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 þ		Non-accelerated filer o		Small reporting company o

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. 30,897,826 common shares as of October 31, 2009.

 

 

TABLE OF CONTENTS

		PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of September 30, 2009 (Unaudited) and December 31, 2008			1
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2009 and 2008 (Unaudited)			2
Consolidated Statement of Shareholders’ Equity for the Nine Months ended September 30, 2009 (Unaudited)			4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008 (Unaudited)			5
Notes to Consolidated Financial Statements			6-23
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24-35
Item 3. Quantitative and Qualitative Disclosures about Market Risk			36
Item 4. 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			38
Item 3. Defaults Upon Senior Securities (None)
Item 4. Submission of Matters to a Vote of Security Holders (None)
Item 5. Other Information (None)
Item 6. Exhibits			38
Signatures			39
Exhibits
Exhibit 10
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I — FINANCIAL INFORMATION

ITEM 1.		Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

(Unaudited)

		September 30,				December 31,
		2009				2008
		(Dollars in thousands)
Assets:
Cash and deposits with banks		$	20,736			$	21,745
Federal funds sold and other			17,222				21,672
Total cash and cash equivalents			37,958				43,417
Securities:
Available for sale, at fair value			296,461				215,731
Loans held for sale			73,924				16,032
Loans, net of allowance for loan losses of $38,845 and $35,962, respectively			1,919,803				2,203,453
Federal Home Loan Bank stock, at cost			26,464				26,464
Premises and equipment, net			23,899				25,015
Accrued interest receivable			8,853				10,082
Real estate owned and other repossessed assets			27,607				29,258
Core deposit intangible			712				884
Cash surrender value of life insurance			25,904				25,090
Assets of discontinued operations—Butler Wick Corp.			—				5,562
Other assets			20,600				17,085
Total assets		$	2,462,185			$	2,618,073
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Interest bearing		$	1,640,411			$	1,779,676
Non-interest bearing			115,092				106,255
Total deposits			1,755,503				1,885,931
Borrowed funds:
Federal Home Loan Bank advances			347,775				337,603
Repurchase agreements and other borrowings			95,934				125,269
Total borrowings			443,709				462,872
Advance payments by borrowers for taxes and insurance			12,950				19,806
Accrued interest payable			2,078				3,077
Liabilities of discontinued operations—Butler Wick Corp.			—				2,388
Accrued expenses and other liabilities			12,019				9,076
Total liabilities			2,226,259				2,383,150
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			145,568				146,439
Retained earnings			164,936				165,447
Accumulated other comprehensive income			4,654				3,635
Unearned employee stock ownership plan shares			(6,277	)			(7,643	)
Treasury stock, at cost, 6,906,632 shares			(72,955	)			(72,955	)
Total shareholders’ equity			235,926				234,923
Total liabilities and shareholders’ equity		$	2,462,185			$	2,618,073

