UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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

UNITED COMMUNITY FINANCIAL CORP.

(Exact name of the registrant as specified in its charter)

OHIO		0-024399		34-1856319
(State or other jurisdiction of incorporation)		(Commission File No.)		(IRS Employer I.D. No.)

275 West Federal Street, Youngstown, Ohio 44503-1203
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (330) 742-0500

Not Applicable

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 30,984,344 common shares as of July 31, 2011.

 

 

TABLE OF CONTENTS

		PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of June 30, 2011 (Unaudited) and December 31, 2010			1
Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2011 and 2010 (Unaudited)			2
Consolidated Statement of Shareholders’ Equity for the Six Months ended June 30, 2011 and 2010 (Unaudited)			4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (Unaudited)			5
Notes to Consolidated Financial Statements (Unaudited)			6 - 37
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			38-51
Item 3. Quantitative and Qualitative Disclosures about Market Risk			52
Item 4. Controls and Procedures			53
Part II. OTHER INFORMATION
Item 1. Legal Proceedings			54
Item 1A. Risk Factors			54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			54
Item 3. Defaults Upon Senior Securities (None)
Item 4. (Removed and Reserved)
Item 5. Other Information (None)
Item 6. Exhibits			54
Signatures			55
Exhibits			56-59
Exhibit 31.1
Exhibit 31.2
Exhibit 32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

ITEM 1.		Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)

		June 30,				December 31,
		2011				2010
		(Dollars in thousands)
Assets:
Cash and deposits with banks		$	25,085			$	18,627
Federal funds sold			30,413				18,480
Total cash and cash equivalents			55,498				37,107
Securities:
Available for sale, at fair value			392,749				362,042
Loans held for sale			4,824				10,870
Loans, net of allowance for loan losses of $46,223 and $50,883			1,509,399				1,649,486
Federal Home Loan Bank stock, at cost			26,464				26,464
Premises and equipment, net			21,489				22,076
Accrued interest receivable			7,201				7,720
Real estate owned and other repossessed assets			43,685				40,336
Core deposit intangible			412				485
Cash surrender value of life insurance			27,822				27,303
Other assets			12,876				13,409
Total assets		$	2,102,419			$	2,197,298
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Interest bearing		$	1,559,045			$	1,551,210
Non-interest bearing			138,752				138,571
Total deposits			1,697,797				1,689,781
Borrowed funds:
Federal Home Loan Bank advances			96,365				202,818
Repurchase agreements and other			98,962				97,797
Total borrowed funds			195,327				300,615
Advance payments by borrowers for taxes and insurance			15,963				20,668
Accrued interest payable			838				809
Accrued expenses and other liabilities			9,352				9,370
Total liabilities			1,919,277				2,021,243
Shareholders’ Equity:
Preferred stock-no par value; 1,000,000 shares authorized and unissued			—				—
Common stock-no par value; 499,000,000 shares authorized; 37,804,457 shares issued and 30,968,960 and 30,937,704 shares, respectively, outstanding			142,513				142,318
Retained earnings			111,910				111,049
Accumulated other comprehensive income (loss)			923				(4,778	)
Treasury stock, at cost, 6,835,497 and 6,866,753 shares, respectively			(72,204	)			(72,534	)
Total shareholders’ equity			183,142				176,055
Total liabilities and shareholders’ equity		$	2,102,419			$	2,197,298

