UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

o		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

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

Yes þ      No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o      No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Small reporting company þ

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

Yes o       No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 30,897,825 common shares as of July 31, 2010.

 

 

TABLE OF CONTENTS

		PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of June 30, 2010 (Unaudited) and December 31, 2009			1
Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2010 and 2009 (Unaudited)			2
Consolidated Statement of Shareholders’ Equity for the Six Months ended June 30, 2010 (Unaudited)			4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009 (Unaudited)			5
Notes to Consolidated Financial Statements (Unaudited)			6 - 22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23-35
Item 3. Quantitative and Qualitative Disclosures about Market Risk			36
Item 4T. Controls and Procedures			37
Part II. OTHER INFORMATION
Item 1. Legal Proceedings			38
Item 1A. Risk Factors			38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			39
Item 3. Defaults Upon Senior Securities (None)
Item 4. (Removed and Reserved)
Item 5. Other Information (None)
Item 6. Exhibits			39
Signatures			40
Exhibit
Exhibit 10.2
Exhibit 10.3
Exhibit 10.4
Exhibit 10.5
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

		June 30,				December 31,
		2010				2009
		(Dollars in thousands)
Assets:
Cash and deposits with banks		$	23,673			$	22,330
Federal funds sold and other			18,189				22,744
Total cash and cash equivalents			41,862				45,074
Securities:
Available for sale, at fair value			307,154				281,348
Loans held for sale			4,946				10,497
Loans, net of allowance for loan losses of $40,728 and $42,287, respectively			1,786,038				1,866,018
Federal Home Loan Bank stock, at cost			26,464				26,464
Premises and equipment, net			22,308				23,139
Accrued interest receivable			8,473				9,090
Real estate owned and other repossessed assets			42,046				30,962
Core deposit intangible			568				661
Cash surrender value of life insurance			26,751				26,198
Other assets			47,499				18,976
Total assets		$	2,314,109			$	2,338,427
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Interest bearing		$	1,570,093			$	1,642,722
Non-interest bearing			126,438				126,779
Total deposits			1,696,531				1,769,501
Borrowed funds:
Federal Home Loan Bank advances			275,773				221,323
Repurchase agreements and other			98,440				96,833
Total borrowed funds			374,213				318,156
Advance payments by borrowers for taxes and insurance			17,939				19,791
Accrued interest payable			1,024				1,421
Accrued expenses and other liabilities			11,711				9,775
Total liabilities			2,101,418				2,118,644
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 30,897,825 shares outstanding			142,808				145,775
Retained earnings			138,647				148,674
Accumulated other comprehensive income			4,191				4,110
Unearned employee stock ownership plan shares			—				(5,821	)
Treasury stock, at cost, 6,906,632 shares			(72,955	)			(72,955	)
Total shareholders’ equity			212,691				219,783
Total liabilities and shareholders’ equity		$	2,314,109			$	2,338,427