See Notes to Consolidated Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(Dollars in thousands, except per share data)
Interest income
Loans		$	29,389			$	33,503			$	90,532			$	103,246
Loans held for sale			99				76				578				352
Securities:
Trading			—				2				—				3
Available for sale			2,925				3,781				8,491				10,826
Federal Home Loan Bank stock dividends			330				352				923				1,032
Other interest earning assets			12				34				50				119
Total interest income			32,755				37,748				100,574				115,578
Interest expense
Deposits			11,037				14,451				35,762				46,007
Federal Home Loan Bank advances			1,348				3,069				4,775				9,952
Repurchase agreements and other			965				1,421				3,216				4,964
Total interest expense			13,350				18,951				43,753				60,923
Net interest income			19,405				18,797				56,821				54,655
Provision for loan losses			5,579				8,995				26,334				14,709
Net interest income after provision for loan losses			13,826				9,802				30,487				39,946
Non-interest income
Non-deposit investment income			366				419				1,074				1,329
Service fees and other charges			2,012				2,103				6,245				6,391
Net gains (losses):
Securities available for sale			481				—				1,863				988
Other than temporary impairment charges on securities available for sale			(572	)			(5,029	)			(722	)			(5,029	)
Trading securities			—				(14	)			—				(38	)
Mortgage banking income			559				292				3,487				2,871
Real estate owned and other repossessed assets sold			(3,964	)			(1,156	)			(6,301	)			(2,830	)
Other income			1,237				1,011				3,421				3,122
Total non-interest income			119				(2,374	)			9,067				6,804
Non-interest expense
Salaries and employee benefits			7,558				8,228				23,345				26,288
Goodwill impairment charge			—				33,593				—				33,593
Occupancy			915				910				2,798				2,757
Equipment and data processing			1,578				1,839				4,968				5,108
Franchise tax			537				472				1,684				1,596
Advertising			261				302				677				784
Amortization of core deposit intangible			54				69				172				220
Deposit insurance premiums			1,531				1,546				6,254				1,816
Professional fees			951				885				2,574				2,136
Real estate owned and other repossessed asset expenses			527				449				2,282				1,536
Other expenses			1,473				1,224				4,232				3,807
Total non-interest expenses			15,385				49,517				48,986				79,641
Loss before income taxes and discontinued operations			(1,440	)			(42,089	)			(9,432	)			(32,891	)
Income tax benefit			(573	)			(3,132	)			(3,972	)			(3	)
Net loss before discontinued operations			(867	)			(38,957	)			(5,460	)			(32,888	)
Discontinued operations
Net income of Butler Wick Corp., net of tax			—				403				4,949				1,106
Net loss		$	(867	)		$	(38,554	)		$	(511	)		$	(31,782	)

(Continued)

(Continued)

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(Dollars in thousands, except per share data)
Comprehensive income (loss)		$	1,163			$	(35,135	)		$	508			$	(32,688	)
Earnings (loss) per share
Basic—continuing operations		$	(0.03	)		$	(1.32	)		$	(0.19	)		$	(1.12	)
Basic—discontinued operations			—				0.01				0.17				0.04
Basic			(0.03	)			(1.31	)			(0.02	)			(1.08	)
Diluted—continuing operations			(0.03	)			(1.32	)			(0.19	)			(1.12	)
Diluted—discontinued operations			—				0.01				0.17				0.04
Diluted			(0.03	)			(1.31	)			(0.02	)			(1.08	)

See notes to Consolidated Financial Statements

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(Unaudited)

																		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 loss											(511	)															(511	)
Change in net unrealized gain on securities, net of tax expense of $549															1,019												1,019
Comprehensive income																											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

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Nine Months Ended September 30,
		2009				2008
		(Dollars in thousands)
Cash Flows from Operating Activities
Net loss		$	(511	)		$	(31,782	)
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses			26,334				14,709
Mortgage banking income			(3,487	)			(2,871	)
Net losses on real estate owned and other repossessed assets sold			6,301				2,830
Net gains on other assets sold			(17	)			(944	)
Other than temporary impairment of securities available for sale			722				5,029
Amortization of premiums and accretion of discounts			2,148				1,304
Depreciation and amortization			1,640				1,919
Federal Home Loan Bank stock dividends			—				(1,032	)
Decrease in interest receivable			1,229				2,016
Decrease in interest payable			(999	)			(2,663	)
Goodwill impairment charge			—				33,593
(Increase) decrease in prepaid and other assets			(4,977	)			7,163
Increase (decrease) in other liabilities			2,266				(10,970	)
Decrease in trading securities			—				274
Stock based compensation			75				150
Net principal disbursed on loans originated for sale			(295,926	)			(127,407	)
Proceeds from sale of loans originated for sale			311,363				209,989
ESOP Compensation			420				1,244
Operating cash flows from discontinued operations			(4,949	)			(1,052	)
Net cash from operating activities			41,632				101,499
Cash Flows from Investing Activities
Proceeds from principal repayments and maturities of:
Securities available for sale			42,139				45,408
Proceeds from sale of:
Securities available for sale			73,630				49,399
Real estate owned and other repossessed assets			11,459				10,884
Purchases of:
Securities available for sale			(196,295	)			(157,065	)
Net change in loans			172,872				23,891
Loans purchased			(2,090	)			(73,823	)
Purchases of premises and equipment			(482	)			(540	)
Investing cash flows from discontinued operations			8,123				2,690
Net cash from investing activities			109,356				(99,156	)
Cash Flows from Financing Activities
Net increase (decrease) in checking, savings and money market accounts			38,612				(34,622	)
Net (decrease) increase in certificates of deposit			(169,040	)			76,490
Net decrease in advance payments by borrowers for taxes and insurance			(6,856	)			(6,086	)
Proceeds from Federal Home Loan Bank advances			652,400				581,000
Repayment of Federal Home Loan Bank advances			(642,228	)			(599,819	)
Net change in repurchase agreements and other borrowed funds			(29,335	)			(14,437	)
Cash dividends paid			—				(4,064	)
Financing cash flows from discontinued operations			—				(3,194	)
Net cash from financing activities			(156,447	)			(4,732	)
Change in cash and cash equivalents			(5,459	)			(2,389	)
Cash and cash equivalents, beginning of period			43,417				33,502
Cash and cash equivalents, end of period		$	37,958			$	31,113