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(Dollars in thousands, except per share data)
Interest income
Loans		$	21,421			$	24,918			$	43,931			$	50,761
Loans held for sale			41				69				107				139
Available for sale securities			3,094				2,896				5,941				5,481
Federal Home Loan Bank stock dividends			294				294				594				594
Other interest earning assets			13				8				22				15
Total interest income			24,863				28,185				50,595				56,990
Interest expense
Deposits			6,081				8,408				12,412				17,726
Federal Home Loan Bank advances			796				875				1,621				1,723
Repurchase agreements and other			928				931				1,850				1,854
Total interest expense			7,805				10,214				15,883				21,303
Net interest income			17,058				17,971				34,712				35,687
Provision for loan losses			8,244				10,310				10,436				22,760
Net interest income after provision for loan losses			8,814				7,661				24,276				12,927
Non-interest income
Non-deposit investment income			308				484				662				912
Service fees and other charges			1,588				424				3,041				2,175
Net gains (losses):
Securities available for sale			229				3,671				1,542				6,514
Other -than-temporary loss in equity securities
Total impairment loss			(28	)			—				(38	)			—
Loss recognized in other comprehensive income			—				—				—				—
Net impairment loss recognized in earnings			(28	)			—				(38	)			—
Mortgage banking income			3,128				651				3,750				1,037
Real estate owned and other repossessed assets			(1,362	)			(1,755	)			(2,354	)			(3,239	)
Gain on sale of retail branch			—				—				—				1,387
Other income			1,437				1,270				2,685				2,519
Total non-interest income			5,300				4,745				9,288				11,305
Non-interest expense
Salaries and employee benefits			7,686				9,105				15,370				17,279
Occupancy			856				839				1,761				1,843
Equipment and data processing			1,624				1,720				3,318				3,387
Franchise tax			402				503				871				1,014
Advertising			141				147				262				369
Amortization of core deposit intangible			36				45				73				93
Deposit insurance premiums			1,057				1,459				2,462				2,920
Professional fees			293				940				1,255				1,973
Real estate owned and other repossessed asset expenses			891				1,024				1,764				1,631
Other expenses			2,924				1,509				5,262				3,750
Total non-interest expenses			15,910				17,291				32,398				34,259
Income (loss) before income taxes			(1,796	)			(4,885	)			1,166				(10,027	)
Income tax expense (benefit)			—								—
Net income (loss)		$	(1,796	)		$	(4,885	)		$	1,166			$	(10,027	)

(Continued)

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

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Income (loss) available to common shareholders		$	(1,796	)		$	(4,885	)		$	1,166			$	(10,027	)
Other comprehensive income
Unrealized gains (losses) on securities, net			7,474				506				5,701				81
Comprehensive income (loss)		$	5,678			$	(4,379	)		$	6,867			$	(9,946	)
Earnings (loss) per share
Basic		$	(0.06	)		$	(0.16	)		$	0.04			$	(0.33	)
Diluted			(0.06	)			(0.16	)			0.04				(0.33	)

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)

																		Unearned
																		Employee
														Accumulated				Stock
														Other				Ownership
		Shares				Common				Retained				Comprehensive				Plan				Treasury
		Outstanding				Stock				Earnings				Income (Loss)				Shares				Stock				Total
		(Dollars in thousands, except per share data)
Balance December 31, 2010			30,938			$	142,318			$	111,049			$	(4,778	)		$	—			$	(72,534	)		$	176,055
Comprehensive income:
Net income											1,166																1,166
Change in net unrealized gain/(loss) on securities, net of taxes															5,701												5,701
Comprehensive income																											6,867
Stock based compensation			31				195				(305	)											330				220
Balance June 30, 2011			30,969			$	142,513			$	111,910			$	923			$	—			$	(72,204	)		$	183,142
Balance December 31, 2009			30,898			$	145,775			$	148,674			$	4,110			$	(5,821	)		$	(72,955	)		$	219,783
Comprehensive income:
Net loss											(10,027	)															(10,027	)
Change in net unrealized gain/(loss) on securities, net of taxes															81												81
Comprehensive loss																											(9,946	)
Shares allocated to ESOP participants							(3,078	)											5,821								2,743
Stock based compensation							111																				111
Balance June 30, 2010			30,898			$	142,808			$	138,647			$	4,191			$	—			$	(72,955	)		$	212,691

