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		Small reporting company þ

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

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

 

 

TABLE OF CONTENTS

		PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of March 31, 2010 (Unaudited) and December 31, 2009			1
Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2010 and 2009 (Unaudited)			2
Consolidated Statement of Shareholders’ Equity for the Three Months ended March 31, 2010 (Unaudited)			4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009 (Unaudited)			5
Notes to Consolidated Financial Statements (Unaudited)			6-21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22-31
Item 3. Quantitative and Qualitative Disclosures about Market Risk			32
Item 4T. Controls and Procedures			33
Part II. OTHER INFORMATION
Item 1. Legal Proceedings			34
Item 1A. Risk Factors			34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			34
Item 3. Defaults Upon Senior Securities (None)
Item 4. Reserved
Item 5. Other Information (None)
Item 6. Exhibits			34
Signatures			35
Exhibits
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I — FINANCIAL INFORMATION

ITEM 1.		Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

		March 31,				December 31,
		2010				2009
		(Dollars in thousands)
Assets:
Cash and deposits with banks		$	20,609			$	22,330
Federal funds sold and other			19,446				22,744
Total cash and cash equivalents			40,055				45,074
Securities:
Available for sale, at fair value			272,239				281,348
Loans held for sale			4,318				10,497
Loans, net of allowance for loan losses of $47,768 and $42,287, respectively			1,823,899				1,866,018
Federal Home Loan Bank stock, at cost			26,464				26,464
Premises and equipment, net			22,697				23,139
Accrued interest receivable			8,405				9,090
Real estate owned and other repossessed assets			35,418				30,962
Core deposit intangible			613				661
Cash surrender value of life insurance			26,475				26,198
Other assets			19,136				18,976
Total assets		$	2,279,719			$	2,338,427
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Interest bearing		$	1,602,851			$	1,642,722
Non-interest bearing			125,741				126,779
Total deposits			1,728,592				1,769,501
Borrowed funds:
Federal Home Loan Bank advances			214,099				221,323
Repurchase agreements and other			96,553				96,833
Total borrowed funds			310,652				318,156
Advance payments by borrowers for taxes and insurance			13,761				19,791
Accrued interest payable			1,751				1,421
Accrued expenses and other liabilities			10,481				9,775
Total liabilities			2,065,237				2,118,644
Shareholders’ Equity
Preferred stock-no par value; 1,000,000 shares authorized and unissued			—				—
Common stock-no par value; 499,000,000 shares authorized; 37,804,457 shares issued and 30,897,825 shares outstanding			145,586				145,775
Retained earnings			143,532				148,674
Accumulated other comprehensive income			3,685				4,110
Unearned employee stock ownership plan shares			(5,366	)			(5,821	)
Treasury stock, at cost, 6,906,632 shares			(72,955	)			(72,955	)
Total shareholders’ equity			214,482				219,783
Total liabilities and shareholders’ equity		$	2,279,719			$	2,338,427

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

		For the Three Months Ended
		March 31,
		2010				2009
		(Dollars in thousands, except per share data)
Interest income
Loans		$	25,843			$	31,067
Loans held for sale			70				263
Available for sale securities			2,585				2,770
Federal Home Loan Bank stock dividends			300				299
Other interest earning assets			7				29
Total interest income			28,805				34,428
Interest expense
Deposits			9,318				12,651
Federal Home Loan Bank advances			848				1,858
Repurchase agreements and other			923				1,190
Total interest expense			11,089				15,699
Net interest income			17,716				18,729
Provision for loan losses			12,450				8,444
Net interest income after provision for loan losses			5,266				10,285
Non-interest income
Non-deposit investment income			428				304
Service fees and other charges			1,751				1,512
Net gains (losses):
Securities available for sale			2,843				—
Other -than-temporary loss in equity securities
Total impairment loss			—				(150	)
Loss recognized in other comprehensive income			—				—
Net impairment loss recognized in earnings			—				(150	)
Mortgage banking income			386				1,140
Real estate owned and other repossessed assets			(1,484	)			(1,138	)
Gain on sale of retail branch			1,387				—
Other income			1,249				1,075
Total non-interest income			6,560				2,743
Non-interest expense
Salaries and employee benefits			8,174				8,023
Occupancy			1,004				984
Equipment and data processing			1,667				1,730
Franchise tax			511				592
Advertising			222				229
Amortization of core deposit intangible			48				60
Deposit insurance premiums			1,461				1,783
Professional fees			1,033				716
Real estate owned and other repossessed asset expenses			607				951
Other expenses			2,241				1,331
Total non-interest expenses			16,968				16,399
Income (loss) from continuing operations before income taxes			(5,142	)			(3,371	)
Income tax expense (benefit)			—				(1,692	)
Net income (loss) from continuing operations			(5,142	)			(1,679	)
Discontinued operations
Net income of Butler Wick Corp., net of tax			—				4,949
Net income (loss)		$	(5,142	)		$	3,270