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, 39 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, 2009, are not necessarily indicative of the results to be expected for the year ending December 31, 2009. 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, 2008, contained in United Community’s Form 10-K for the year ended December 31, 2008.

Management has evaluated events occurring subsequent to the balance sheet date through November 9, 2009, determining no events require adjustment to or additional disclosure in the consolidated financial statements.

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 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. Because of the consent to the Bank Order, Home Savings is deemed ‘adequately capitalized’ for regulatory capital purposes, as discussed in Note 17 of the Consolidated Financial Statements.

United Community and Home Savings believe they are in full compliance with the OTS Order and Bank Order, however, some provisions require ongoing monitoring and testing.

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 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. Butler Wick’s results of operations summarized are as follows:

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(Dollars in thousands)								(Dollars in thousands)
Income
Interest income		$	—			$	174			$	32			$	590
Brokerage commissions			—				6,402				—				19,132
Service fees and other charges			—				1,410				1,287				4,582
Underwriting and investment banking			—				484				—				718
Gain on the sale of Butler Wick Trust			—				—				7,904				—
Other income			—				42				—				208
Total income			—				8,512				9,223				25,230
Expenses
Interest expense on borrowings			—				56				—				177
Salaries and employee benefits			—				5,909				1,198				17,480
Occupancy expenses			—				372				68				1,145
Equipment and data processing			—				633				84				1,839
Other expenses			—				922				258				2,861
Total expenses			—				7,892				1,608				23,502
Income before taxes			—				620				7,615				1,728
Income tax			—				217				2,666				622
Net income		$	—			$	403			$	4,949			$	1,106

4. RECENT ACCOUNTING DEVELOPMENTS

Accounting for Business Combinations: United Community adopted new guidance impacting Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805, Business Combinations (SFAS 141(R), “Business Combinations”), on January 1, 2009. This guidance was issued with the objective to improve the comparability of information that a company provides in its financial statements related to a business combination. This new guidance establishes principles and requirements for how the acquirer: (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This new guidance does not apply to combinations between entities under common control. The Company’s adoption of the new guidance had no impact on United Community’s financial statements.

Noncontrolling Interests in Consolidated Financial Statements: United Community adopted new guidance impacting FASB ASC 810-10, Consolidation (SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”), on January 1, 2009. A noncontrolling interest, also known as a “minority interest”, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. This guidance was issued with the objective to improve upon the consistency of financial information that a company provides in its consolidated financial statements. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company’s adoption of the new guidance did not have a material impact on United Community’s consolidated financial statements.

Disclosures about Derivative Instruments and Hedging Activities: United Community adopted new guidance impacting FASB ASC 815-10, Derivatives and Hedging (SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities”), on January 1, 2009. This guidance requires enhanced disclosures about an entity’s derivative and hedging activities and therefore should improve the transparency of financial reporting, and is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company’s adoption of the new guidance did not have a material impact on United Community’s consolidated financial statements.

Subsequent Events: United Community adopted FASB ASC 855, Subsequent Events (SFAS No. 165 “Subsequent Events”), on June 30, 2009. This guidance establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company’s adoption of this guidance did not have a material impact on United Community’s consolidated financial statements.

Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly: In April 2009, the FASB issued new guidance impacting FASB ASC 820, Fair Value Measurements and Disclosures (FASB Staff Position (FSP) FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”). This provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This also includes guidance on identifying circumstances that indicate a transaction is not orderly. The Company’s adoption of the new guidance did not have a material impact on United Community’s consolidated financial statements. See Note 11 to the Consolidated Financial Statements for disclosures required by this new guidance.

Interim Disclosures about Fair Value of Financial Instruments: United Community adopted new guidance impacting FASB ASC 825-10-50, Financial Instruments (FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”), effective June 30, 2009. This guidance amended existing GAAP to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The Company’s adoption of the new guidance did not have a material impact on United Community’s consolidated financial statements. See Note 11 to the Consolidated Financial Statements for disclosures required by this new guidance.

Recognition and Presentation of Other-Than-Temporary Impairments: In April 2009, the FASB issued new guidance impacting FASB ASC 320-10, Investments — Debt and Equity Securities (FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”). This guidance amends the other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The Company’s adoption of the new guidance did not have a material impact on United Community’s consolidated financial statements.

Recently Issued but not yet Effective Accounting Pronouncements:

Accounting for Transfers of Financial Assets: In June 2009, FASB issued SFAS No. 166 “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140.” 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; 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 new guidance will be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009 (for United Community this will be as of January 1, 2010), for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Management is still evaluating the impact of this accounting standard.

Amendments to FASB Interpretation No. 46(R): In June 2009, FASB issued SFAS No. 167 “Amendments to FASB Interpretation No. 46(R).” The objective of this new guidance is to amend 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. This guidance will be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009 (for United Community, this will be as of January 1, 2010), for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. Management is still evaluating the impact of this accounting standard.

5. STOCK COMPENSATION

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

The 1999 Plan provides for the grant of options, which may qualify as either incentive or nonqualified stock options. The incentive plan provides that option prices will not be less than the fair market value of the share at the grant date. The maximum number of common shares that may be issued under the plan is 3,569,766. There were 312,000 stock options granted in the first six months of 2009 under the 1999 plan, however, no additional options may be issued under the 1999 Plan. All of the previous options awarded became exercisable on the date of grant. For the options granted in 2009, one third of the total options granted become exercisable on December 31, 2009, 2010 and 2011. The option period for each grant expires 10 years from the date of grant.

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 shares, stock options, performance awards, stock appreciation rights (SARs), or other forms of stock-based incentive awards. There were 32,000 stock options granted in the first nine months of 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 become exercisable on December 31, 2009, 2010 and 2011. The option period for each grant expires 10 years from the date of grant.

A summary of activity in the plans is as follows:

		For the nine months ended September 30, 2009
										Aggregate
						Weighted				intrinsic
						average				value
		Shares				exercise price				(in thousands)
Outstanding at beginning of year			2,092,128			$	9.08
Granted			344,000				1.85
Exercised			—				—
Forfeited			(232,790	)			9.17
Outstanding at end of period			2,203,338			$	7.94			$	11
Options exercisable at end of period			1,859,338			$	9.41			$	4

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

		September 30,
		2009
Intrinsic value of options exercised		$	—
Cash received from option exercises			—
Tax benefit realized from option exercises			—
Weighted average fair value of options granted, per share			1.08

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model that uses assumptions noted in the table below. 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.

		May 8,				June 25,				August 7,				September 23,
		2009				2009				2009				2009
Risk-free interest rate			2.15	%			2.58	%			2.84	%			2.40	%
Expected term (years)			5				5				5				5
Expected stock volatility			67.4				67.8				76.7				77
Dividend yield			0.00	%			0.00	%			0.00	%			0.00	%

Outstanding stock options have a weighted average remaining life of 4.84 years and may be exercised in the range of $1.30 to $12.38.

