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. 30,968,960 common shares as of April 30, 2011.

 

 

TABLE OF CONTENTS

		PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of March 31, 2011 (Unaudited) and December 31, 2010			1
Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010 (Unaudited)			2
Consolidated Statement of Shareholders’ Equity for the Three Months ended March 31, 2011 and 2010 (Unaudited)			4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 (Unaudited)			5
Notes to Consolidated Financial Statements (Unaudited)			6-33
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			34-44
Item 3. Quantitative and Qualitative Disclosures about Market Risk			45
Item 4. Controls and Procedures			46
Part II. OTHER INFORMATION
Item 1. Legal Proceedings			47
Item 1A. Risk Factors			47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			47
Item 3. Defaults Upon Senior Securities (None)
Item 4. (Removed and Reserved)
Item 5. Other Information (None)
Item 6. Exhibits			47
Signatures			48
Exhibits			49
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I — FINANCIAL INFORMATION

ITEM 1.		Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

		March 31,				December 31,
		2011				2010
		(Dollars in thousands)
Assets:
Cash and deposits with banks		$	18,497			$	18,627
Federal funds sold			20,181				18,480
Total cash and cash equivalents			38,678				37,107
Securities:
Available for sale, at fair value			289,388				362,042
Loans held for sale			2,531				10,870
Loans, net of allowance for loan losses of $46,415 and $50,883			1,620,094				1,649,486
Federal Home Loan Bank stock, at cost			26,464				26,464
Premises and equipment, net			21,760				22,076
Accrued interest receivable			7,684				7,720
Real estate owned and other repossessed assets			42,873				40,336
Core deposit intangible			448				485
Cash surrender value of life insurance			27,560				27,303
Other assets			37,600				13,409
Total assets		$	2,115,080			$	2,197,298
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Interest bearing		$	1,568,161			$	1,551,210
Non-interest bearing			144,362				138,571
Total deposits			1,712,523				1,689,781
Borrowed funds:
Federal Home Loan Bank advances			100,954				202,818
Repurchase agreements and other			100,446				97,797
Total borrowed funds			201,400				300,615
Advance payments by borrowers for taxes and insurance			13,219				20,668
Accrued interest payable			905				809
Accrued expenses and other liabilities			9,662				9,370
Total liabilities			1,937,709				2,021,243
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 30,951,032 and 30,937,704 shares, respectively, outstanding			142,404				142,318
Retained earnings			113,911				111,049
Accumulated other comprehensive loss			(6,551	)			(4,778	)
Treasury stock, at cost, 6,853,425 and 6,866,753 shares, respectively			(72,393	)			(72,534	)
Total shareholders’ equity			177,371				176,055
Total liabilities and shareholders’ equity		$	2,115,080			$	2,197,298

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

		For the Three Months Ended
		March 31,
		2011				2010
		(Dollars in thousands, except per share data)
Interest income
Loans		$	22,510			$	25,843
Loans held for sale			66				70
Available for sale securities			2,847				2,585
Federal Home Loan Bank stock dividends			300				300
Other interest earning assets			9				7
Total interest income			25,732				28,805
Interest expense
Deposits			6,331				9,318
Federal Home Loan Bank advances			825				848
Repurchase agreements and other			922				923
Total interest expense			8,078				11,089
Net interest income			17,654				17,716
Provision for loan losses			2,192				12,450
Net interest income after provision for loan losses			15,462				5,266
Non-interest income
Non-deposit investment income			354				428
Service fees and other charges			1,453				1,751
Net gains (losses):
Securities available for sale			1,313				2,843
Other -than-temporary loss in equity securities
Total impairment loss			(10	)			—
Loss recognized in other comprehensive income			—				—
Net impairment loss recognized in earnings			(10	)			—
Mortgage banking income			622				386
Real estate owned and other repossessed assets			(992	)			(1,484	)
Gain on sale of retail branch			—				1,387
Other income			1,248				1,249
Total non-interest income			3,988				6,560
Non-interest expense
Salaries and employee benefits			7,684				8,174
Occupancy			905				1,004
Equipment and data processing			1,694				1,667
Franchise tax			469				511
Advertising			121				222
Amortization of core deposit intangible			37				48
Deposit insurance premiums			1,405				1,461
Professional fees			962				1,033
Real estate owned and other repossessed asset expenses			873				607
Other expenses			2,338				2,241
Total non-interest expenses			16,488				16,968
Income (loss) before income taxes			2,962				(5,142	)
Income tax expense (benefit)			—				—
Net income (loss)		$	2,962			$	(5,142	)