(Continued)

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

		For the Three Months Ended
		March 31,
		2010				2009
Comprehensive income (loss)		$	(5,567	)		$	4,180
Earnings (loss) per share
Basic—continuing operations		$	(0.17	)		$	(0.06	)
Basic—discontinued operations			—				0.17
Basic—net income (loss)			(0.17	)			0.11
Diluted—continuing operations			(0.17	)			(0.06	)
Diluted—discontinued operations			—				0.17
Diluted—net income (loss)			(0.17	)			0.11

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

																		Unearned
														Accumulated				Employee
														Other				Stock
		Shares				Common				Retained				Comprehensive				Ownership				Treasury
		Outstanding				Stock				Earnings				Income (Loss)				Plan Shares				Stock				Total
		(Dollars in thousands, except share data)
Balance December 31, 2009			30,898			$	145,775			$	148,674			$	4,110			$	(5,821	)		$	(72,955	)		$	219,783
Comprehensive loss:
Net loss											(5,142	)															(5,142	)
Change in net unrealized gain on securities, net of tax expense of $230															(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

																		Unearned
														Accumulated				Employee
														Other				Stock
		Shares				Common				Retained				Comprehensive				Ownership				Treasury
		Outstanding				Stock				Earnings				Income (Loss)				Plan Shares				Stock				Total
		(Dollars in thousands, except share data)
Balance December 31, 2008			30,898			$	146,439			$	165,447			$	3,635			$	(7,643	)		$	(72,955	)		$	234,923
Comprehensive income:
Net income											3,270																3,270
Change in net unrealized gain on securities, net of tax expense of $490															910												910
Comprehensive income																											4,180
Shares allocated to ESOP participants							(261	)											455								194
Balance March 31, 2009			30,898			$	146,178			$	168,717			$	4,545			$	(7,188	)		$	(72,955	)		$	239,297

See Notes to Consolidated Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

		Three Months Ended March 31,
		2010				2009
		(Dollars in thousands)
Cash Flows from Operating Activities
Net income (loss)		$	(5,142	)		$	3,270
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses			12,450				8,444
Mortgage banking income			(386	)			(1,140	)
Net losses on real estate owned and other repossessed assets sold			1,484				1,138
Net gain on retail branch sold			(1,387	)			—
Net gain on available for sale securities sold			(2,843	)			—
Net gains on other assets sold			(3	)			(21	)
Other than temporary impairment of securities available for sale			—				150
Amortization of premiums and accretion of discounts			971				1,061
Depreciation and amortization			509				586
Decrease in interest receivable			685				845
(Decrease) increase in interest payable			330				(38	)
Increase in prepaid and other assets			(1,366	)			(4,150	)
Increase in other liabilities			882				2,436
Stock based compensation			31				—
Net principal disbursed on loans originated for sale			(39,870	)			(134,445	)
Proceeds from sale of loans originated for sale			44,650				137,447
ESOP Compensation			235				194
Operating cash flows from discontinued operations			—				(4,949	)
Net cash from operating activities			11,230				10,828
Cash Flows from Investing Activities
Proceeds from principal repayments and maturities of:
Securities available for sale			14,136				10,011
Proceeds from sale of:
Securities available for sale			118,947				—
Real estate owned and other repossessed assets			3,222				3,085
Fixed assets			20				—
Purchases of:
Securities available for sale			(122,131	)			(42,050	)
Net change in loans			21,576				76,035
Loans purchased			(1,206	)			(1,476	)
Purchases of premises and equipment			(75	)			(190	)
Sale of retail branch			(22,503	)			—
Investing cash flows from discontinued operations			—				11,921
Net cash from investing activities			11,986				57,336
Cash Flows from Financing Activities
Net increase in checking, savings and money market accounts			14,474				19,872
Net decrease in certificates of deposit			(29,175	)			(70,288	)
Net decrease in advance payments by borrowers for taxes and insurance			(6,030	)			(5,739	)
Proceeds from Federal Home Loan Bank advances			257,000				172,000
Repayment of Federal Home Loan Bank advances			(264,224	)			(174,775	)
Net change in repurchase agreements and other borrowed funds			(280	)			(5,868	)
Net cash from financing activities			(28,235	)			(64,798	)
Change in cash and cash equivalents			(5,019	)			3,366
Cash and cash equivalents, beginning of period			45,074				43,417
Cash and cash equivalents, end of period		$	40,055			$	46,783