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
		(Dollars in thousands, except per share data)
Interest income
Loans		$	24,918			$	30,076			$	50,761			$	61,143
Loans held for sale			69				216				139				479
Available for sale securities			2,896				2,796				5,481				5,566
Federal Home Loan Bank stock dividends			294				294				594				593
Other interest earning assets			8				9				15				38
Total interest income			28,185				33,391				56,990				67,819
Interest expense
Deposits			8,408				12,074				17,726				24,725
Federal Home Loan Bank advances			875				1,569				1,723				3,427
Repurchase agreements and other			931				1,061				1,854				2,251
Total interest expense			10,214				14,704				21,303				30,403
Net interest income			17,971				18,687				35,687				37,416
Provision for loan losses			10,310				12,311				22,760				20,755
Net interest income after provision for loan losses			7,661				6,376				12,927				16,661
Non-interest income
Non-deposit investment income			484				404				912				708
Service fees and other charges			424				2,721				2,175				4,233
Net gains (losses):
Securities available for sale			3,671				1,382				6,514				1,382
Other -than-temporary loss in equity securities
Total impairment loss			—				—				—				(150	)
Loss recognized in other comprehensive income			—				—				—				—
Net impairment loss recognized in earnings			—				—				—				(150	)
Mortgage banking income			651				1,788				1,037				2,928
Real estate owned and other repossessed assets			(1,755	)			(1,182	)			(3,239	)			(2,320	)
Gain on sale of retail branch			—				—				1,388				—
Other income			1,270				1,092				2,518				2,167
Total non-interest income			4,745				6,205				11,305				8,948
Non-interest expense
Salaries and employee benefits			9,105				7,764				17,279				15,787
Occupancy			839				899				1,843				1,883
Equipment and data processing			1,720				1,660				3,387				3,390
Franchise tax			503				555				1,014				1,147
Advertising			147				187				369				416
Amortization of core deposit intangible			45				58				93				118
Deposit insurance premiums			1,459				2,940				2,920				4,723
Professional fees			940				907				1,973				1,623
Real estate owned and other repossessed asset expenses			1,024				804				1,631				1,755
Other expenses			1,509				1,428				3,750				2,759
Total non-interest expenses			17,291				17,202				34,259				33,601
Loss from continuing operations before income taxes			(4,885	)			(4,621	)			(10,027	)			(7,992	)
Income tax benefit			—				(1,707	)			—				(3,399	)
Net loss from continuing operations			(4,885	)			(2,914	)			(10,027	)			(4,593	)
Discontinued operations
Net income of Butler Wick Corp., net of tax			—				—				—				4,949
Net income (loss)		$	(4,885	)		$	(2,914	)		$	(10,027	)		$	356

(Continued)

(Continued)

UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Comprehensive loss		$	(4,379	)		$	(4,835	)		$	(9,946	)		$	(655	)
Earnings (loss) per share
Basic—continuing operations		$	(0.16	)		$	(0.10	)		$	(0.33	)		$	(0.16	)
Basic—discontinued operations			—				—				—				0.17
Basic			(0.16	)			(0.10	)			(0.33	)			0.01
Diluted—continuing operations			(0.16	)			(0.10	)			(0.33	)			(0.16	)
Diluted—discontinued operations			—				—				—				0.17
Diluted			(0.16	)			(0.10	)			(0.33	)			0.01

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

																		Unearned
														Accumulated				Employee
														Other				Stock
		Shares				Common				Retained				Comprehensive				Ownership				Treasury
		Outstanding				Stock				Earnings				Income (Loss)				Plan Shares				Stock				Total
		(Dollars in thousands, except share data)
Balance December 31, 2009			30,898			$	145,775			$	148,674			$	4,110			$	(5,821	)		$	(72,955	)		$	219,783
Comprehensive loss:
Net loss											(10,027	)															(10,027	)
Change in net unrealized gain      on securities, net of tax expense of $44															81												81
Comprehensive loss																											(9,946	)
Shares allocated to ESOP participants							(3,078	)											5,821								2,743
Stock based compensation							111																				111
Balance June 30, 2010			30,898			$	142,808			$	138,647			$	4,191			$	—			$	(72,955	)		$	212,691

																		Unearned
														Accumulated				Employee
														Other				Stock
		Shares				Common				Retained				Comprehensive				Ownership				Treasury
		Outstanding				Stock				Earnings				Income (Loss)				Plan Shares				Stock				Total
		(Dollars in thousands, except share data)
Balance December 31, 2008			30,898			$	146,439			$	165,447			$	3,635			$	(7,643	)		$	(72,955	)		$	234,923
Comprehensive income:
Net income											356																356
Change in net unrealized gain      on securities, net of tax benefit of $544															(1,011	)											(1,011	)
Comprehensive loss																											(655	)
Shares allocated to ESOP participants							(595	)											911								316
Stock based compensation							29																				29
Balance June 30, 2009			30,898			$	145,873			$	165,803			$	2,624			$	(6,732	)		$	(72,955	)		$	234,613