(Continued)

UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		For the Three Months Ended
		March 31,
		2011				2010
Net income (loss)		$	2,962			$	(5,142	)
Other comprehensive income
Unrealized losses on securities, net			(1,773	)			(425	)
Comprehensive income (loss)		$	1,189			$	(5,567	)
Earnings (loss) per share
Basic		$	0.10			$	(0.17	)
Diluted			0.10				(0.17	)

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

																		Unearned
																		Employee
														Accumulated				Stock
														Other				Ownership
		Shares				Common				Retained				Comprehensive				Plan				Treasury
		Outstanding				Stock				Earnings				Income (Loss)				Shares				Stock				Total
		(Dollars thousands, except per share data)
Balance December 31, 2010			30,938			$	142,318			$	111,049			$	(4,778	)		$	—			$	(72,534	)		$	176,055
Comprehensive income:
Net income											2,962																2,962
Change in net unrealized gain/(loss) on securities, net of taxes															(1,773	)											(1,773	)
Comprehensive income																											1,189
Stock based compensation			13				86				(100	)											141				127
Balance March 31, 2011			30,951			$	142,404			$	113,911			$	(6,551	)		$	—			$	(72,393	)		$	177,371
Balance December 31, 2009			30,898			$	145,775			$	148,674			$	4,110			$	(5,821	)		$	(72,955	)		$	219,783
Comprehensive income:
Net loss											(5,142	)															(5,142	)
Change in net unrealized gain/(loss) on securities, net of taxes															(425	)											(425	)
Comprehensive loss																											(5,567	)
Shares allocated to ESOP participants							(220	)											455								235
Stock based compensation							31																				31
Balance March 31, 2010			30,898			$	145,586			$	143,532			$	3,685			$	(5,366	)		$	(72,955	)		$	214,482

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

		Three Months Ended March 31,
		2011				2010
		(Dollars in thousands)
Cash Flows from Operating Activities
Net income (loss)		$	2,962			$	(5,142	)
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			2,192				12,450
Mortgage banking income			(622	)			(386	)
Net losses on real estate owned and other repossessed assets sold			992				1,484
Net gain on retail branch sold			—				(1,387	)
Net gain on available for sale securities sold			(1,313	)			(2,843	)
Net gains on other assets sold			(10	)			(3	)
Other than temporary impairment of securities available for sale			10				—
Amortization of premiums and accretion of discounts			428				971
Depreciation and amortization			453				509
Decrease in interest receivable			36				685
Increase in interest payable			96				330
Decrease (increase) in prepaid and other assets			408				(1,366	)
Increase in other liabilities			292				882
Stock based compensation			127				31
Net principal disbursed on loans originated for sale			(36,760	)			(39,870	)
Proceeds from sale of loans originated for sale			45,721				44,650
ESOP compensation			—				235
Net cash from operating activities			15,012				11,230
Cash Flows from Investing Activities
Proceeds from principal repayments and maturities of:
Securities available for sale			10,703				14,136
Proceeds from sale of:
Securities available for sale			63,202				118,947
Real estate owned and other repossessed assets			4,978				3,222
Premises and equipment			10				20
Purchases of:
Securities available for sale			(26,858	)			(122,131	)
Principal disbursed on loans, net of repayments			19,913				21,576
Loans purchased			(1,338	)			(1,206	)
Purchases of premises and equipment			(129	)			(75	)
Sale of retail branch			—				(22,503	)
Net cash from investing activities			70,481				11,986
Cash Flows from Financing Activities
Net increase in checking, savings and money market accounts			28,462				14,474
Net decrease in certificates of deposit			(5,720	)			(29,175	)
Net decrease in advance payments by borrowers for taxes and insurance			(7,449	)			(6,030	)
Proceeds from Federal Home Loan Bank advances			33,000				257,000
Repayment of Federal Home Loan Bank advances			(134,864	)			(264,224	)
Net change in repurchase agreements and other borrowed funds			2,649				(280	)
Net cash from financing activities			(83,922	)			(28,235	)
Change in cash and cash equivalents			1,571				(5,019	)
Cash and cash equivalents, beginning of period			37,107				45,074
Cash and cash equivalents, end of period		$	38,678			$	40,055

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 seven loan production offices located throughout Ohio and western Pennsylvania.