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 three months ended March 31, 2010, are not necessarily indicative of the results to be expected for the year ending December 31, 2010. The consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2009, contained in United Community’s Form 10-K for the year ended December 31, 2009.

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

2. REGULATORY ENFORCEMENT ACTION

On August 8, 2008, the board of directors of United Community approved a Stipulation and Consent to Issuance of Order to Cease and Desist (OTS Order) with the 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 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 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:

		Three
		Months
		Ended
		March 31,
		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 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. 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 should 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 that 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 are 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.

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 provided 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 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 became exercisable on December 31, 2009, with the remaining two-thirds vesting equally on December 31, 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, stock options, performance awards, stock appreciation rights (SARs), or other forms of stock-based incentive awards. There were 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. The option period for each grant expires 10 years from the date of grant.

Expenses related to stock option grants is included with salaries and employee benefits. The Company recognized $31,000 in stock option expenses for the three months ended March 31, 2010. The Company will recognize additional expenses of $92,000 for the remainder of 2010 and $122,000 in 2011.

A summary of activity in the plans is as follows:

		For the three months ended March 31, 2010
						Weighted				Aggregate
						average				intrinsic value
		Shares				exercise price				(in thousands)
Outstanding at beginning of year			2,200,672			$	7.95
Granted			—				—
Exercised			—				—
Forfeited			(337,147	)			8.45
Outstanding at end of period			1,863,525			$	7.76			$	5
Options exercisable at end of period			1,647,540			$	8.64			$	2

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

		March 31, 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			n/a

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.

Outstanding stock options have a weighted average remaining life of 4.55 years and may be exercised in the range of $1.30 to $12.38.

6. SECURITIES

Components of the available for sale portfolio are as follows:

		March 31, 2010
		(Dollars in thousands)
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
U.S. Treasury and government sponsored entities’ securities		$	48,534			$	95			$	—			$	48,629
Equity securities			293				157				—				450
Mortgage-backed securities GSE issued: residential			218,090				5,138				(68	)			223,160
Total		$	266,917			$	5,390			$	(68	)		$	272,239

		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:

		March 31, 2010
		(Dollars in thousands)
		Amortized				Fair
		Cost				Value
Due in one year or less		$	499			$	509
Due after one year through five years			40,034				40,034
Due after five years through ten years			8,001				8,086
Mortgage-backed securities: residential			218,090				223,160
Total		$	266,624			$	271,789

Securities pledged for the Company’s investment in VISA stock were approximately $1.1 million at March 31, 2010 and $1.2 million at December 31, 2009. Securities pledged for public funds deposits were approximately $1.9 million at March 31, 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 $115.3 million at March 31, 2010, and $125.7 million at December 31, 2009.

