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

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		Smaller reporting company þ

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 30,937,704 common shares as of October 31, 2010.

 

 

TABLE OF CONTENTS

		PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of September 30, 2010 (Unaudited) and December 31, 2009			1
Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2010 and 2009 (Unaudited)			2
Consolidated Statement of Shareholders’ Equity for the Nine Months ended September 30, 2010 and 2009 (Unaudited)			4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009 (Unaudited)			5
Notes to Consolidated Financial Statements (Unaudited)			6-24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25-38
Item 3. Quantitative and Qualitative Disclosures about Market Risk			39
Item 4. Controls and Procedures			40
Part II. OTHER INFORMATION
Item 1. Legal Proceedings			41
Item 1A. Risk Factors			41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			42
Item 3. Defaults Upon Senior Securities (None)
Item 4. (Removed and Reserved)
Item 5. Other Information			42
Item 6. Exhibits			42
Signatures			44
Exhibits
Exhibit 10.1
Exhibit 10.2
Exhibit 10.3
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

		September 30,				December 31,
		2010				2009
		(Dollars in thousands)
Assets:
Cash and deposits with banks		$	21,110			$	22,330
Federal funds sold and other			19,613				22,744
Total cash and cash equivalents			40,723				45,074
Securities:
Available for sale, at fair value			390,636				281,348
Loans held for sale			15,376				10,497
Loans, net of allowance for loan losses of $40,884 and $42,287, respectively			1,726,381				1,866,018
Federal Home Loan Bank stock, at cost			26,464				26,464
Premises and equipment, net			22,149				23,139
Accrued interest receivable			8,963				9,090
Real estate owned and other repossessed assets			40,297				30,962
Core deposit intangible			525				661
Cash surrender value of life insurance			27,028				26,198
Other assets			19,406				18,976
Total assets		$	2,317,948			$	2,338,427
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Interest bearing		$	1,557,113			$	1,642,722
Non-interest bearing			127,920				126,779
Total deposits			1,685,033				1,769,501
Borrowed funds:
Federal Home Loan Bank advances			306,606				221,323
Repurchase agreements and other			97,802				96,833
Total borrowed funds			404,408				318,156
Advance payments by borrowers for taxes and insurance			16,037				19,791
Accrued interest payable			928				1,421
Accrued expenses and other liabilities			10,209				9,775
Total liabilities			2,116,615				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 30,925,384 and 30,897,825 shares, respectively outstanding			142,899				145,775
Retained earnings			128,476				148,674
Accumulated other comprehensive income			2,622				4,110
Unearned employee stock ownership plan shares			—				(5,821	)
Treasury stock, at cost, 6,879,073 and 6,906,632 shares, respectively			(72,664	)			(72,955	)
Total shareholders’ equity			201,333				219,783
Total liabilities and shareholders’ equity		$	2,317,948			$	2,338,427

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
		(Dollars in thousands, except per share data)
Interest income
Loans		$	24,589			$	29,389			$	75,350			$	90,532
Loans held for sale			109				99				248				578
Available for sale securities			3,235				2,925				8,716				8,491
Federal Home Loan Bank stock dividends			297				330				891				923
Other interest earning assets			10				12				25				50
Total interest income			28,240				32,755				85,230				100,574
Interest expense
Deposits			7,528				11,037				25,254				35,762
Federal Home Loan Bank advances			984				1,348				2,707				4,775
Repurchase agreements and other			942				965				2,796				3,216
Total interest expense			9,454				13,350				30,757				43,753
Net interest income			18,786				19,405				54,473				56,821
Provision for loan losses			17,116				5,579				39,876				26,334
Net interest income after provision for loan losses			1,670				13,826				14,597				30,487
Non-interest income
Non-deposit investment income			388				366				1,300				1,074
Service fees and other charges			1,563				2,012				3,738				6,245
Net gains (losses):
Securities available for sale			781				481				7,295				1,863
Other -than-temporary loss in equity securities
Total impairment loss			(44	)			(572	)			(44	)			(722	)
Loss recognized in other comprehensive income			—				—				—				—
Net impairment loss recognized in earnings			(44	)			(572	)			(44	)			(722	)
Mortgage banking income			1,419				559				2,456				3,487
Real estate owned and other repossessed assets			(1,273	)			(3,964	)			(4,512	)			(6,301	)
Gain on sale of retail branch			—				—				1,388				—
Other income			1,281				1,237				3,799				3,421
Total non-interest income			4,115				119				15,420				9,067
Non-interest expense
Salaries and employee benefits			7,568				7,558				24,847				23,345
Occupancy			850				915				2,693				2,798
Equipment and data processing			1,562				1,578				4,949				4,968
Franchise tax			498				537				1,512				1,684
Advertising			205				261				574				677
Amortization of core deposit intangible			43				54				136				172
Deposit insurance premiums			1,391				1,531				4,311				6,254
Professional fees			948				951				2,921				2,574
Real estate owned and other repossessed asset expenses			1,027				527				2,658				2,282
Other expenses			1,608				1,473				5,358				4,232
Total non-interest expenses			15,700				15,385				49,959				48,986
Loss from continuing operations before income taxes			(9,915	)			(1,440	)			(19,942	)			(9,432	)
Income tax benefit			—				(573	)			—				(3,972	)
Net loss from continuing operations			(9,915	)			(867	)			(19,942	)			(5,460	)
Discontinued operations
Net income of Butler Wick Corp., net of tax			—				—				—				4,949
Net loss		$	(9,915	)		$	(867	)		$	(19,942	)		$	(511	)