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

The results of operations for the three months ended March 31, 2011, are not necessarily indicative of the results to be expected for the year ending December 31, 2011. 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, 2010, contained in United Community’s Form 10-K for the year ended December 31, 2010.

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 the Issuance of an Order to Cease and Desist (the 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 (the Bank Order) with the Federal Deposit Insurance Corporation (FDIC) and the Division of Financial Institutions of the Ohio Department of Commerce (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. As of December 31, 2010, the Tier 1 leverage ratio was 7.84%; however at March 31, 2011, the ratio was 8.44%. As a result, Home Savings remained in compliance with the Bank Order. See Note 15 for details on current capital levels of Home Savings.

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 is 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. The capital plan was submitted to the OTS in December 2010.

3. RECENT ACCOUNTING DEVELOPMENTS

In April 2011, The Financial Accounting Standards Board (FASB) issued ASU 2011-02, A Creditors Determination of whether a Restructuring Is a Troubled Debt Restructuring. The new guidance clarifies when a loan modification or restructuring is considered a troubled debt restructuring (TDR) in order to address current diversity in practice and lead to more consistent application of accounting principles generally accepted in the United States of America. In evaluating whether a restructuring constitutes a TDR, a creditor must separately conclude that the restructuring constitutes a concession and the debtor is experiencing financial difficulties. Additionally, the guidance clarifies that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on restructuring of payables (paragraph 470-60-55-10) when evaluating whether a restructuring constitutes a TDR. The Company has not yet evaluated whether the clarifications provided in ASU 2011-02 will change the amount of loan modifications or restructurings classified as TDR.

ASU 2011-01, Deferral of the Effective Date of Disclosures about TDR in Update No. 2010-20, deferred additional disclosures regarding TDR’s required by ASU 2010-20 until ASU 2011-02 was issued. For interim and annual periods ending after June 15, 2011, entities are required to enhance existing disclosures about the allowance for credit losses and the credit quality of financing receivables to include, at minimum, the nature and extent of a creditor’s defaulted TDR and financing receivables modified as TDR within the previous 12 months.

4. 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 3,866 stock options granted in 2011, all of which become exercisable on January 6, 2013. There were 423,695 stock options granted in 2010 and there were 32,000 stock options granted in 2009 under the 2007 Plan. For 418,000 of the options granted in 2010, one-half of the total options granted become exercisable on each of December 31, 2010 and 2011. The remainder of the options granted in 2010 become exercisable on October 7, 2012. For the options granted in 2009, one third of the total options granted become exercisable on each of December 31, 2009, 2010 and 2011. The option period for each grant expires no more than 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 under it. All of the options awarded became exercisable on the date of grant except that options granted in 2009 became exercisable over three years beginning on December 31, 2009. All options expire 10 years from the date of grant.

Expenses related to stock option grants are included with salaries and employee benefits. The Company recognized $99,000 in stock option expenses for the three months ended March 31, 2011. The Company expects to recognize additional expenses of $288,000 for the remainder of 2011.

A summary of activity in the plans is as follows:

		For the three months ended March 31, 2011
						Weighted				Aggregate
						average				intrinsic value
		Shares				exercise price				(in thousands)
Outstanding at beginning of year			2,237,322			$	6.88
Granted			3,866				1.50
Exercised			—				—
Forfeited			(161,849	)			7.46
Outstanding at end of period			2,079,339			$	6.82			$	1
Options exercisable at end of period			1,770,546			$	7.66			$	—

Information related to the stock option plans for the three months ended March 31, 2011 follows:

		March 31, 2011
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		$	0.97

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

The fair value of options granted during the first quarter 2011 was determined using the following weighted-average assumptions as of the grant date.