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Six Months Ended June 30,
		2011				2010
		(Dollars in thousands)
Cash Flows from Operating Activities
Net income (loss)		$	1,166			$	(10,027	)
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			10,436				22,760
Mortgage banking income			(3,750	)			(1,037	)
Net losses on real estate owned and other repossessed assets sold			2,354				3,239
Net gain on retail branch sold			—				(1,387	)
Net gain on available for sale securities sold			(1,542	)			(6,514	)
Net gains on other assets sold			(10	)			(3	)
Other than temporary impairment of securities available for sale			38				—
Amortization of premiums and accretion of discounts			601				(1,149	)
Depreciation and amortization			883				993
Decrease in interest receivable			519				617
Increase (decrease) in interest payable			29				(397	)
Decrease (increase) in prepaid and other assets			934				610
(Decrease) increase in other liabilities			(16	)			1,836
Stock based compensation			220				111
Net principal disbursed on loans originated for sale			(57,577	)			(80,372	)
Proceeds from sale of loans originated for sale			64,927				85,175
ESOP compensation			—				2,743
Net cash from operating activities			19,212				17,198
Cash Flows from Investing Activities
Proceeds from principal repayments and maturities of:
Securities available for sale			15,612				40,945
Proceeds from sale of:
Securities available for sale			115,928				174,022
Real estate owned and other repossessed assets			7,860				11,183
Premises and equipment			10				20
Loans transferred from portfolio to held for sale			87,533				—
Purchases of:
Securities available for sale			(156,349	)			(263,157	)
Principal disbursed on loans, net of repayments			32,971				33,913
Loans purchased			(2,129	)			(2,460	)
Purchases of premises and equipment			(280	)			(161	)
Sale of retail branch			—				(22,158	)
Net cash from investing activities			101,156				(27,853	)
Cash Flows from Financing Activities
Net increase in checking, savings and money market accounts			40,655				31,590
Net decrease in certificates of deposit			(32,639	)			(78,352	)
Net decrease in advance payments by borrowers for taxes and insurance			(4,705	)			(1,852	)
Proceeds from Federal Home Loan Bank advances			206,000				509,200
Repayment of Federal Home Loan Bank advances			(312,453	)			(454,750	)
Net change in repurchase agreements and other borrowed funds			1,165				1,607
Net cash from financing activities			(101,977	)			7,443
Change in cash and cash equivalents			18,391				(3,212	)
Cash and cash equivalents, beginning of period			37,107				45,074
Cash and cash equivalents, end of period		$	55,498			$	41,862

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. BASIS OF PRESENTATION

United Community Financial Corp. (United Community or the Company) was incorporated under Ohio law in February 1998 by The Home Savings and Loan Company of Youngstown, Ohio (Home Savings) in connection with the conversion of Home Savings from an Ohio mutual savings and loan association to an Ohio capital stock savings association (Conversion). Upon consummation of the Conversion on July 8, 1998, United Community became the unitary thrift holding company for Home Savings. Home Savings, a state-chartered savings bank, conducts business from its main office located in Youngstown, Ohio, 38 full-service branches and seven loan production offices located throughout Ohio and western Pennsylvania.

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

The results of operations for the three and six months ended June 30, 2011, are not necessarily indicative of the results to be expected for the year ending December 31, 2011. The consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2010, contained in United Community’s Form 10-K for the year ended December 31, 2010.

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

2. REGULATORY ENFORCEMENT ACTION

As previously disclosed, on August 8, 2008, the board of directors of United Community approved a Stipulation and Consent to the Issuance of an Order to Cease and Desist (the OTS Order) with the Office of Thrift Supervision (OTS). Simultaneously, the board of directors of Home Savings approved a Stipulation and Consent to the Issuance of an Order to Cease and Desist (the Bank Order) with the Federal Deposit Insurance Corporation (FDIC) and the Division of Financial Institutions of the Ohio Department of Commerce (Ohio Division). Although United Community and Home Savings have agreed to the issuance of the OTS Order and the Bank Order, respectively, neither has admitted or denied any allegations of unsafe or unsound banking practices, or any legal or regulatory violations. No monetary penalties were assessed by the OTS, the FDIC, or the Ohio Division.

The OTS Order requires United Community to obtain OTS approval prior to: (i) incurring or increasing its debt position; (ii) repurchasing any United Community stock; or (iii) paying any dividends. The OTS Order also requires United Community to develop a debt reduction plan and submit the plan to the OTS for approval.

