequate, based on management’s evaluation of such factors as the delinquency status of loans, current economic conditions, the net realizable value of the underlying collateral, changes in the composition of the loan portfolio and prior loan loss experience. The provision for loan losses increased to $37.2 million in the first nine months of 2012, compared to $22.3 million in the first nine months of 2011. This $15.0 million increase in the provision for loan losses is primarily a result of the level of chargeoffs applied to loans sold in the bulk asset sale, as previously mentioned.

Noninterest Income. Noninterest income increased in the first nine months of 2012 to $15.8 million, as compared to $11.2 million for the first nine months of 2011. Driving the increase in noninterest income were gains recognized on the sale of available for sale securities. In the first nine months of 2012, Home Savings sold securities totaling approximately $281.8 million and consequently recognized a $5.2 million gain. These securities were sold in order to realize gains on the securities portfolio in anticipation of increased prepayment speeds that would cause unrealized gains to erode. Fees generated on nondeposit investments increased $475,000 during the first nine months of 2012 as compared to the same period last year. The change was driven by the volume of investment activity in 2012. Some of Home Savings’ customers that had funds deposited in Step CDs that matured in the first quarter of 2012 were retained and their deposits were invested in various mutual funds and insurance annuities offered through Home Savings’ Investments Division. Finally, lower losses incurred on real estate owned and other repossessed assets during the nine months ended September 30, 2012, as compared to the same period last year, were the result of the need to mark fewer properties down to fair market value as real estate values have stabilized.

Noninterest Expense. Noninterest expense was $50.9 million in the first nine months of 2012, compared to $47.0 million in the first nine months of 2011. In the first nine months of 2012, salaries and employee benefits were up as a result of the recognition of expenses associated with the Executive Incentive Plan, a restricted stock grant and, to a lesser extent, the reinstatement of a matching contribution to the 401(k) plan in 2012. Also contributing to the increase were expenses incurred due to the prepayment of FHLB term advances. In the second and third quarters of 2012, Home Savings paid in full $25.7 million in term advances. This was done to utilize excess cash and reduce interest expenses going forward. Professional fees, including legal and other consultants, were higher during the first nine months of 2012 due to the engagement of professionals hired to assist management in resolving nonperforming assets of Home Savings. Professional fees specifically associated with the bulk asset sale aggregated $1.2 million. These fees included investment banking fees and legal fees paid to attorneys assisting with the transaction. The change in noninterest expense for the first nine months of 2012 as compared to the same period in 2011 was also affected by increased other expenses incurred by the Company. Other expenses were higher as the Bank recognized expenses aggregating $1.8 million for the payment of delinquent real estate taxes on properties used as collateral that were part of the bulk asset sale.

UNITED COMMUNITY FINANCIAL CORP.

AVERAGE BALANCE SHEETS

The following table presents the total dollar amounts of interest income and interest expense on the indicated amounts of average interest-earning assets or interest-bearing liabilities together with the weighted average interest rates for the three month periods ended September 30, 2012 and 2011. Average balance calculations were based on daily balances.


	Three Months Ended September 30,
	2012							2011
	Average		Interest					Average		Interest
	Outstanding		Earned/		Yield/			Outstanding		Earned/		Yield/
	Balance		Paid		Cost			Balance		Paid		Cost
	(Dollars in thousands)
Interest-earning assets:
Net loans (1)	$	1,213,126	$	14,567		4.80	%	$	1,483,257	$	19,558		5.27	%
Net loans held for sale		10,853		101		3.72	%		15,083		163		4.32	%
Investment securities:
Available for sale		488,723		3,219		2.63	%		405,542		3,323		3.28	%
Federal Home Loan Bank stock		26,464		279		4.22	%		26,464		264		3.99	%
Other interest-earning assets		44,263		25		0.23	%		36,627		13		0.14	%

Total interest-earning assets		1,783,429		18,191		4.08	%		1,966,973		23,321		4.74	%
Noninterest-earning assets		112,376							130,852