See Notes to Consolidated Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

		Six Months Ended June 30,
		2010				2009
		(Dollars in thousands)
Cash Flows from Operating Activities
Net income (loss)		$	(10,027	)		$	356
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses			22,760				20,755
Mortgage banking income			(1,037	)			(2,928	)
Net losses on real estate owned and other repossessed assets sold			3,239				2,337
Net gain on retail branch sold			(1,388	)			—
Net gain on available for sale securities sold			(6,514	)			(1,382	)
Net gains on other assets sold			(3	)			(17	)
Other than temporary impairment of securities available for sale			—				150
Amortization of premiums and accretion of discounts			(1,149	)			1,156
Depreciation and amortization			993				1,124
Decrease in interest receivable			617				1,040
Decrease in interest payable			(397	)			(379	)
Decrease (increase) in prepaid and other assets			611				(4,042	)
Increase in other liabilities			1,836				3,104
Stock based compensation			111				29
Net principal disbursed on loans originated for sale			(80,372	)			(262,788	)
Proceeds from sale of loans originated for sale			85,175				267,691
ESOP Compensation			2,743				316
Operating cash flows from discontinued operations			—				(4,949	)
Net cash from operating activities			17,198				21,573
Cash Flows from Investing Activities
Proceeds from principal repayments and maturities of:
Securities available for sale			40,945				25,923
Proceeds from sale of:
Securities available for sale			174,022				47,433
Real estate owned and other repossessed assets			11,183				6,797
Fixed assets			20				37
Purchases of:
Securities available for sale			(263,157	)			(114,047	)
Net change in loans			33,913				138,926
Loans purchased			(2,460	)			(2,009	)
Purchases of premises and equipment			(161	)			(371	)
Sale of retail branch			(22,158	)			—
Investing cash flows from discontinued operations			—				11,921
Net cash from investing activities			(27,853	)			114,610
Cash Flows from Financing Activities
Net increase in checking, savings and money market accounts			31,590				30,279
Net decrease in certificates of deposit			(78,352	)			(87,996	)
Net decrease in advance payments by borrowers for taxes and insurance			(1,852	)			(5,755	)
Proceeds from Federal Home Loan Bank advances			509,200				423,400
Repayment of Federal Home Loan Bank advances			(454,750	)			(466,851	)
Net change in repurchase agreements and other borrowed funds			1,607				(28,017	)
Net cash from financing activities			7,443				(134,940	)
Change in cash and cash equivalents			(3,212	)			1,243
Cash and cash equivalents, beginning of period			45,074				43,417
Cash and cash equivalents, end of period		$	41,862			$	44,660

See Notes to Consolidated Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

1. 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 (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, 38 full-service branches and six 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 six months ended June 30, 2010, are not necessarily indicative of the results to be expected for the year ending December 31, 2010. 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, 2009, contained in United Community’s Form 10-K for the year ended December 31, 2009.

Some items in the prior year financial statements were reclassified to conform to the current presentation.

2. REGULATORY ENFORCEMENT ACTION

On August 8, 2008, the board of directors of United Community approved a Stipulation and Consent to Issuance of Order to Cease and Desist (OTS Order) with the Office of Thrift Supervision (OTS). Simultaneously, the board of directors of Home Savings approved a Stipulation and Consent to the Issuance of an Order to Cease and Desist (Bank Order) with the FDIC and the Ohio Division of Financial Institutions (Ohio Division). Because of the consent to the Bank Order, Home Savings is deemed ‘adequately capitalized’ for regulatory capital purposes, as discussed in Notes 3 and 17 of the December 31, 2009 Consolidated Financial Statements.

3. DISCONTINUED OPERATIONS

On August 12, 1999, United Community acquired Butler Wick Corp. (Butler Wick), the parent company for two wholly owned subsidiaries: Butler Wick & Co., Inc. and Butler Wick Trust Company. On December 31, 2008, the Company completed the sale of Butler Wick & Co., Inc., to Stifel Financial Corp. for $12.0 million. On March 31, 2009, the Company completed the sale of Butler Wick Trust Company to Farmers National Banc Corp. for $12.1 million. As a result, Butler Wick has been reported as a discontinued operation and consolidated financial statement information for all periods presented has been reclassified to reflect this presentation. Summarized Butler Wick results of operations are as follows:

		Six
		Months
		Ended
		June 30,
		2009
Income
Interest income		$	32
Brokerage commissions			—
Service fees and other charges			1,287
Underwriting and investment banking			—
Gain on the sale of Butler Wick Trust			7,904
Other income			—
Total income			9,223
Expenses
Interest expense on borrowings			—
Salaries and employee benefits			1,198
Occupancy expenses			68
Equipment and data processing			84
Other expenses			258
Total expenses			1,608
Income before taxes			7,615
Income tax			2,666
Net income		$	4,949