The Bank Order requires Home Savings, within specified timeframes, to take or refrain from certain actions, including: (i) retaining a bank consultant to assess Home Savings management needs and submitting a management plan that identifies officer positions needed, identifies and establishes board and internal operating committees, evaluates Home Savings’ senior officers, and provides for the hiring of any additional personnel; (ii) seeking regulatory approval prior to adding any individuals to the board of directors or employing any individual as a senior executive officer of Home Savings; (iii) not extending additional credit to classified borrowers; (iv) establishing a compliant Allowance for Loan and Lease Loss methodology; (v) enhancing its risk management policies and procedures; (vi) adopting and implementing plans to reduce its classified assets and delinquent loans, and to reduce loan concentrations in nonowner-occupied commercial real estate and construction, land development, and land loans; (vii) establishing board of directors committees to evaluate and approve certain loans and oversee Home Savings’ compliance with the Bank Order; (viii) revising its loan policy and enhancing its underwriting and credit administration functions; (ix) developing a strategic plan and budget and profit plan; (x) correcting all violations of laws, rules, and regulations and implementing procedures to ensure future compliance; (xi) increasing its Tier 1 leverage ratio to 8.0% and its total risk-based capital ratio to 12.0% by December 31, 2008; and (xii) seeking regulatory approval prior to declaring or paying any cash dividend. See Note 15 for details on current capital levels of Home Savings.

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

3. RECENT ACCOUNTING DEVELOPMENTS

The Financial Accounting Standards Board (FASB) issued new Accounting Standards Updates (ASU) during the period. Below is a summary of each new ASU.

In April 2011, the FASB amended existing guidance for assisting a creditor in determining whether a restructuring is a troubled debt restructuring. The amendments clarify the guidance for a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. With regard to determining whether a concession has been granted, the ASU clarifies that creditors are precluded from using the effective interest method to determine whether a concession has been granted. In the absence of using the effective interest method, a creditor must now focus on other considerations such as the value of the underlying collateral, evaluation of other collateral or guarantees, the debtor’s ability to access other funds at market rates, interest rate increases and whether the restructuring results in a delay in payment that is insignificant. Management is evaluating the impact of adoption on the Company’s financial statements.

ASU 2011-04, “Fair Value Measurement (Topic 820) — Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 amends Topic 820, “Fair Value Measurements and Disclosures”; to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.

ASU 2011-05, “Comprehensive Income (Topic 220) — Presentation of Comprehensive Income.” ASU 2011-05 amends Topic 220, “Comprehensive Income”, to require that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. ASU 2011-05 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.

4. STOCK COMPENSATION

Stock Options:

On April 26, 2007, shareholders approved the United Community Financial Corp. 2007 Long-Term Incentive Plan (as amended, the 2007 Plan). The purpose of the 2007 Plan is to promote and advance the interests of United Community and its shareholders by enabling United Community to attract, retain and reward directors, directors emeritus, managerial and other key employees of United Community, including Home Savings, by facilitating their purchase of an ownership interest in United Community. The 2007 Plan provides for the issuance of up to 2,000,000 shares that are to be used for awards of restricted stock, stock options, performance awards, stock appreciation rights (SARs), or other forms of stock-based incentive awards. There were 3,866 stock options granted in the first quarter of 2011, all of which become exercisable on January 6, 2013. There were 12,746 stock options granted in the second quarter of 2011, 4,000 of which become exercisable on December 31, 2011, 4,000 of which become exercisable on December 31, 2012 and the remaining 4,746 become exercisable on April 7, 2013. There were 423,695 stock options granted in 2010 and 32,000 stock options granted in 2009 under the 2007 Plan. For 418,000 of the options granted in 2010, one-half of the total options granted become exercisable on each of December 31, 2010 and 2011. The remainder of the options granted in 2010 become exercisable on October 7, 2012. For the options granted in 2009, one third of the total options granted become exercisable on each of December 31, 2009, 2010, and 2011. The options must be exercised within 10 years from the date of grant.

On July 12, 1999, shareholders approved the United Community Financial Corp. 1999 Long-Term Incentive Plan (as amended, the 1999 Plan). The purpose of the 1999 Plan was the same as the 2007 Plan. The 1999 Plan terminated on May 20, 2009, although the 1999 Plan survives so long as options issued under the 1999 Plan remain outstanding and exercisable.

The 1999 Plan provided for the grant of either incentive or nonqualified stock options. Options were awarded at exercise prices that were not less than the fair market value of the share at the grant date. The maximum number of common shares that could be issued under the plan was 3,569,766. Because the 1999 Plan terminated, no additional options may be issued under it. All of the options awarded became exercisable on the date of grant except that options granted in 2009 became exercisable over three years beginning on December 31, 2009. All options expire 10 years from the date of grant.