6. SECURITIES

United Community categorizes securities as available for sale and trading. Components of the available for sale portfolio are as follows:

		September 30, 2009
						(Dollars in thousands)
						Gross				Gross
		Fair				Unrealized				Unrealized				Amortized
		Value				Gains				Losses				Cost
U.S. Treasury and government sponsored entities’ securities		$	49,066			$	354			$	(32	)		$	48,744
Equity securities			631				104				—				527
Mortgage-backed securities			246,764				6,229				(15	)			240,550
Total		$	296,461			$	6,687			$	(47	)		$	289,821

		December 31, 2008
		(Dollars in thousands)
						Gross				Gross
		Fair				Unrealized				Unrealized
		Value				Gains				Losses
U.S. Treasury and government sponsored entities’ securities		$	27,170			$	865			$	—
Equity securities			910				70				(411	)
Mortgage-backed securities			187,651				4,527				(107	)
Total		$	215,731			$	5,462			$	(518	)

The amortized cost and fair value of the investment securities portfolio are shown by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

		September 30, 2009
		(Dollars in thousands)
		Fair				Amortized
		Value				Cost
Due in one year or less		$	520			$	499
Due after one year through five years			40,092				40,076
Due after five years through ten years			8,454				8,169
Mortgage-backed securities			246,764				240,550
Total		$	295,830			$	289,294

Home Savings holds in its available for sale securities portfolio a Fannie Mae auction rate pass through trust security with an original cost basis of $5.0 million. This security represents an interest in a trust that is collateralized with Fannie Mae non-cumulative preferred stock. The market value of the security held by the Company declined following the September 7, 2008 announcement of the appointment of a conservator for Fannie Mae. Because the effects of the conservatorship may trigger the redemption provisions of the trust, United Community’s management determined it was necessary for the Company to recognize a write-down of $4.9 million in 2008 and an additional write-down of $26,000 in the first quarter of 2009.

The Company owns equity investments in the common shares of several financial institutions. A write-down of the Company’s equity investment in the common shares of three financial institutions of $1.2 million was recognized in 2008. The Company determined that in the first quarter of 2009, further deterioration of the investment in one of those financial institutions caused the need to recognize an additional loss of $124,000. The deterioration was a result of recent regulatory enforcement actions imposed on that institution by its regulatory authorities. In the third quarter of 2009, an impairment charge aggregating $573,000 was necessary as a result of several securities trading below cost for a period of twelve months or more.

Securities pledged for public funds deposits were approximately $406,000 at September 30, 2009, and $2.1 million at December 31, 2008. Securities sold under an agreement to repurchase are secured primarily by mortgage-backed securities with a fair value of approximately $107.2 million at September 30, 2009, and $131.5 million at December 31, 2008.

United Community had no securities classified as trading as of September 30, 2009 and December 31, 2008.

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

		September 30, 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		$	4,980			$	(32	)		$	—			$	—			$	4,980			$	(32	)
Equity securities			—				—				—				—				—				—
Mortgage-backed securities			2,219				(9	)			550				(6	)			2,769				(15	)
Total		$	7,199			$	(41	)		$	550			$	(6	)		$	7,749			$	(47	)

Proceeds from sales and calls of securities available for sale were $27.6 million and $0 for the three months ended September 30, 2009 and 2008, respectively. Gross gains of $481,000 and $0 and gross losses of $0 and $0 were realized on these sales during 2009 and 2008, respectively.

Proceeds from sales and calls of securities available for sale were $73.6 million and $49.4 million for the nine months ended September 30, 2009 and 2008, respectively. Gross gains of $1.9 million and $988,000 and gross losses of $0 and $0 were realized on these sales during 2009 and 2008, 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 other-than-temporary decline 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 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.

As of September 30, 2009, the Company’s security portfolio consisted of 65 securities, five of which were in an unrealized loss position totaling $47,000.

Mortgage-backed Securities

At September 30, 2009, 100% of the mortgage-backed securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2009.

7. LOANS

Portfolio loans consist of the following:

		September 30,				December 31,
		2009				2008
		(Dollars in thousands)
Real Estate:
One- to four-family residential		$	771,891			$	909,567
Multifamily residential			158,342				187,711
Nonresidential			407,853				375,463
Land			23,625				23,517
Construction:
One- to four-family residential			190,123				255,355
Multifamily and non-residential			13,675				35,797
Total real estate			1,565,509				1,787,410
Consumer			320,106				348,834
Commercial			71,727				101,489
Total loans			1,957,342				2,237,733
Less:
Allowance for loan losses			38,845				35,962
Deferred loan fees, net			(1,306	)			(1,682	)
Total			37,539				34,280
Loans, net		$	1,919,803			$	2,203,453