(Continued)
(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,
		2010				2009				2010				2009
Loss available to common shareholders		$	(9,915	)		$	(867	)		$	(19,942	)		$	(511	)
Other comprehensive income
Unrealized gain/(loss) on securities, net			(1,569	)			2,030				(1,488	)			1,019
Comprehensive income (loss)		$	(11,484	)		$	1,163			$	(21,430	)		$	508
Earnings (loss) per share
Basic—continuing operations		$	(0.32	)		$	(0.03	)		$	(0.66	)		$	(0.19	)
Basic—discontinued operations			—				—				—				0.17
Basic			(0.32	)			(0.03	)			(0.66	)			(0.02	)
Diluted—continuing operations			(0.32	)			(0.03	)			(0.66	)			(0.19	)
Diluted—discontinued operations			—				—				—				0.17
Diluted			(0.32	)			(0.03	)			(0.66	)			(0.02	)

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 January 1, 2010			30,898			$	145,775			$	148,674			$	4,110			$	(5,821	)		$	(72,955	)		$	219,783
Comprehensive loss:
Net loss											(19,942	)															(19,942	)
Change in net unrealized gain on securities, net of tax of $801															(1,488	)											(1,488	)
Comprehensive loss																											(21,430	)
Shares allocated to ESOP participants							(3,078	)											5,821								2,743
Stock based compensation			27				202				(256	)											291				237
Balance September 30, 2010			30,925			$	142,899			$	128,476			$	2,622			$	—			$	(72,664	)		$	201,333

																		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 January 1, 2009			30,898			$	146,439			$	165,447			$	3,635			$	(7,643	)		$	(72,955	)		$	234,923
Comprehensive income:
Net income											(511	)															(511	)
Change in net unrealized gain on securities, net of tax of $549															1,019												1,019
Comprehensive loss																											508
Shares allocated to ESOP participants							(946	)											1,366								420
Stock based compensation							75																				75
Balance September 30, 2009			30,898			$	145,568			$	164,936			$	4,654			$	(6,277	)		$	(72,955	)		$	235,926