Total assets	$	1,895,805						$	2,097,825

Interest-bearing liabilities:
NOW and money market accounts	$	472,860	$	344		0.29	%	$	445,043	$	493		0.44	%
Savings accounts		258,834		82		0.13	%		247,497		104		0.17	%
Certificates of deposit		628,671		2,174		1.38	%		853,516		5,375		2.52	%
Federal Home Loan Bank advances		56,097		535		3.81	%		97,675		793		3.25	%
Repurchase agreements and other		90,606		928		4.10	%		92,390		931		4.03	%

Total interest-bearing liabilities		1,507,068		4,063		1.08	%		1,736,121		7,696		1.77	%

Noninterest-bearing liabilities		187,805							174,928

Total liabilities		1,694,873							1,911,049
Equity		200,932							186,776

Total liabilities and equity	$	1,895,805						$	2,097,825

Net interest income and interest rate spread			$	14,128		3.00	%			$	15,625		2.97	%

Net interest margin						3.17	%						3.18	%

Average interest-earning assets to average interest-bearing liabilities						118.34	%						113.30	%

(1)	Nonaccrual loans are included in the average balance at a yield of 0%.

UNITED COMMUNITY FINANCIAL CORP.

AVERAGE BALANCE SHEETS

The following table presents the total dollar amounts of interest income and interest expense on the indicated amounts of average interest-earning assets or interest-bearing liabilities together with the weighted average interest rates for the nine month periods ended September 30, 2012 and 2011. Average balance calculations were based on daily balances.


	Nine Months Ended September 30,
	2012							2011
	Average		Interest					Average		Interest
	Outstanding		Earned/		Yield/			Outstanding		Earned/		Yield/
	Balance		Paid		Cost			Balance		Paid		Cost
	(Dollars in thousands)
Interest-earning assets:
Net loans (1)	$	1,289,740	$	49,182		5.08	%	$	1,573,394	$	63,489		5.38	%
Net loans held for sale		10,585		305		3.84	%		6,964		270		5.17	%
Investment securities:
Available for sale		489,472		10,253		2.79	%		361,911		9,264		3.41	%
Federal Home Loan Bank stock		26,464		859		4.33	%		26,464		858		4.32	%
Other interest-earning assets		37,505		48		0.17	%		30,200		35		0.15	%

Total interest-earning assets		1,853,766		60,647		4.35	%		1,998,933		73,916		4.93	%
Noninterest-earning assets		114,720							130,012

Total assets	$	1,968,486						$	2,128,945

Interest-bearing liabilities:
NOW and money market accounts	$	465,864	$	1,219		0.35	%	$	435,599	$	1,749		0.54	%
Savings accounts		254,265		248		0.13	%		238,635		418		0.23	%
Certificates of deposit		669,921		8,107		1.61	%		881,906		16,217		2.45	%
Federal Home Loan Bank advances		102,159		1,880		2.45	%		118,343		2,414		2.72	%
Repurchase agreements and other		90,611		2,766		4.07	%		96,615		2,781		3.84	%

Total interest-bearing liabilities		1,582,820		14,220		1.20	%		1,771,098		23,579		1.78	%

Noninterest-bearing liabilities		188,354							174,776

Total liabilities		1,771,174							1,945,874
Equity		197,312							183,071

Total liabilities and equity	$	1,968,486						$	2,128,945

Net interest income and interest rate spread			$	46,427		3.15	%			$	50,337		3.15	%

Net interest margin						3.34	%						3.36	%

Average interest-earning assets to average interest-bearing liabilities						117.12	%						112.86	%

(1)	Nonaccrual loans are included in the average balance at a yield of 0%.

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

Qualitative Aspects of Market Risk. The principal market risk affecting United Community is interest rate risk. United Community is subject to interest rate risk to the extent that its interest earning assets reprice differently than its interest bearing liabilities. Interest rate risk is defined as the sensitivity of United Community’s earnings and net asset values to changes in interest rates. As part of its efforts to monitor and manage the interest rate risk, the Board of Directors of Home Savings has adopted an interest rate risk policy that requires the Home Savings Board to review quarterly reports related to interest rate risk and annually set exposure limits for Home Savings as a guide to management in setting and implementing day to day operating strategies.