Expenses related to stock option grants are included with salaries and employee benefits. The Company recognized $63,000 in stock option expenses for the three months ended June 30, 2011. The Company recognized $160,000 in stock option expense for the six months ended June 30, 2011. The Company expects to recognize additional expense of $193,000 for the remainder of 2011.

A summary of activity in the plans is as follows:

		For the six months ended June 30, 2011
						Weighted				Aggregate
						average				intrinsic value
		Shares				exercise price				(in thousands)
Outstanding at beginning of year			2,237,322			$	6.88
Granted			16,612				1.36
Exercised			—				—
Forfeited			(212,953	)			7.86
Outstanding at end of period			2,040,981			$	6.73			$	—
Options exercisable at end of period			1,722,608			$	7.60			$	—

Information related to the stock option plans for the six months ended June 30, 2011 follows:

		June 30, 2011
Intrinsic value of options exercised			n/a
Cash received from option exercises			n/a
Tax benefit realized from option exercises			n/a
Weighted average fair value of options granted, per share		$	0.89

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

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

		April 7, 2011				April 28, 2011
Risk-free interest rate			2.29	%			2.00	%
Expected term (years)			5				5
Expected stock volatility			81.0				81.0
Dividend yield			—	%			—	%

Outstanding stock options have a weighted average remaining life of 4.55 years and may be exercised in the range of $1.20 to $12.38.

Restricted Stock Awards:

The 2007 Plan permits the issuance of awards to nonemployee directors. Compensation expense is recognized over the vesting period of the awards based on the market value of the shares at the issue date. A total of 71,135 restricted shares have been issued under the 2007 Plan; 31,256 of which were issued in 2011 and 39,879 were issued in 2010. These restricted shares vest on the first anniversary of the grant date. Expenses related to restricted stock awards are included with salaries and employee benefits. The cost will be recognized over a weighted average period of one year. The Company recognized approximately $33,000 in restricted stock award expenses for the three months ended June 30, 2011. The Company recognized approximately $60,000 in restricted stock award expenses for the six months ended June 30, 2011. The Company expects to recognize additional expenses of approximately $25,000 for the remainder of 2011.

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

						Weighted
						average grant
		Shares				date fair value
Nonvested shares at January 1, 2011			39,879			$	1.32
Granted			31,256				1.34
Vested			(9,446	)			1.32
Forfeited			—				—
Nonvested shares at June 30, 2011			61,689			$	1.33

5. SECURITIES

Components of the available for sale portfolio are as follows:

		June 30, 2011
		(Dollars in thousands)
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
U.S. Treasury and government sponsored entities’ securities		$	64,598			$	379			$	—			$	64,977
Equity securities			164				140				—				304
Mortgage-backed securities GSE issued:
residential			325,868				2,051				(451	)			327,468
Total		$	390,630			$	2,570			$	(451	)		$	392,749

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

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

		June 30, 2011
		Amortized cost				Fair value
		(Dollars in thousands)
Due in one year or less		$	—			$	—
Due after one year through five years			—				—
Due after five years through ten years			64,598				64,977
Mortgage-related securities			325,867				327,468
Total		$	390,465			$	392,445

Securities pledged for the Company’s investment in VISA stock were approximately $5.8 million at June 30, 2011 and $5.7 million at December 31, 2010. Securities pledged for public funds deposits were $400,000 at June 30, 2011, and $864,000 at December 31, 2010. Securities sold under an agreement to repurchase are secured primarily by mortgage-backed securities with a fair value of approximately $129.1 million at June 30, 2011, and $129.4 million at December 31, 2010.

United Community had no securities classified as trading as of June 30, 2011 or December 31, 2010.