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

		Nine Months Ended September 30,
		2010				2009
		(Dollars in thousands)
Cash Flows from Operating Activities
Net loss		$	(19,942	)		$	(511	)
Adjustments to reconcile net loss to net cash provided by operating activities
Provision for loan losses			39,876				26,334
Mortgage banking income			(2,456	)			(3,487	)
Net losses on real estate owned and other repossessed assets sold			4,512				6,301
Net gain on retail branch sold			(1,388	)			—
Net gain on available for sale securities sold			(7,295	)			(1,863	)
Net gains on other assets sold			(3	)			(17	)
Other than temporary impairment of securities available for sale			44				722
Amortization of premiums and accretion of discounts			(649	)			2,148
Depreciation and amortization			1,484				1,640
Decrease in interest receivable			127				1,229
Decrease in interest payable			(493	)			(999	)
Decrease (increase) in prepaid and other assets			3,175				(4,977	)
Increase in other liabilities			1,179				2,266
Stock based compensation			237				75
Net principal disbursed on loans originated for sale			(157,723	)			(295,926	)
Proceeds from sale of loans originated for sale			153,515				311,363
ESOP Compensation			2,743				420
Purchase of interest rate caps			(2,126	)			—
Net change in interest rate caps			95				—
Operating cash flows from discontinued operations			—				(4,949	)
Net cash from operating activities			14,912				39,769
Cash Flows from Investing Activities
Proceeds from principal repayments and maturities of:
Securities available for sale			68,368				41,442
Proceeds from sale of:
Securities available for sale			247,129				76,190
Real estate owned and other repossessed assets			14,931				11,459
Fixed assets			20				37
Purchases of:
Securities available for sale			(421,856	)			(196,295	)
Net change in loans			75,281				172,872
Loans purchased			(4,729	)			(2,090	)
Purchases of premises and equipment			(487	)			(519	)
Sale of retail branch			(22,158	)			—
Investing cash flows from discontinued operations			—				8,123
Net cash from investing activities			(43,501	)			111,219
Cash Flows from Financing Activities
Net increase in checking, savings and money market accounts			33,952				38,612
Net decrease in certificates of deposit			(92,212	)			(169,040	)
Net decrease in advance payments by borrowers for taxes and insurance			(3,754	)			(6,856	)
Proceeds from Federal Home Loan Bank advances			745,200				652,400
Repayment of Federal Home Loan Bank advances			(659,917	)			(642,228	)
Net change in repurchase agreements and other borrowed funds			969				(29,335	)
Net cash from financing activities			24,238				(156,447	)
Change in cash and cash equivalents			(4,351	)			(5,459	)
Cash and cash equivalents, beginning of period			45,074				43,417
Cash and cash equivalents, end of period		$	40,723			$	37,958

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 nine months ended September 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

As previously disclosed, 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 with the original OTS Order, 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). Although United Community and Home Savings have agreed to the issuance of the OTS Order and the Bank 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 OTS Order requires United Community to obtain OTS approval prior to: (i) incurring or increasing its debt position; (ii) repurchasing any United Community stock; or (iii) paying any dividends. The OTS Order also requires United Community to develop a debt reduction plan and submit the plan to the OTS for approval.

The Bank Order requires Home Savings, within specified timeframes, to take or refrain from certain actions, including: (i) retaining a bank consultant to assess Home Savings management needs and submitting a management plan that identifies officer positions needed, identifies and establishes board and internal operating committees, evaluates Home Savings’ senior officers, and provides for the hiring of any additional personnel; (ii) seeking 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 extending additional credit to classified borrowers; (iv) establishing a compliant Allowance for Loan and Lease Loss methodology; (v) enhancing its risk management policies and procedures; (vi) adopting and implementing plans to reduce its classified assets and delinquent loans, and to reduce loan concentrations in nonowner-occupied commercial real estate and construction, land development, and land loans; (vii) establishing board of directors committees to evaluate and approve certain loans and oversee Home Savings’ compliance with the Bank Order; (viii) revising its loan policy and enhancing its underwriting and credit administration functions; (ix) developing a strategic plan and budget and profit plan; (x) correcting all violations of laws, rules, and regulations and implementing procedures to ensure future compliance; (xi) increasing its Tier 1 leverage ratio to 8.0% and its total risk-based capital ratio to 12.0% by December 31, 2008; and (xii) seeking regulatory approval prior to declaring or paying any cash dividend.

Both the OTS Order and the Bank Order remain in effect. Since the issuance of the Bank Order, there has been no change in the requirements of that Order. The OTS Order, however, was subsequently amended effective November 5, 2010. This amendment removed a requirement in the original OTS Order to provide the OTS with a debt reduction plan and added a requirement to provide the OTS with a capital plan. This capital plan will be consistent with and incorporated into the strategic planning process that Home Savings has already been undertaking for the past two years under the terms of the Bank Order.

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:

		Nine Months
		Ended
		September 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 is 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 did not 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

Stock Options:

On April 26, 2007, shareholders approved the United Community Financial Corp. 2007 Long-Term Incentive Plan, as amended (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 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. All options expire 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 (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 plan was 3,569,766. Because the 1999 Plan terminated, 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. 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 $231,000 in stock option expenses for the nine months ended September 30, 2010. The Company expects to recognize additional expenses of $121,000 for the remainder of 2010 approximately $391,000 in 2011.

A summary of activity in the plans is as follows:

		For the nine months ended September 30, 2010
						Weighted				Aggregate
						average				intrinsic value
		Shares				exercise price				(in thousands)
Outstanding at beginning of year			2,200,672			$	7.95
Granted			418,200				2.10
Exercised			—				—
Forfeited			(363,045	)			8.13
Outstanding at end of period			2,255,827			$	6.83			$	—
Options exercisable at end of period			1,628,974			$	8.69			$	1

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

		September 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 5.03 years and may be exercised in the range of $1.30 to $12.38.