4. RECENT ACCOUNTING DEVELOPMENTS

Accounting for Transfers of Financial Assets: In June 2009, the FASB amended previous guidance relating to transfers of financial assets. This removes the concept of a qualifying special-purpose entity from existing GAAP and removes the exception from applying FASB ASC 810-10, Consolidation (FASB Interpretation No. 46 (revised December 2003) Consolidation of Variable Interest Entities) to qualifying special purpose entities. The objective of this new guidance is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets (which includes loan participations); the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. The Company’s adoption of this new guidance on January 1, 2010, did not have a material impact on United Community’s consolidated financial statements.

 Amendments to FASB Interpretation No. 46(R) (ASC 810-10): In June 2009, FASB issued guidance with the objective of amending certain requirements of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. The Company’s adoption of this new guidance on January 1, 2010 had no impact on United Community’s consolidated financial statements.

Improving Disclosures About Fair Value Measurements: In January 2010, the FASB issued an amendment to Fair Value Measurements and Disclosures, Topic 820, Improving Disclosures About Fair Value Measurements. This amendment requires new disclosures regarding significant transfers in and out of Level 1 and 2 fair value measurements and the reasons for the transfers. This amendment also requires that a reporting entity must present separately information about purchases, sales, issuances, and settlements on a gross basis rather than a net basis for activity in Level 3 fair value measurements using significant unobservable inputs. This amendment also clarifies existing disclosures on the level of disaggregation, in that the reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities, and a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and 3. The new disclosures and clarifications of existing disclosures for ASC 820 were effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of ASC 820 did not have a material effect on the Company’s consolidated financial statements.

Pooled Purchased Loans: In April 2010, the FASB issued ASU 2010-18, Receivables (Topic 310): Effect of a Loan Modification When the Loan is a Part of a Pool That is Accounted for as a Single Asset – a consensus of the FASB Emerging Issues Task Force. ASU 2010-18 clarifies the treatment for a modified loan that was acquired as part of a pool of assets. Refinancing or restructuring the loan does not make it eligible for removal from the pool, the FASB said. The amendment will be effective for loans that are part of an asset pool and are modified during financial reporting period that ends July 15, 2010 or later and are not expected to have a significant impact on the Company’s financial statements.

Disclosure on Credit Quality: In July 2010, FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The amendments in ASU 2010-20 encourage, but do not require, comparative disclosures for earlier reporting periods that ended before initial adoption. However, an entity should provide comparative disclosures for those reporting periods ending after initial adoption. The Company is currently evaluating the impact the adoption of this guidance will have on the Company’s financial position or results of operations.

5. STOCK COMPENSATION

On April 26, 2007, shareholders approved the United Community Financial Corp. 2007 Long-Term Incentive Plan (2007 Plan). The purpose of the 2007 Plan is the same as that of the 1999 Plan. 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 418,200 stock options granted in 2010, 32,000 stock options granted in 2009 and there were 243,721 stock options granted in 2008 under the 2007 Plan. All of the options awarded in 2008 became exercisable on the date of grant. For the options granted in 2009, one-third of the total options granted became exercisable on December 31, 2009, with the remaining two-thirds vesting equally on December 31, 2010 and 2011. For the options granted in 2010, one-half of the total options vest equally on December 31, 2010 and 2011. The option period for each grant expires 10 years from the date of grant.

On July 12, 1999, shareholders approved the United Community Financial Corp. 1999 Long-Term Incentive Plan (1999 Plan). The purpose of the 1999 Plan was 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 1999 Plan terminated on May 20, 2009.

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 plan was 3,569,766. No additional options may be issued. 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. The option period for each grant expires 10 years from the date of grant.

Expenses related to stock option grants are included with salaries and employee benefits. The Company recognized $111,000 in stock option expenses for the six months ended June 30, 2010. The Company expects to recognize additional expenses of $244,000 for the remainder of 2010 and $394,000 in 2011.