Changes in the allowance for loan loss are as follows:

		Three months ended				Nine months ended				Twelve months ended
		September 30,				September 30,				December 31,
		2009				2009				2008
		(Dollars in thousands)
Balance, beginning of period		$	39,832			$	35,962			$	32,006
Provision for loan losses			5,579				26,334				25,329
Amounts charged off			(6,728	)			(24,234	)			(22,088	)
Recoveries			162				783				715
Balance, end of period		$	38,845			$	38,845			$	35,962

Non-accrual loans were $107.5 million and $98.3 million at September 30, 2009, and December 31, 2008, respectively. Restructured loans were $1.9 million at September 30, 2009 and $1.8 million at December 31, 2008. Loans greater than 90 days past due and still accruing interest were $4.3 million and $6.6 million at September 30, 2009 and December 31, 2008, respectively.

Impaired loans consist of the following:

		As of or for the				As of or for
		Nine Months Ended				the Year Ended
		September 30,				December 31,
		2009				2008
		(Dollars in thousands)
Impaired loans on which no specific valuation allowance was provided		$	45,891			$	43,256
Impaired loans on which a specific valuation allowance was provided			52,342				43,992
Total impaired loans at period-end		$	98,233			$	87,248
Specific valuation allowances on impaired loans at period-end		$	7,545			$	10,968
Average impaired loans during the period			92,740				85,812
Interest income recognized on impaired loans during the period			484				513
Interest income received on impaired loans during the period			484				513

8. MORTGAGE BANKING ACTIVITIES

Mortgage loans serviced for others, which are not reported in United Community’s assets, totaled $991.6 million at September 30, 2009, and $921.0 million at December 31, 2008.

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

		Nine Months Ended				Year Ended
		September 30,				December 31,
		2009				2008
		(Dollars in thousands)
Balance, beginning of year		$	5,562			$	6,184
Originations			2,387				1,337
Amortized to expense			(1,999	)			(1,959	)
Balance, end of period			5,950				5,562
Less valuation allowance			(883	)			(2,233	)
Net balance		$	5,067			$	3,329

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

		Nine Months Ended				Year Ended
		September 30,				December 31,
		2009				2008
		(Dollars in thousands)
Balance, beginning of year		$	(2,233	)		$	(562	)
Impairment charges			—				(2,233	)
Recoveries			1,350				562
Balance, end of period		$	(883	)		$	(2,233	)

Fair value of mortgage servicing rights as of September 30, 2009 was approximately $6.2 million and at December 31, 2008 was $3.9 million.

Key economic assumptions in measuring the value of mortgage servicing rights at September 30, 2009 and December 31, 2008 were as follows:

		September 30,				December 31,
		2009				2008
Weighted average prepayment rate		433 PSA				644 PSA
Weighted average life (in years)			3.49				3.34
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, 2009 and December 31, 2008 were as follows:

		September 30,				December 31,
		2009				2008
		(Dollars in thousands)
Real estate owned and other repossessed assets		$	34,281			$	32,012
Valuation allowance			(6,674	)			(2,754	)
End of period		$	27,607			$	29,258

Activity in the valuation allowance was as follows:

		September 30,				December 31,
		2009				2008
		(Dollars in thousands)
Beginning of year		$	2,754			$	—
Additions charged to expense			6,220				3,753
Direct write-downs			(2,300	)			(999	)
End of period		$	6,674			$	2,754

Expenses related to foreclosed and repossessed assets include:

		Three months ended								Nine months ended
		September 30,								September 30,
		2009				2008				2009				2008
		(Dollars in thousands)								(Dollars in thousands)
Net loss on sales		$	137			$	662			$	1,287			$	938
Provision for unrealized losses			3,827				494				5,014				1,892
Operating expenses, net of rental income			527				449				2,282				1,536
Total expenses		$	4,491			$	1,605			$	8,583			$	4,366

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,
		2009				2008
		(Dollars in thousands)
Service cost		$	—			$	—
Interest cost			47				49
Expected return on plan assets			—				—
Net amortization of prior service cost			—				(1	)
Net amortization of actuarial gain			(4	)			(3	)
Net periodic benefit cost		$	43			$	45