Restricted Stock Awards:

The 2007 Plan, as amended by the 2010 Director Sub-Plan, permits the issuance of 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 issue date. Total restricted shares issued under the 2007 plan were 27,559, all of which were issued on August 24, 2010. These restricted shares 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 a weighted average period of one year. The Company recognized approximately $6,000 in restricted stock award expenses for the nine months ended September 30, 2010. The Company expects to recognize additional expenses of approximately $8,000 for the remainder of 2010 approximately $21,000 in 2011.

A summary of changes in the Company’s nonvested restricted shares for the year is as follows:

						Weighted
						average grant
						date fair
		Shares				value
Nonvested shares at January 1, 2010			—			$	—
Granted			27,559				1.27
Vested			—				—
Forfeited			—				—
Nonvested shares at September 30, 2010			27,559			$	1.27

6. SECURITIES

Components of the available for sale portfolio are as follows:

		September 30, 2010
		(Dollars in thousands)
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
U.S. Treasury and government sponsored entities’ securities		$	65,347			$	328			$	—			$	65,675
Equity securities			249				148				—				397
Mortgage-backed securities GSE issued: residential			321,352				3,624				(412	)			324,564
Total		$	386,948			$	4,100			$	(412	)		$	390,636

		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:

		September 30, 2010
		(Dollars in thousands)
		Amortized				Fair
		Cost				Value
						$	—
Due in one year or less		$	—
Due after one year through five years			—				—
Due after five years through ten years			65,347				65,675
Mortgage-backed securities: residential			321,352				324,564
Total		$	386,699			$	390,239

Securities pledged for the Company’s investment in VISA stock were approximately $818,000 at September 30, 2010 and $1.2 million at December 31, 2009. Securities pledged for public funds deposits were $0 at September 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 $114.6 million at September 30, 2010, and $125.7 million at December 31, 2009.

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

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

		September 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		$	—			$	—			$	—			$	—			$	—			$	—
Equity securities			—				—				—				—				—				—
Mortgage-backed securities GSE issued: residential			91,644				(412	)			—				—				91,644				(412	)
Total		$	91,644			$	(412	)		$	—			$	—			$	91,644			$	(412	)

		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			7				—				—				—				7				—
Total		$	27,905			$	(108	)		$	—			$	—			$	27,905			$	(108	)

All of the government sponsored entities’ securities that are temporarily impaired at September 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 $45.1 million and $27.6 million for the three months ended September 30, 2010 and 2009, respectively. Gross gains of $781,000 and $481,000 and no gross losses were realized on these sales during the third quarter of 2010 and 2009, respectively.

Proceeds from sales of securities available for sale were $247.1 million and $76.2 million for the nine months ended September 30, 2010 and 2009, respectively. Gross gains of $7.3 million and $1.9 million and gross losses of $25,000 and $0 were realized on these sales during the first nine 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 recognized in earnings is 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 is 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.

The Company recognized a $44,000 OTTI charge on an equity investment in another financial institution in the third quarter of 2010. That financial institution completed an equity offering which diluted the Company's investment, making a chance of recovery remote in the foreseeable future.

As of September 30, 2010, the Company’s security portfolio consisted of 51 securities, seven of which were in an unrealized loss position totaling approximately $412,000.

7. LOANS

Portfolio loans consist of the following:

		September 30,				December 31,
		2010				2009
		(Dollars in thousands)
Real Estate:
One- to four-family residential		$	778,005			$	773,831
Multifamily residential			136,681				150,480
Nonresidential			355,914				397,895
Land			25,413				23,502
Construction:
One- to four-family residential			117,297				178,095
Multifamily and non-residential			14,537				13,741
Total real estate			1,427,847				1,537,544
Consumer			289,296				309,202
Commercial			48,902				60,217
Total loans			1,766,045				1,906,963
Less:
Allowance for loan losses			40,884				42,287
Deferred loan fees, net			(1,220	)			(1,342	)
Total			39,664				40,945
Loans, net		$	1,726,381			$	1,866,018

Changes in the allowance for loan loss are as follows:

		Three months				Three months
		ended				ended
		September 30,				September 30,
		2010				2009
		(Dollars in thousands)
Balance, beginning of period		$	40,728			$	39,832
Provision for loan losses			17,116				5,579
Amounts charged off			(17,307	)			(6,728	)
Recoveries			347				162
Balance, end of period		$	40,884			$	38,845