		January 6, 2011
Risk-free interest rate			2.09	%
Expected term (years)			5
Expected stock volatility			79.9
Dividend yield			—	%

Outstanding stock options have a weighted average remaining life of 4.75 years and may be exercised in the range of $1.30 to $12.38.

Restricted Stock Awards:

The 2007 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 53,207, 13,328 of which were issued on January 6, 2011 and 39,879 were issued in 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 $18,000 in restricted stock award expenses for the three months ended March 31, 2011. The Company expects to recognize additional expenses of approximately $70,000 for the remainder of 2011.

A summary of changes in the Company’s nonvested restricted shares for the first quarter 2011 is as follows:

						Weighted
						average grant
		Shares				date fair value
Nonvested shares at January 1, 2011			39,879			$	1.32
Granted			13,328				1.50
Vested			—				—
Forfeited			—				—
Nonvested shares at March 31, 2011			53,207			$	1.37

5. SECURITIES

Components of the available for sale portfolio are as follows:

		March 31, 2011
		(Dollars in thousands)
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
U.S. Treasury and government sponsored entities’ securities		$	64,849			$	—			$	(1,984	)		$	62,865
Equity securities			192				135				—				327
Mortgage-backed securities GSE issued: residential			229,702				99				(3,605	)			226,196
Total		$	294,743			$	234			$	(5,589	)		$	289,388

		December 31, 2010
		(Dollars in thousands)
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
U.S. Treasury and government sponsored entities’ securities		$	65,099			$	—			$	(2,164	)		$	62,935
Equity securities			235				159				—				394
Mortgage-backed securities GSE issued: residential			300,290				1,688				(3,265	)			298,713
Total		$	365,624			$	1,847			$	(5,429	)		$	362,042

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

		March 31, 2011
		(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			64,849				62,865
Mortgage-backed securities: residential			229,702				226,196
Total		$	294,551			$	289,061

Securities pledged for the Company’s investment in VISA stock were approximately $5.7 million at March 31, 2011 and December 31, 2010. Securities pledged for public funds deposits were $383,000 at March 31, 2011, and $864,000 at December 31, 2010. Securities sold under an agreement to repurchase are secured primarily by mortgage-backed securities with a fair value of approximately $127.9 million at March 31, 2011, and $129.4 million at December 31, 2011.

United Community had no securities classified as trading as of March 31, 2011 or December 31, 2010.

The following table summarizes the investment securities with unrealized losses at March 31, 2011 and December 31, 2010 by aggregated major security type and length of time in a continuous unrealized loss position:

		March 31, 2011
		(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		$	62,865			$	(1,984	)		$	—			$	—			$	62,865			$	(1,984	)
Mortgage-backed securities GSE issued: residential			228,392				(3,605	)			—				—				228,392				(3,605	)
Total		$	291,257			$	(5,589	)		$	—			$	—			$	291,257			$	(5,589	)

		December 31, 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		$	62,935			$	(2,164	)		$	—			$	—			$	62,935			$	(2,164	)
Mortgage-backed securities GSE issued: residential			203,569				(3,265	)			—				—				203,569				(3,265	)
Total		$	266,504			$	(5,429	)		$	—			$	—			$	266,504			$	(5,429	)

All of the U.S. Treasury and government sponsored entities’ mortgage backed securities that are temporarily impaired at March 31, 2011, 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 $87.6 million and $118.9 million for the three months ended March 31, 2011 and 2010, respectively. Gross gains of $1.3 million and $2.8 million and no gross losses were realized on these sales during the first quarter of 2011 and 2010, respectively.

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

The Company recognized a $10,000 OTTI charge on an equity investment in another financial institution in the first quarter of 2011. That financial institution consented to a regulatory enforcement action, diminishing the chance of fair value recovery in the foreseeable future.

As of March 31, 2011, the Company’s security portfolio consisted of 37 securities, 23 of which were in an unrealized loss position totaling approximately $5.6 million.