Quantitative Aspects of Market Risk. As part of its interest rate risk analysis, Home Savings uses the net portfolio value (NPV) and net interest income methodology. Generally, NPV is the discounted present value of the difference between incoming cash flows on interest earning and other assets and outgoing cash flows on interest bearing and other liabilities. The application of the methodology attempts to quantify interest rate risk as the change in the NPV and net interest income that would result from various levels of theoretical basis point changes in market interest rates.

Home Savings uses an NPV and earnings simulation model prepared internally as its primary method for identifying and managing its interest rate risk profile. The model is based on actual cash flows and repricing characteristics for all financial instruments and incorporates market-based assumptions regarding the impact of changing interest rates on future volumes and the prepayment rate of applicable financial instruments. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates also are incorporated into the model. These assumptions inherently are uncertain and, as a result, the model cannot precisely measure NPV or net interest income or precisely predict the impact of fluctuations in interest rates on net interest rate changes as well as changes in market conditions and management strategies.

Presented below are analyses of Home Savings’ interest rate risk as measured by changes in NPV and net interest income for instantaneous and sustained parallel shifts of 100 basis point increments in market interest rates. As noted, for the quarter ended September 30, 2012, the percentage changes fall within the policy limits set by the Board of Directors of Home Savings in regard to the minimum NPV ratio and the maximum change in interest income that the Home Savings Board deems advisable in the event of various changes in interest rates. See the table below for Board adopted policy limits.


Period Ended September 30, 2012
NPV as % of portfolio value of assets													Next 12 months net interest income
													(Dollars in thousands)
Change in rates (Basis points)	NPV Ratio			Internal policy limitations			Change in %			Internal policy limitations on NPV Change			$ Change		Internal policy limitations			% Change
400		10.89	%		6.00	%		1.42	%		25.00	%	$	6,500		-20.00	%		12.54	%
300		11.11	%		6.00	%		1.64	%		25.00	%		5,478		-15.00	%		10.57	%
200		11.22	%		7.00	%		1.75	%		25.00	%		4,069		-10.00	%		7.85	%
100		11.06	%		7.00	%		1.59	%		25.00	%		2,084		-5.00	%		4.02	%
Static		9.47	%		8.00	%		—	%		25.00	%		—		—	%		—	%

Home Savings’ interest rate risk profile as of September 30, 2012, as measured by the NPV methodology described above, changed from that of December 31, 2011, in that Home Savings was more asset sensitive. As a result, at September 30, 2012, the Bank was in a better position to benefit from a rising rate environment than it was a year ago. This change was primarily the result of the flattening of the yield curve and an increase in prepayment speeds.


Year Ended December 31, 2011
NPV as % of portfolio value of assets													Next 12 months net interest income
													(Dollars in thousands)
Change in rates (Basis points)	NPV Ratio			Internal policy limitations			Change in %			Internal policy limitations on NPV Change			$ Change		Internal policy limitations			% Change
400		8.98	%		6.00	%		-0.37	%		25.00	%	$	2,321		-20.00	%		3.88	%
300		9.65	%		6.00	%		0.30	%		25.00	%		2,702		-15.00	%		4.51	%
200		10.16	%		7.00	%		0.81	%		25.00	%		2,322		-10.00	%		3.88	%
100		10.28	%		7.00	%		0.93	%		25.00	%		1,333		-5.00	%		2.23	%
Static		9.35	%		7.00	%		—	%		—	%		—		—	%		—	%

Due to a low interest rate environment, it was not possible to calculate results for a drop in interest rates.

As with any method of measuring interest rate risk, certain shortcomings are inherent in the NPV approach. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. In addition, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, expected rates of prepayment on loans and early withdrawal levels from certificates of deposit may deviate significantly from those assumed in making risk calculations.