		Nine months				Nine months				Twelve months
		ended				ended				ended
		September 30,				September 30,				December 31,
		2010				2009				2009
		(Dollars in thousands)
Balance, beginning of period		$	42,287			$	35,962			$	35,962
Provision for loan losses			39,876				26,334				49,074
Amounts charged off			(42,005	)			(24,234	)			(43,692	)
Recoveries			726				783				943
Balance, end of period		$	40,884			$	38,845			$	42,287

Non-accrual loans were $142.9 million and $112.2 million at September 30, 2010, and December 31, 2009, respectively. Restructured loans were $28.2 million at September 30, 2010 and $22.6 million at December 31, 2009. Loans greater than 90 days past due and still accruing interest were $4.3 million and $3.7 million at September 30, 2010 and December 31, 2009, respectively.

Impaired loans consist of the following:

		As of or for the				As of or for
		Nine				the Year
		Months Ended				Ended
		September 30,				December 31,
		2010				2009
		(Dollars in thousands)
Impaired loans on which no specific valuation allowance was provided		$	73,027			$	82,443
Impaired loans on which a specific valuation allowance was provided			68,865				36,362
Total impaired loans at period-end		$	141,892			$	118,805
Specific valuation allowances on impaired loans at period-end		$	10,657			$	4,064
Average impaired loans during the period			130,349				103,026
Interest income recognized on impaired loans during the period			1,453				2,056
Interest income received on impaired loans during the period			1,453				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 September 30, 2010, and December 31, 2009.

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

		Nine Months Ended				Year Ended
		September 30, 2010				December 31, 2009
		(Dollars in thousands)
Balance, beginning of year		$	6,228			$	5,562
Originations			1,517				3,220
Amortized to expense			(1,779	)			(2,554	)
Balance, end of period			5,966				6,228
Less valuation allowance			(1,598	)			(423	)
Net balance		$	4,368			$	5,805

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

		Nine Months Ended				Year Ended
		September 30, 2010				December 31, 2009
		(Dollars in thousands)
Balance, beginning of year		$	(423	)		$	(2,233	)
Impairment charges			(1,279	)			—
Recoveries			104				1,810
Balance, end of period		$	(1,598	)		$	(423	)

Fair value of mortgage servicing rights as of September 30, 2010 was approximately $5.5 million and at December 31, 2009 was approximately $8.0 million.

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

		September 30,				December 31,
		2010				2009
Weighted average prepayment rate		529 PSA				325 PSA
Weighted average life (in years)		3.52				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 September 30, 2010 and December 31, 2009 were as follows:

		September 30,				December 31,
		2010				2009
		(Dollars in thousands)
Real estate owned and other repossessed assets		$	48,250			$	38,829
Valuation allowance			(7,953	)			(7,867	)
End of period		$	40,297			$	30,962

Activity in the valuation allowance was as follows:

		September 30,				December 31,
		2010				2009
		(Dollars in thousands)
Beginning of year		$	7,867			$	2,754
Additions charged to expense			3,230				7,925
Direct write-downs			(3,144	)			(2,812	)
End of period		$	7,953			$	7,867

Expenses related to foreclosed and repossessed assets include:

		For the three months ended								For the nine months ended
		September 30,								September 30,
		2010				2009				2010				2009
		(Dollars in thousands)								(Dollars in thousands)
Net loss (gain) on sales		$	407			$	137			$	1,282			$	1,287
Provision for unrealized losses, net			866				3,827				3,230				5,014
Operating expenses, net of rental income			1,066				527				2,658				2,282
Total expenses		$	2,339			$	4,491			$	7,170			$	8,583

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 September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
		(In thousands)								(In thousands)
Service cost		$	—			$	—			$	—			$	—
Interest cost			46				47				140				141
Expected return on plan assets			—				—				—				—
Net amortization of prior service cost			(1	)			—				(1	)			—
Recognized net actuarial gain			—				(4	)			—				(12	)
Net periodic benefit cost/(gain)		$	45			$	43			$	139			$	129
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 independent 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 September 30, 2010 Using:
						Quoted Prices in
						Active Markets								Significant
						for Identical				Significant Other				Unobservable
		September 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		$	65,675			$	—			$	65,675			$	—
Equity securities			397				397				—				—
Mortgage-backed securities: residential			324,564				—				324,564				—
Interest rate caps			2,030				—				2,030				—

						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				—