6. LOANS

Portfolio loans consist of the following:

		March 31,				December 31,
		2011				2010
		(Dollars in thousands)
Real Estate:
One-to four-family residential		$	762,065			$	757,426
Multi-family residential			131,246				135,771
Nonresidential			328,772				331,390
Land			25,624				25,138
Construction:
One-to four-family residential and land development			88,075				108,583
Multi-family and nonresidential			11,201				15,077
Total real estate			1,346,983				1,373,385
Consumer
Home equity			216,386				220,582
Auto			11,179				11,525
Marine			6,807				7,285
Recreational vehicles			34,066				35,671
Other			4,040				4,390
Total consumer			272,478				279,453
Commercial
Secured			31,574				28,876
Unsecured			14,198				17,428
Total commercial			45,772				46,304
Total loans			1,665,233				1,699,142
Less:
Allowance for loan losses			46,415				50,883
Deferred loan costs, net			(1,276	)			(1,227	)
Total			45,139				49,656
Loans, net		$	1,620,094			$	1,649,486

The Bank Order required Home Savings to adopt and implement plans to reduce loan concentrations in nonowner-occupied commercial real estate loans and in construction, land development and land loans. A concentration reduction plan was implemented in the third quarter of 2008. The concentration reduction plan included sharply reducing the origination of new construction, land, and land development loans, as well as loans secured by commercial real estate. The Company has also reduced the level of construction loans purchased from another financial institution.

Changes in the allowance for loan losses are as follows:

		Quarter ended				Quarter ended
		March 31,				March 31,
		2011				2010
		(Dollars in thousands)
Balance, beginning of year		$	50,883			$	42,287
Provision for loan losses			2,192				12,450
Amounts charged off			(7,226	)			(7,140	)
Recoveries			566				171
Balance, end of year		$	46,415			$	47,768

The following tables present activity and the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of and for the quarter ended March 31, 2011 and the year ended December 31, 2010.

Allowance For Loan Losses
(Dollars in thousands)
		Permanent
		Real Estate				Construction				Consumer				Commercial
		Loans				Loans				Loans				Loans				Unallocated				Total
March 31, 2011
Beginning balance		$	28,066			$	8,533			$	5,260			$	9,024			$	—			$	50,883
Provision			1,554				(464	)			592				510				—				2,192
Chargeoffs			(2,878	)			(2,352	)			(1,030	)			(966	)			—				(7,226	)
Recoveries			249				57				174				86				—				566
Net chargeoffs			(2,629	)			(2,295	)			(856	)			(880	)			—				(6,660	)
Ending balance		$	26,991			$	5,774			$	4,996			$	8,654			$	—			$	46,415
Period-end amount allocated to:
Loans individually evaluated for impairment		$	5,069			$	3,334			$	—			$	3,858			$	—			$	12,261
Loans collectively evaluated for impairment			21,922				2,440				4,996				4,796				—				34,154
Ending balance		$	26,991			$	5,774			$	4,996			$	8,654			$	—			$	46,415
Period-end balances:
Loans individually evaluated for impairment		$	106,023			$	47,687			$	1,373			$	14,515			$	—			$	169,598
Loans collectively evaluated for impairment			1,141,684				51,589				271,105				31,257				—				1,495,635
Ending balance		$	1,247,707			$	99,276			$	272,478			$	45,772			$	—			$	1,665,233

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

Allowance For Loan Losses
(Dollars in thousands)
		Permanent
		Real Estate				Construction				Consumer				Commercial
		Loans				Loans				Loans				Loans				Unallocated				Total
December 31, 2010
Beginning balance		$	15,288			$	19,020			$	4,959			$	3,020			$	—			$	42,287
Provision			40,595				10,028				4,079				7,725				—				62,427
Chargeoffs			(28,153	)			(20,648	)			(4,316	)			(1,962	)			—				(55,079	)
Recoveries			336				133				538				241				—				1,248
Net chargeoffs			(27,817	)			(20,515	)			(3,778	)			(1,721	)			—				(53,831	)
Ending balance		$	28,066			$	8,533			$	5,260			$	9,024			$	—			$	50,883
Period-end amount allocated to:
Loans individually evaluated for impairment		$	7,509			$	3,360			$	—			$	2,575			$	—			$	13,444
Loans collectively evaluated for impairment			20,557				5,173				5,260				6,449				—				37,439
Ending balance		$	28,066			$	8,533			$	5,260			$	9,024			$	—			$	50,883
Period-end balances:
Loans individually evaluated for impairment**		$	101,410			$	47,054			$	1,547			$	6,444			$	—			$	156,455
Loans collectively evaluated for impairment			1,148,315				76,606				277,906				39,860				—				1,542,687
Ending balance		$	1,249,725			$	123,660			$	279,453			$	46,304			$	—			$	1,699,142