A summary of activity in the plans is as follows:

		For the six months ended June 30, 2010
										Aggregate
						Weighted				intrinsic
						average				value (in
		Shares				exercise price				thousands)
Outstanding at beginning of year			2,200,672			$	7.95
Granted			418,200				2.10
Exercised			—				—
Forfeited			(358,379	)			8.21
Outstanding at end of period			2,260,493			$	6.82			$	10
Options exercisable at end of period			1,628,974			$	8.69			$	3

Information related to the stock option plans during the year follows (dollars in thousands, except per share amount):

		June 30, 2010
Intrinsic value of options exercised			n/a
Cash received from option exercises			n/a
Tax benefit realized from option exercises			n/a
Weighted average fair value of options granted, per share		$	1.34

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 was determined using the following weighted-average assumptions as of grant date.

		April 29, 2010
Risk-free interest rate			2.49	%
Expected term (years)			5
Expected stock volatility			77.2
Dividend yield			—	%

Outstanding stock options have a weighted average remaining life of 5.29 years and may be exercised in the range of $1.30 to $12.38.

6. SECURITIES

Components of the available for sale portfolio are as follows:

		June 30, 2010
		(Dollars in thousands)
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
U.S. Treasury and government sponsored entities’ securities		$	54,900			$	383			$	(8	)		$	55,275
Equity securities			293				124				(24	)			393
Mortgage-backed securities GSE issued: residential			245,859				5,627				—				251,486
Total		$	301,052			$	6,134			$	(32	)		$	307,154

		December 31, 2009
		(Dollars in thousands)
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
U.S. Treasury and government sponsored entities’ securities		$	48,717			$	313			$	(108	)		$	48,922
Equity securities			472				236				—				708
Mortgage-backed securities GSE issued: residential			226,182				5,536				—				231,718
Total		$	275,371			$	6,085			$	(108	)		$	281,348

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

		June 30, 2010
		(Dollars in thousands)
		Amortized				Fair
		Cost				Value
Due in one year or less		$	500			$	503
Due after one year through five years			25,000				25,228
Due after five years through ten years			29,400				29,544
Mortgage-backed securities: residential			245,859				251,486
Total		$	300,759			$	306,761

Securities pledged for the Company’s investment in VISA stock were approximately $1.0 million at June 30, 2010 and $1.2 million at December 31, 2009. Securities pledged for public funds deposits were $0 at June 30, 2010, and $1.8 million at December 31, 2009. Securities sold under an agreement to repurchase are secured primarily by mortgage-backed securities with a fair value of approximately $111.9 million at June 30, 2010, and $125.7 million at December 31, 2009.

United Community had no securities classified as trading as of June 30, 2010 or December 31, 2009.

The following table summarizes the investment securities with unrealized losses at June 30, 2010 and December 31, 2009 by aggregated major security type and length of time in a continuous unrealized loss position:

		June 30, 2010
		(Dollars in thousands)
		Less Than 12 Months								12 Months or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Loss				Value				Loss				Value				Loss
U.S. Treasury and government sponsored entities’ securities		$	11,402			$	(8	)		$	—			$	—			$	11,402			$	(8	)
Equity securities			105				(24	)			—				—				105				(24	)
Mortgage-backed securities GSE issued: residential			—				—				—				—				—				—
Total		$	11,507			$	(32	)		$	—			$	—			$	11,507			$	(32	)

		December 31, 2009
		(Dollars in thousands)
		Less Than 12 Months								12 Months or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Loss				Value				Loss				Value				Loss
U.S. Treasury and government sponsored entities’ securities		$	27,898			$	(108	)		$	—			$	—			$	27,898			$	(108	)
Equity securities			—				—				—				—				—				—
Mortgage-backed securities GSE issued: residential			6				—				—				—				6				—
Total		$	27,905			$	(108	)		$	—			$	—			$	27,905			$	(108	)

All of the U.S. Treasury and government sponsored entities’ securities that are temporarily impaired at June 30, 2010, are impaired due to the current level of interest rates. All of these securities continue to pay on schedule and management expects to receive all principal and interest owed on the securities.

Proceeds from sales of securities available for sale were $83.0 million and $47.4 for the three months ended June 30, 2010 and 2009, respectively. Gross gains of $3.7 million and $1.4 and no gross losses were realized on these sales during second quarter of 2010 and 2009, respectively.