The following table summarizes the investment securities with unrealized losses at June 30, 2011 and December 31, 2010 by aggregated major security type and length of time in a continuous unrealized loss position:

		June 30, 2011
		(Dollars in thousands)
		Less Than 12 Months								12 Months or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Loss				Value				Loss				Value				Loss
U.S. Treasury and government sponsored entities’ securities		$	—			$	—			$	—			$	—			$	—			$	—
Mortgage-backed securities GSE issued: residential			130,312				(451	)			—				—				130,312				(451	)
Total		$	130,312			$	(451	)		$	—			$	—			$	130,312			$	(451	)

		December 31, 2010
		(Dollars in thousands)
		Less Than 12 Months								12 Months or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Loss				Value				Loss				Value				Loss
U.S. Treasury and government sponsored entities’ securities		$	62,935			$	(2,164	)		$	—			$	—			$	62,935			$	(2,164	)
Mortgage-backed securities GSE issued: residential			203,569				(3,265	)			—				—				203,569				(3,265	)
Total		$	266,504			$	(5,429	)		$	—			$	—			$	266,504			$	(5,429	)

All of the U.S. Treasury and government sponsored entities’ mortgage backed securities that were temporarily impaired at June 30, 2011, were 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 these securities.

Proceeds from sales of securities available for sale were $115.9 million and $174.0 million for the six months ended June 30, 2011 and 2010, respectively. Gross gains of $1.5 million and $6.5 million and no gross losses were realized on these sales during the first six months of 2011 and 2010, respectively.

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

The Company recognized a $38,000 OTTI charge on equity investments in two other financial institutions in the first six months of 2011. One financial institution consented to a regulatory enforcement action, diminishing the chance of fair value recovery in the foreseeable future. The other investment was trading below book value and management was not able to determine with reasonable certainty that recovery would occur in the near-term.

As of June 30, 2011, the Company’s security portfolio consisted of 36 securities, 11 of which were in an unrealized loss position totaling approximately $451,000.

6. LOANS

Portfolio loans consist of the following:

		June 30,				December 31,
		2011				2010
		(Dollars in thousands)
Real Estate:
One-to four-family residential		$	693,435			$	757,426
Multi-family residential			129,767				135,771
Nonresidential			307,702				331,390
Land			25,515				25,138
Construction:
One-to four-family residential and land development			87,827				108,583
Multi-family and nonresidential			5,524				15,077
Total real estate			1,249,770				1,373,385
Consumer
Home equity			212,578				220,582
Auto			10,952				11,525
Marine			6,069				7,285
Recreational vehicles			32,584				35,671
Other			3,892				4,390
Total consumer			266,075				279,453
Commercial
Secured			28,404				28,876
Unsecured			9,950				17,428
Total commercial			38,354				46,304
Total loans			1,554,199				1,699,142
Less:
Allowance for loan losses			46,223				50,883
Deferred loan costs, net			(1,423	)			(1,227	)
Total			44,800				49,656
Loans, net		$	1,509,399			$	1,649,486

Changes in the allowance for loan losses are as follows:

		Three Months				Three Months
		ended				ended
		June 30, 2011				June 30, 2010
		(Dollars in thousands)
Balance, beginning of year		$	46,415			$	47,768
Provision for loan losses			8,244				10,310
Amounts charged off			(9,030	)			(17,558	)
Recoveries			594				208
Balance, end of year		$	46,223			$	40,728

		Six Months				Six Months
		ended				ended
		June 30, 2011				June 30, 2010
		(Dollars in thousands)
Balance, beginning of year		$	50,883			$	42,287
Provision for loan losses			10,436				22,760
Amounts charged off			(16,256	)			(24,678	)
Recoveries			1,160				379
Balance, end of year		$	46,223			$	40,748

The following tables present activity and the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of and for the three and six months ended June 30, 2011 and the year ended December 31, 2010.

Allowance For Loan Losses
(Dollars in thousands)
		Permanent
For the three months ended		Real Estate				Construction				Consumer				Commercial
June 30, 2011		Loans				Loans				Loans				Loans				Unallocated				Total
Beginning balance (3/31/11)		$	26,991			$	5,774			$	4,996			$	8,654			$	—			$	46,415
Provision			8,438				2,015				190				(2,399	)			—				8,244
Chargeoffs			(4,295	)			(1,405	)			(767	)			(2,563	)			—				(9,030	)
Recoveries			237				145				125				87				—				594
Net chargeoffs			(4,058	)			(1,260	)			(642	)			(2,476	)			—				(8,436	)
Ending balance (6/30/11)		$	31,371			$	6,529			$	4,544			$	3,779			$	—			$	46,223