**		Revised to include impaired loans without specific allocations.

Impaired loans consisted of the following:

		As of or for				As of or for
		the three				the three				As of or for
		months				months				the year
		ended				ended				ended
		March 31,				March 31,				December 31,
		2011				2010				2010
		(Dollars in thousands)
Impaired loans on which no specific valuation allowance was provided		$	85,709			$	97,340			$	71,853
Impaired loans on which specific valuation allowance was provided			83,889				51,617				84,602
Total impaired loans at end of period		$	169,598			$	148,957			$	156,455
Specific valuation allowances on impaired loans at year-end			12,261				9,040				13,444
Average impaired loans during year			163,028				133,881				144,977
Interest income recognized on impaired loans during the year			702				294				1,778
Interest income received on impaired loans during the year			1,215				294				4,570

The following table presents loans individually evaluated for impairment by class of loans as of and for the quarter ended March 31, 2011:

Impaired Loans
(Dollars in thousands)
										Allowance
		Unpaid								for Loan				Average				Interest				Cash Basis
		Principal				Recorded				Losses				Recorded				Income				Income
		Balance				Investment				Allocated				Investment				Recognized				Recognized
With no specific allowance recorded
Permanent real estate
One-to four-family residential		$	32,380			$	26,895			$	217			$	25,702			$	121			$	175
Multifamily residential			2,921				2,491				—				2,633				—				43
Nonresidential			35,974				27,775				—				19,924				93				244
Land			7,872				6,311				63				5,810				11				22
Total			79,147				63,472				280				54,069				225				484
Construction loans
One-to four-family residential			28,341				18,719				71				20,901				27				87
Multifamily and nonresidential			707				382				—				382				—				—
Total			29,048				19,101				71				21,283				27				87
Consumer loans
Home Equity			2,904				1,250				—				1344				2				9
Auto			87				69				5				62				—				2
Marine			—				—				—				—				—				—
Recreational vehicle			113				47				—				47				—				1
Other			7				7				—				7				—				—
Total			3,111				1,373				5				1,460				2				12
Commercial loans
Secured			3,639				1,510				48				1,583				7				8
Unsecured			12,171				253				—				386				—				10
Total			15,810				1,763				48				1,969				7				18
Total		$	127,116			$	85,709			$	404			$	78,781			$	261			$	601

Impaired Loans
(Dollars in thousands)
										Allowance
		Unpaid								for Loan				Average				Interest				Cash Basis
		Principal				Recorded				Losses				Recorded				Income				Income
		Balance				Investment				Allocated				Investment				Recognized				Recognized
With a specific allowance recorded
Permanent real estate
One-to four-family residential		$	1,278			$	1,073			$	160			$	1,029			$	—			$	9
Multifamily residential			7,529				6,283				1,065				7,498				—				10
Nonresidential			36,938				34,605				3,708				40,696				264				367
Land			1,127				590				136				425				—				4
Total			46,872				42,551				5,069				49,648				264				390
Construction loans
One-to four-family residential			42,874				28,586				3,334				26,088				59				94
Multifamily and nonresidential			—				—				—				—				—				—
Total			42,874				28,586				3,334				26,088				59				94
Consumer loans
Home Equity			—				—				—				—				—				—
Auto			—				—				—				—				—				—
Marine			—				—				—				—				—				—
Recreational vehicle			—				—				—				—				—				—
Other			—				—				—				—				—				—
Total			—				—				—				—				—				—
Commercial loans
Secured			11,526				9,587				1,626				5,051				118				118
Unsecured			3,166				3,165				2,232				3,460				—				12
Total			14,692				12,752				3,858				8,511				118				130
Total			104,438				83,889				12,261				84,247				441				614
Total		$	231,554			$	169,598			$	12,665			$	163,028			$	702			$	1,215