Proceeds from sales of securities available for sale were $202.0 million and $46.1 million for the six months ended June 30, 2010 and 2009, respectively. Gross gains of $6.5 million and $1.4 and gross losses of $25,000 and $0 were realized on these sales during the first six months of 2010 and 2009, respectively.

Other-Than-Temporary-Impairment

Management evaluates securities for other-than-temporary-impairment (OTTI) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model.

The first segment represents securities classified as available for sale or held to maturity. In evaluating this segment, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an OTTI exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

The second segment represents securities purchased that, on the purchase date, were rated below AA. The Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

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 OTTI charge on the security. If the security has been in an unrealized loss position for less that 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.

As of June 30, 2010, the Company’s security portfolio consisted of 51 securities, three of which were in an unrealized loss position totaling $32,072.

7. LOANS

Portfolio loans consist of the following:

		June 30,				December 31,
		2010				2009
		(Dollars in thousands)
Real Estate:
One- to four-family residential		$	779,565			$	773,831
Multifamily residential			138,875				150,480
Nonresidential			383,882				397,895
Land			26,217				23,502
Construction:
One- to four-family residential			133,534				178,095
Multifamily and non-residential			14,870				13,741
Total real estate			1,476,943				1,537,544
Consumer			295,007				309,202
Commercial			53,566				60,217
Total loans			1,825,516				1,906,963
Less:
Allowance for loan losses			40,728				42,287
Deferred loan fees, net			(1,250	)			(1,342	)
Total			39,478				40,945
Loans, net		$	1,786,038			$	1,866,018

Changes in the allowance for loan loss are as follows:

		Three months				Three months
		ended				ended
		June 30,				June 30,
		2010				2009
		(Dollars in thousands)
Balance, beginning of period		$	47,768			$	37,856
Provision for loan losses			10,310				12,311
Amounts charged off			(17,558	)			(10,815	)
Recoveries			208				480
Balance, end of period		$	40,728			$	39,832

		Six months				Six months				Twelve months
		ended				ended				ended
		June 30,				June 30,				December 31,
		2010				2009				2009
		(Dollars in thousands)
Balance, beginning of period		$	42,287			$	35,962			$	35,962
Provision for loan losses			22,760				20,755				49,074
Amounts charged off			(24,678	)			(17,506	)			(43,692	)
Recoveries			379				621				943
Balance, end of period		$	40,728			$	39,832			$	42,287

Non-accrual loans were $155.1 million and $112.2 million at June 30, 2010, and December 31, 2009, respectively. Restructured loans were $29.1 million at June 30, 2010 and $22.6 million at December 31, 2009. Loans greater than 90 days past due and still accruing interest were $2.6 million and $3.7 million at June 30, 2010 and December 31, 2009, respectively.

Impaired loans consist of the following:

		As of or for the				As of or for
		Six				the Year
		Months Ended				Ended
		June 30,				December 31,
		2010				2009
		(Dollars in thousands)
Impaired loans on which no specific valuation allowance was provided		$	82,736			$	83,443
Impaired loans on which a specific valuation allowance was provided			76,041				36,362
Total impaired loans at period-end		$	158,777			$	119,805
Specific valuation allowances on impaired loans at period-end		$	10,029			$	4,064
Average impaired loans during the period			138,791				103,026
Interest income recognized on impaired loans during the period			816				2,056
Interest income received on impaired loans during the period			816				2,056

8. MORTGAGE BANKING ACTIVITIES

Mortgage loans serviced for others, which are not reported in United Community’s assets, totaled $1.1 billion at June 30, 2010, and December 31, 2009.

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

		Six Months Ended				Year Ended
		June 30, 2010				December 31, 2009
		(Dollars in thousands)
Balance, beginning of year		$	6,228			$	5,562
Originations			840				3,220
Amortized to expense			(1,199	)			(2,554	)
Balance, end of period			5,869				6,228
Less valuation allowance			(1,579	)			(423	)
Net balance		$	4,290			$	5,805

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

		Six Months Ended				Year Ended
		June 30, 2010				December 31, 2009
		(Dollars in thousands)
Balance, beginning of year		$	(423	)		$	(2,233	)
Impairment charges			(1,260	)			—
Recoveries			104				1,810
Balance, end of period		$	(1,579	)		$	(423	)

Fair value of mortgage servicing rights as of June 30, 2010 was approximately $5.3 million and at December 31, 2009 was approximately $8.0 million.