Allowance For Loan Losses
(Dollars in thousands)
		Permanent
For the six months ended		Real Estate				Construction				Consumer				Commercial
June 30, 2011		Loans				Loans				Loans				Loans				Unallocated				Total
Beginning balance (12/31/10)		$	28,066			$	8,533			$	5,260			$	9,024			$	—			$	50,883
Provision			9,992				1,551				782				(1,889	)			—				10,436
Chargeoffs			(7,173	)			(3,757	)			(1,797	)			(3,529	)			—				(16,256	)
Recoveries			486				202				299				173				—				1,160
Net chargeoffs			(6,687	)			(3,555	)			(1,498	)			(3,356	)			—				(15,096	)
Ending balance (6/30/11)		$	31,371			$	6,529			$	4,544			$	3,779			$	—			$	46,223

(Continued)

		Permanent
		Real Estate				Construction				Consumer				Commercial
		Loans				Loans				Loans				Loans				Unallocated				Total
Period-end amount allocated to:
Loans individually evaluated for impairment		$	6,914			$	3,727			$	—			$	1,011			$	—			$	11,652
Loans collectively evaluated for impairment			24,457				2,802				4,544				2,768				—				34,571
Ending balance (6/30/11)		$	31,371			$	6,529			$	4,544			$	3,779			$	—			$	46,223
Period-end balances:
Loans individually evaluated for impairment		$	105,604			$	45,345			$	1,169			$	10,428			$	—			$	162,546
Loans collectively evaluated for impairment			1,050,815				48,006				264,906				27,926				—				1,391,653
Ending balance (6/30/11)		$	1,156,419			$	93,351			$	266,075			$	38,354			$	—			$	1,554,199

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

Allowance For Loan Losses
(Dollars in thousands)
		Permanent
For the twelve months ended		Real Estate				Construction				Consumer				Commercial
December 31, 2010		Loans				Loans				Loans				Loans				Unallocated				Total
Beginning balance (12/31/09)		$	15,288			$	19,020			$	4,959			$	3,020			$	—			$	42,287
Provision			40,595				10,028				4,079				7,725				—				62,427
Chargeoffs			(28,153	)			(20,648	)			(4,316	)			(1,962	)			—				(55,079	)
Recoveries			336				133				538				241				—				1,248
Net chargeoffs			(27,817	)			(20,515	)			(3,778	)			(1,721	)			—				(53,831	)
Ending balance (12/31/10)		$	28,066			$	8,533			$	5,260			$	9,024			$	—			$	50,883
Period-end amount allocated to:
Loans individually evaluated for impairment		$	7,509			$	3,360			$	—			$	2,575			$	—			$	13,444
Loans collectively evaluated for impairment			20,557				5,173				5,260				6,449				—				37,439
Ending balance (12/31/10)		$	28,066			$	8,533			$	5,260			$	9,024			$	—			$	50,883
Period-end balances:
Loans individually evaluated for impairment**		$	101,410			$	47,054			$	1,547			$	6,444			$	—			$	156,455
Loans collectively evaluated for impairment			1,148,315				76,606				277,906				39,860				—				1,542,687
Ending balance (12/31/10)		$	1,249,725			$	123,660			$	279,453			$	46,304			$	—			$	1,699,142

Impaired loans are defined as loans which, based on current information and events, it is probable that Home Savings will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement and the loan is non-homogeneous in nature. Impaired loans can be divided into two categories: those with a specific valuation and those without a specific valuation. In general, impaired loans without a specific valuation either has sufficient collateral to support the loan balance, or any collateral shortfall that did exist has been charged off such that the remaining loan balance is dully supported by collateral value (less costs to sell).

Impaired loans consisted of the following:

		As of or for				As of or for the				As of or for
		the six months				twelve months				the six months
		ended				ended				ended
		June 30,				December 31,				June 30,
		2011				2010				2010
		(Dollars in thousands)
Impaired loans on which no specific valuation allowance was provided		$	82,499			$	71,853			$	82,736
Impaired loans on which specific valuation allowance was provided			80,047				84,602				76,041
Total impaired loans at end of period		$	162,546			$	156,455			$	158,777
Specific valuation allowances on impaired loans at period-end			11,652				13,444				10,029
Average impaired loans during period			162,868				144,977				138,791
Interest income recognized on impaired loans during the period **			1,184				1,778				816
Interest income received on impaired loans during the period **			2,412				4,570				816