		Nine Months Ended September 30,
		2009				2008
		(Dollars in thousands)
Service cost		$	—			$	—
Interest cost			141				145
Expected return on plan assets			—				—
Net amortization of prior service cost			—				(1	)
Net amortization of actuarial gain			(12	)			(9	)
Net periodic benefit cost		$	129			$	135

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 September 30, 2009 Using:
						Quoted Prices in
						Active Markets				Significant Other				Significant
						for Identical				Observable				Unobservable
		September 30,				Assets				Inputs				Inputs
		2009				(Level 1)				(Level 2)				(Level 3)
		(Dollars in thousands)
Assets:
Available for sale securities
US Treasury and government sponsored entities’ securities		$	49,066			$	—			$	49,066			$	—
Equity securities			631				631				—				—
Mortgage-backed securities			246,764				—				246,764				—

Fair Value Measurements at December 31, 2008 Using:

Quoted Prices in

Active Markets

Significant Other

Significant

for Identical

Observable

Unobservable

December 31,

Assets

Inputs

Inputs

2008

(Level 1)

(Level 2)

(Level 3)

(Dollars in thousands)

Assets:

Available for sale securities

$

215,731

$

809

$

214,922

$

—

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

						Fair Value Measurements at September 30, 2009 Using:
						Quoted Prices in
						Active Markets				Significant Other				Significant
						for Identical				Observable				Unobservable
		September 30,				Assets				Inputs				Inputs
		2009				(Level 1)				(Level 2)				(Level 3)
		(Dollars in thousands)
Assets:
Impaired loans		$	44,797				—				—			$	44,797
Mortgage servicing assets			2,741				—				2,741				—
Foreclosed assets			16,978				—				—				16,978

Fair Value Measurements at December 31, 2008 Using:

Quoted Prices in

Active Markets

Significant Other

Significant

for Identical

Observable

Unobservable

December 31,

Assets

Inputs

Inputs

2008

(Level 1)

(Level 2)

(Level 3)

(Dollars in thousands)

Assets:

Impaired loans

$

33,024

—

—

$

33,024

Mortgage servicing rights

2,421

—

2,421

—

Impaired loans with specific allocations of the allowance for loan losses, carried at fair value, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $52.3 million at September 30, 2009, with a specific valuation allowance of $7.5 million, resulting in additional provision for loan losses of $4.0 million during the period.

Mortgage servicing rights had a carrying amount of $6.0 million with a valuation allowance of $883,000, at September 30, 2009, and are valued by an independent third party that is active in purchasing and selling these instruments. The value reflects the characteristics of the underlying loans discounted at a market multiple.

Foreclosed assets, carried at fair value, which are measured for impairment using the fair value of the property less estimated selling costs, had a carrying amount of $23.7 million, with a valuation allowance of $6.7 million at September 30, 2009.

In accordance with generally accepted accounting principles, the carrying amounts and estimated fair values of financial instruments, at September 30, 2009 and December 31, 2008 are as follows:

		September 30, 2009								December 31, 2008
		Carrying				Fair				Carrying				Fair
		Value				Value				Value				Value
		(Dollars in thousands)
Assets:
Cash and cash equivalents		$	37,958			$	37,958			$	43,417			$	43,417
Securities:
Available for sale			296,461				296,461				215,731				215,731
Loans held for sale			73,924				75,512				16,032				16,358
Loans, net			1,919,803				1,923,553				2,203,453				2,203,606
Federal Home Loan Bank stock			26,464				n/a				26,464				n/a
Accrued interest receivable			8,853				8,853				10,082				10,082
Liabilities:
Deposits:
Checking, savings and money market accounts			(699,288	)			(699,288	)			(660,675	)			(660,675	)
Certificates of deposit			(1,056,215	)			(1,069,785	)			(1,225,256	)			(1,237,262	)
Federal Home Loan Bank advances			(347,775	)			(348,185	)			(337,603	)			(348,185	)
Repurchase agreements and other			(95,934	)			(106,934	)			(125,269	)			(138,862	)
Advance payments by borrowers for taxes and insurance			(12,950	)			(12,950	)			(19,806	)			(19,806	)
Accrued interest payable			(2,078	)			(2,078	)			(3,077	)			(3,077	)