Key economic assumptions in measuring the value of mortgage servicing rights at June 30, 2010 and December 31, 2009 were as follows:

		June 30,		December 31,
		2010		2009
Weighted average prepayment rate		553 PSA		325 PSA
Weighted average life (in years)		3.48		3.65
Weighted average discount rate		8%		8%

9. OTHER REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS

Real estate owned and other repossessed assets at June 30, 2010 and December 31, 2009 were as follows:

		June 30,				December 31,
		2010				2009
		(Dollars in thousands)
Real estate owned and other repossessed assets		$	49,348			$	38,829
Valuation allowance			(7,302	)			(7,867	)
End of period		$	42,046			$	30,962

Activity in the valuation allowance was as follows:

		June 30,				December 31,
		2010				2009
		(Dollars in thousands)
Beginning of year		$	7,867			$	2,754
Additions charged to expense			2,656				7,925
Direct write-downs			(3,221	)			(2,812	)
End of period		$	7,302			$	7,867

Expenses related to foreclosed and repossessed assets include:

		For the three months ended June 30,								For the six months ended June 30,
		2010				2009				2010				2009
		(Dollars in thousands)								(Dollars in thousands)
Net loss (gain) on sales		$	775			$	497			$	875			$	922
Provision for unrealized losses, net			980				685				2,364				1,398
Operating expenses, net of rental income			1,024				804				1,631				1,755
Total expenses		$	2,779			$	1,986			$	4,870			$	4,075

10. OTHER POSTRETIREMENT BENEFIT PLANS

Home Savings sponsors a defined benefit health care plan. The plan 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 June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
		(In thousands)								(In thousands)
Service cost		$	—			$	—			$	—			$	—
Interest cost			47				47				94				94
Expected return on plan assets			—				—				—				—
Net amortization of prior service cost			—				—				—				—
Recognized net actuarial gain			—				(4	)			—				(8	)
Net periodic benefit cost/(gain)		$	47			$	43			$	94			$	86
Assumptions used in the valuations were as follows:
Weighted average discount rate			5.75	%			6.00	%			5.75	%			6.00	%

11. FAIR VALUE MEASUREMENT

Fair value is defined as the exchange price that would be received for an asset or 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. Furthermore, a fair value hierarchy is established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of inputs that are used to measure fair values:

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 assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally 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 appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Assets and liabilities measured at fair value on a recurring basis are summarized below:

						Fair Value Measurements at June 30, 2010 Using:
						Quoted Prices in
						Active Markets								Significant
						for Identical				Significant Other				Unobservable
		June 30,				Assets				Observable				Inputs
		2010				(Level 1)				Inputs (Level 2)				(Level 3)
		(Dollars in thousands)
Assets:
Available for sale securities
US Treasury and government sponsored entities’ securities		$	55,275			$	—			$	55,275			$	—
Equity securities			393				393				—				—
Mortgage-backed securities: residential			251,486				—				251,486				—

						Fair Value Measurements at December 31, 2009 Using:
						Quoted Prices in
						Active Markets								Significant
						for Identical				Significant Other				Unobservable
		December 31,				Assets				Observable				Inputs
		2009				(Level 1)				Inputs (Level 2)				(Level 3)
		(Dollars in thousands)
Assets:
Available for sale securities
US Treasury and government sponsored entities’ securities		$	48,922			$	—			$	48,922			$	—
Equity securities			708				708				—				—
Mortgage-backed securities: residential			231,718				—				231,718				—

Assets and liabilities measured at fair value on a nonrecurring basis are summarized below:

						Fair Value Measurements at June 30, 2010 Using:
						Quoted Prices in
						Active Markets								Significant
						for Identical				Significant Other				Unobservable
		June 30,				Assets				Observable				Inputs
		2010				(Level 1)				Inputs (Level 2)				(Level 3)
		(Dollars in thousands)
Assets:
Impaired loans		$	66,012				—				—			$	66,012
Mortgage servicing assets			4,065				—				4,065				—
Foreclosed assets			16,392				—				—				16,392