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

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

		March 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		$	—			$	—			$	—			$	—			$	—			$	—
Equity securities			—				—				—				—				—				—
Mortgage-backed securities GSE issued: residential			27,141				(68	)			—				—				27,141				(68	)
Total		$	27,141			$	(68	)		$	—			$	—			$	27,141			$	(68	)

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

All of the mortgage-related securities that are temporarily impaired at March 31, 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 $118.9 million and $0 for the three months ended March 31, 2010 and 2009, respectively. Gross gains of $2.9 million and $0 and gross losses of $25,000 and $0 were realized on these sales during 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 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.

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 institution to determine whether or not an OTTI charge is appropriate.

As of March 31, 2010, the Company’s security portfolio consisted of 45 securities, three of which were in an unrealized loss position totaling $68,100.

Mortgage-backed Securities

At March 31, 2010, 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 March 31, 2010.

7. LOANS

Portfolio loans consist of the following:

		March 31,				December 31,
		2010				2009
		(Dollars in thousands)
Real Estate:
One- to four-family residential		$	777,380			$	773,831
Multifamily residential			143,992				150,480
Nonresidential			389,407				397,895
Land			25,122				23,502
Construction:
One- to four-family residential			161,625				178,095
Multifamily and non-residential			14,682				13,741
Total real estate			1,512,208				1,537,544
Consumer			301,457				309,202
Commercial			56,726				60,217
Total loans			1,870,391				1,906,963
Less:
Allowance for loan losses			47,768				42,287
Deferred loan fees, net			(1,276	)			(1,342	)
Total			46,492				40,945
Loans, net		$	1,823,899			$	1,866,018

Changes in the allowance for loan loss are as follows:

		Three months				Three months
		ended				ended
		March 31,				March 31,
		2010				2009
		(Dollars in thousands)
Balance, beginning of period		$	42,287			$	35,962
Provision for loan losses			12,450				8,444
Amounts charged off			(7,140	)			(6,691	)
Recoveries			171				141
Balance, end of period		$	47,768			$	37,856

Non-accrual loans were $138.0 million and $112.2 million at March 31, 2010, and December 31, 2009, respectively. Restructured loans were $31.9 million at March 31, 2010 and $22.6 million at December 31, 2009. Loans greater than 90 days past due and still accruing interest were $536,000 and $3.7 million at March 31, 2010 and December 31, 2009, respectively.

Impaired loans consist of the following:

		As of or for the				As of or for
		Three				the Year
		Months Ended				Ended
		March 31,				December 31,
		2010				2009
		(Dollars in thousands)
Impaired loans on which no specific valuation allowance was provided		$	97,340			$	83,443
Impaired loans on which a specific valuation allowance was provided			51,617				36,362
Total impaired loans at period-end		$	148,957			$	119,805
Specific valuation allowances on impaired loans at period-end		$	9,040			$	4,064
Average impaired loans during the period			133,881				103,026
Interest income recognized on impaired loans during the period			294				2,056
Interest income received on impaired loans during the period			294				2,056

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

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

		Three Months
		Ended				Year Ended
		March 31,				December 31,
		2010				2009
		(Dollars in thousands)
Balance, beginning of year		$	6,228			$	5,562
Originations			446				3,220
Amortized to expense			(551	)			(2,554	)
Balance, end of period			6,123				6,228
Less valuation allowance			(319	)			(423	)
Net balance		$	5,804			$	5,805

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

		Three Months
		Ended				Year Ended
		March 31,				December 31,
		2010				2009
		(Dollars in thousands)
Balance, beginning of year		$	(423	)		$	(2,233	)
Impairment charges			—				—
Recoveries			104				1,810
Balance, end of period		$	(319	)		$	(423	)

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

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

		March 31,				December 31,
		2010				2009
Weighted average prepayment rate		322 PSA				325 PSA
Weighted average life (in years)			3.55				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 March 31, 2010 and December 31, 2009 were as follows:

		March 31,				December 31,
		2010				2009
		(Dollars in thousands)
Real estate owned and other repossessed assets		$	44,369			$	38,829
Valuation allowance			(8,951	)			(7,867	)
End of period		$	35,418			$	30,962

Activity in the valuation allowance was as follows:

		March 31,				December 31,
		2010				2009
		(Dollars in thousands)
Beginning of year		$	7,867			$	2,754
Additions charged to expense			1,646				7,925
Direct write-downs			(562	)			(2,812	)
End of period		$	8,951			$	7,867

Expenses related to foreclosed and repossessed assets include:

		Three months ended
		March 31,
		2010				2009
		(Dollars in thousands)
Net loss on sales		$	100			$	425
Provision for unrealized losses			1,384				713
Operating expenses, net of rental income			607				951
Total expenses		$	2,091			$	2,089

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 March 31,
		2010				2009
		(Dollars in thousands)
Service cost		$	—			$	—
Interest cost			47				47
Expected return on plan assets			—				—
Net amortization of prior service cost			—				—
Net amortization of actuarial gain			—				(4	)
Net periodic benefit cost		$	47			$	43
Assumptions used in the valuations were as follows:
Weighted average discount rate			5.75	%			6.00	%

11. FAIR VALUE MEASUREMENT

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Furthermore, a fair value hierarchy is established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of inputs that are used to measure fair values:

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

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

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

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

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

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

						Fair Value Measurements at March 31, 2010 Using:
						Quoted Prices in
						Active Markets				Significant Other				Significant
						for Identical				Observable				Unobservable
		March 31,				Assets				Inputs				Inputs
		2010				(Level 1)				(Level 2)				(Level 3)
		(Dollars in thousands)
Assets:
Available for sale securities
US Treasury and government sponsored entities’ securities		$	48,629			$	—			$	48,629			$	—
Equity securities			450				450				—				—
Mortgage-backed securities: residential			223,160				—				223,160				—

						Fair Value Measurements at December 31, 2009 Using:
						Quoted Prices in
						Active Markets				Significant Other				Significant
						for Identical				Observable				Unobservable
		December 31,				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		$	48,922			$	—			$	48,922			$	—
Equity securities			708				708				—				—
Mortgage-backed securities: residential			231,718				—				231,718				—

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

						Fair Value Measurements at March 31, 2010 Using:
						Quoted Prices in
						Active Markets				Significant Other				Significant
						for Identical				Observable				Unobservable
		March 31,				Assets				Inputs				Inputs
		2010				(Level 1)				(Level 2)				(Level 3)
		(Dollars in thousands)
Assets:
Impaired loans		$	42,577				—				—			$	42,577
Mortgage servicing assets			1,753				—				1,753				—
Foreclosed assets			19,924				—				—				19,924

						Fair Value Measurements at December 31, 2009 Using:
						Quoted Prices in
						Active Markets				Significant Other				Significant
						for Identical				Observable				Unobservable
		December 31,				Assets				Inputs				Inputs
		2009				(Level 1)				(Level 2)				(Level 3)
						(Dollars in thousands)
Assets:
Impaired loans		$	32,298				—				—			$	32,298
Mortgage servicing rights			1,865				—				1,865				—
Foreclosed assets			19,534				—				—				19,534

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 $51.6 million at March 31, 2010, with a specific valuation allowance of $9.0 million, resulting in additional provision for loan losses of $5.8 million during the period.

Mortgage servicing rights had a carrying amount of $2.1 million with a valuation allowance of $319,000, at March 31, 2010, resulting in no additional expenses during the period. Mortgage servicing rights are valued by an independent third party that is active in purchasing and selling these instruments. The value reflects the characteristics of the underlying loans discounted at a market multiple.

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 $28.9 million, with a valuation allowance of $9.0 million at March 31, 2010, resulting in additional expenses of $1.4 million during the period.