Potential Impact of Changes in Interest Rates. Home Savings’ profitability depends to a large extent on its net interest income, which is the difference between interest income from loans and securities and interest expense on deposits and borrowings. Like most financial institutions, Home Savings’ short-term interest income and interest expense are affected significantly by changes in market interest rates and other economic factors beyond its control.

ITEM 4.

Controls and Procedures

An evaluation was carried out by United Community’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of United Community’s disclosure controls and procedures (as defined in Rules 13a-15(e)/15d-15(e) of the Securities Exchange Act of 1934) as of September 30, 2012. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that United Community’s disclosure controls and procedures as of September 30, 2012 were effective in ensuring that information required to be disclosed in the reports that United Community files or submits under the Exchange Act (i) was recorded, processed, summarized and reported on a timely basis, and (ii) is accumulated and communicated to management including United Community’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. During the quarter ended September 30, 2012, there were no changes in United Community’s internal controls over financial reporting that have materially affected or are reasonably likely to materially affect United Community’s internal controls over financial reporting.

PART II. OTHER INFORMATION

UNITED COMMUNITY FINANCIAL CORP.

ITEM 1 - Legal Proceedings

United Community and its subsidiaries are parties to litigation arising in the normal course of business. While it is impossible to determine the ultimate resolution of these contingent matters, management believes any resulting liability would not have a material effect upon United Community’s financial statements.

ITEM 1A - Risk Factors

There have been no significant changes in United Community’s risk factors as outlined in United Community’s Form 10-K for the period ended December 31, 2011. The risk factors described in the Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that management currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results. Moreover, the Company undertakes no obligation and disclaims any intention to publish revised information or updates to forward looking statements contained in such risk factors or in any other statement made at any time by the Company or any of its directors, officers, employees or other representatives, unless and until any such revisions or updates are expressly required to be disclosed by securities laws or regulations.

ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds

There were no purchases of UCFC shares during the quarter ended September 30, 2012.

ITEM 5 – Other Information

The 2012 Annual Meeting of the Shareholders (the Annual Meeting) of the Company will be held on December 18, 2012. As such, the date of the Annual Meeting will have changed by more than 30 days from the anniversary of the Company’s 2011 Annual Meeting. In accordance with Rule 14a-5(f) and Rule 14a-8(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company considered shareholder proposals submitted pursuant to Rule 14a-8 for inclusion in the Company’s proxy materials for the Annual Meeting to have been submitted in a timely fashion if such proposals were received by the Company no later than November 29, 2011. Such proposals should have been delivered by certified mail to the Board or any of the directors c/o Secretary, United Community Financial Corp., 275 West Federal Street, Youngstown, Ohio 44503-1203.

ITEM 6 - Exhibits


Exhibit Number		Description

2.1		Asset Purchase and Interim Servicing Agreement, entered into on September 19, 2012, by and between The Home Savings and Loan Company of Youngtown, Ohio and Navy Portfolio, LLC*

3.1		Articles of Incorporation

3.2		Amended Code of Regulations

31.1		Section 302 Certification by Chief Executive Officer

31.2		Section 302 Certification by Chief Financial Officer

32		Certification of Statements by Chief Executive Officer and Chief Financial Officer

101		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, formatted in XBRL (Extensible Business reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Changes in Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Consolidated Financial Statements.

Note: Certain exhibits and other schedules( including Exhibits E, F, H, I, N-1, N-2, O and P and Schedules I and II) referenced in the Asset Purchase and Interim Servicing Agreement have been omitted pursuant to Item 601(b)(2) of SEC Regulation S-K. UCFC hereby undertakes to furnish a copy of the omitted exhibits and schedules upon request by the SEC.

UNITED COMMUNITY FINANCIAL CORP.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

UNITED COMMUNITY FINANCIAL CORP.


Date: November 13, 2012						/S/ Patrick W. Bevack
						Patrick W. Bevack President and Chief Executive Officer
						(Principal Executive Officer)

Date: November 13, 2012						/S/ James R. Reske
						James R. Reske, CFA Treasurer and Chief Financial Officer
						(Principal Financial Officer)