In accordance with generally accepted accounting principles, the carrying amounts and estimated fair values of financial instruments, at March 31, 2010 and December 31, 2009 are as follows:

		March 31, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
		Value				Value				Value				Value
		(Dollars in thousands)
Assets:
Cash and cash equivalents		$	40,055			$	40,055			$	45,074			$	45,074
Securities:
Available for sale			272,239				272,239				281,348				281,348
Loans held for sale			4,318				4,351				10,497				10,551
Loans, net			1,823,899				1,835,045				1,866,018				1,873,776
Federal Home Loan Bank stock			26,464				n/a				26,464				n/a
Accrued interest receivable			8,405				8,405				9,090				9,090
Liabilities:
Deposits:
Checking, savings and money market accounts			(737,510	)			(737,510	)			(729,512	)			(729,512	)
Certificates of deposit			(991,082	)			(1,000,982	)			(1,039,989	)			(1,051,133	)
Federal Home Loan Bank advances			(214,099	)			(220,160	)			(221,323	)			(227,350	)
Repurchase agreements and other			(96,553	)			(103,242	)			(96,833	)			(105,546	)
Advance payments by borrowers for taxes and insurance			(13,761	)			(13,761	)			(19,791	)			(19,791	)
Accrued interest payable			(1,751	)			(1,751	)			(1,421	)			(1,421	)

Fair value of financial instruments:

The estimated fair values of financial instruments have been determined by United Community using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that United Community could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material affect on the estimated fair value amounts.

Cash and cash equivalents, accrued interest receivable and payable and advance payments by borrowers for taxes and insurance—The carrying amounts as reported in the Statements of Financial Condition are a reasonable estimate of fair value due to their short-term nature.

Securities—Fair values are based on quoted market prices, dealer quotes, and prices obtained from independent pricing services.

Loans held for sale—The fair value of loans held for sale is based on market quotes.

Loans—The fair value is estimated by discounting the future cash flows using the current market rates for loans of similar maturities with adjustments for market and credit risks.

Federal Home Loan Bank stock—It is not practical to determine the fair value of Federal Home Loan Bank stock due to restrictions placed on its transferability.

Deposits—The fair value of demand deposits, savings accounts and money market deposit accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using rates currently offered for deposits of similar remaining maturities.

Borrowed funds—For short-term borrowings, fair value is estimated to be carrying value. The fair value of other borrowings is based on current rates for similar financing.

Limitations—Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time United Community’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of United Community’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, a significant asset not considered a financial asset is premises and equipment. In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

12. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURE

Supplemental disclosures of cash flow information are summarized below.

		March 31, 2010				March 31, 2009
		(Dollars in thousands)
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest on deposits and borrowings		$	10,759			$	15,738
Income taxes			—				—
Supplemental schedule of noncash activities:
Transfers from loans to real estate owned and other repossessed assets			8,119				5,395

13. SEGMENT INFORMATION

United Community monitors the revenue streams of the various Company products and services. The identifiable segments and operations are managed, and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company’s financial service operations are considered by management to be aggregated in one reportable operating segment, which is banking services.

Discontinued operations are essentially the results of operations from Butler Wick Corp. which were previously reported as a separate segment, investment services. Refer to Note 3 for a discussion on discontinued operations and its impact on segment reporting.

14. EARNINGS PER SHARE

Earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares determined for the basic computation plus the dilutive effect of potential common shares that could be issued under outstanding stock options. Stock options for 1,863,525 shares were anti-dilutive for the three months ended March 31, 2010. There were 1,687,388 stock options for shares that were anti-dilutive for the three months ended March 31, 2009.

		Three Months Ended
		March 31,
		2010				2009
		(Dollars in thousands,
		except per share data)
Numerator:
Loss from continuing operations		$	(5,142	)		$	(1,679	)
Income from discontinued operations			—				4,949
Net loss		$	(5,142	)		$	3,270
Denominator:
Weighted average common shares outstanding—basic			29,955				29,632
Dilutive effect of stock options			—				—
Weighted average common shares outstanding—dilutive			29,955				29,632
Basic earnings (loss) per share:
Basic loss per common share—continuing operations		$	(0.17	)		$	(0.06	)
Basic earnings per common share—discontinued operations			—				0.17
Basic loss per common share			(0.17	)			0.11
Dilutive earnings (loss) per share:
Dilutive loss per common share—continuing operations			(0.17	)			(0.06	)
Dilutive earnings per common share—discontinued operations			—				0.17
Dilutive loss per common share			(0.17	)			0.11