United Community Financial (UCFC) 10-Q 2011 Q1 Quarterly report

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

For the quarterly period ended March 31, 2011

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

For the transition period from                    to                    

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

(Former name or former address, if changed since last report)

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.

Yesþ           Noo

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).

Yeso           Noo

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 filero Accelerated filero Non-accelerated filero Smaller reporting companyþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso           Noþ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 30,968,960 common shares as of April 30, 2011.

TABLE OF CONTENTS

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

PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

	March 31,			December 31,
	2011			2010
	(Dollars in thousands)
Assets:
Cash and deposits with banks	$	18,497		$	18,627
Federal funds sold		20,181			18,480
Total cash and cash equivalents		38,678			37,107
Securities:
Available for sale, at fair value		289,388			362,042
Loans held for sale		2,531			10,870
Loans, net of allowance for loan losses of $46,415 and $50,883		1,620,094			1,649,486
Federal Home Loan Bank stock, at cost		26,464			26,464
Premises and equipment, net		21,760			22,076
Accrued interest receivable		7,684			7,720
Real estate owned and other repossessed assets		42,873			40,336
Core deposit intangible		448			485
Cash surrender value of life insurance		27,560			27,303
Other assets		37,600			13,409
Total assets	$	2,115,080		$	2,197,298
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Interest bearing	$	1,568,161		$	1,551,210
Non-interest bearing		144,362			138,571
Total deposits		1,712,523			1,689,781
Borrowed funds:
Federal Home Loan Bank advances		100,954			202,818
Repurchase agreements and other		100,446			97,797
Total borrowed funds		201,400			300,615
Advance payments by borrowers for taxes and insurance		13,219			20,668
Accrued interest payable		905			809
Accrued expenses and other liabilities		9,662			9,370
Total liabilities		1,937,709			2,021,243
Shareholders’ Equity:
Preferred stock-no par value; 1,000,000 shares authorized and unissued		—			—
Common stock-no par value; 499,000,000 shares authorized; 37,804,457 shares issued and 30,951,032 and 30,937,704 shares, respectively, outstanding		142,404			142,318
Retained earnings		113,911			111,049
Accumulated other comprehensive loss		(6,551	)		(4,778	)
Treasury stock, at cost, 6,853,425 and 6,866,753 shares, respectively		(72,393	)		(72,534	)
Total shareholders’ equity		177,371			176,055
Total liabilities and shareholders’ equity	$	2,115,080		$	2,197,298

See Notes to Consolidated Financial Statements.

1

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

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

2

(Continued)

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

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

See Notes to Consolidated Financial Statements.

3

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

See Notes to Consolidated Financial Statements.

4

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

See Notes to Consolidated Financial Statements

5

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

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

2. REGULATORY ENFORCEMENT ACTION

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

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

The Bank Order requires Home Savings, within specified timeframes, to take or refrain from certain actions, including: (i) retaining a bank consultant to assess Home Savings management needs and submitting a management plan that identifies officer positions needed, identifies and establishes board and internal operating committees, evaluates Home Savings’ senior officers, and provides for the hiring of any additional personnel; (ii) seeking regulatory approval prior to adding any individuals to the board of directors or employing any individual as a senior executive officer of Home Savings; (iii) not extending additional credit to classified borrowers; (iv) establishing a compliant Allowance for Loan and Lease Loss methodology; (v) enhancing its risk management policies and procedures; (vi) adopting and implementing plans to reduce its classified assets and delinquent loans, and to reduce loan concentrations in nonowner-occupied commercial real estate and construction, land development, and land loans; (vii) establishing board of directors committees to evaluate and approve certain loans and oversee Home Savings’ compliance with the Bank Order; (viii) revising its loan policy and enhancing its underwriting and credit administration functions; (ix) developing a strategic plan and budget and profit plan; (x) correcting all violations of laws, rules, and regulations and implementing procedures to ensure future compliance; (xi) increasing its Tier 1 leverage ratio to 8.0% and its total risk-based capital ratio to 12.0% by December 31, 2008; and (xii) seeking regulatory approval prior to declaring or paying any cash dividend. As of December 31, 2010, the Tier 1 leverage ratio was 7.84%; however at March 31, 2011, the ratio was 8.44%. As a result, Home Savings remained in compliance with the Bank Order. See Note 15 for details on current capital levels of Home Savings.

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

6

3. RECENT ACCOUNTING DEVELOPMENTS

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

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

4. STOCK COMPENSATION

Stock Options:

On April 26, 2007, shareholders approved the United Community Financial Corp. 2007 Long-Term Incentive Plan, as amended (2007 Plan). The purpose of the 2007 Plan is to promote and advance the interests of United Community and its shareholders by enabling United Community to attract, retain and reward directors, directors emeritus, managerial and other key employees of United Community, including Home Savings, by facilitating their purchase of an ownership interest in United Community. The 2007 Plan provides for the issuance of up to 2,000,000 shares that are to be used for awards of restricted stock, stock options, performance awards, stock appreciation rights (SARs), or other forms of stock-based incentive awards. There were 3,866 stock options granted in 2011, all of which become exercisable on January 6, 2013. There were 423,695 stock options granted in 2010 and there were 32,000 stock options granted in 2009 under the 2007 Plan. For 418,000 of the options granted in 2010, one-half of the total options granted become exercisable on each of December 31, 2010 and 2011. The remainder of the options granted in 2010 become exercisable on October 7, 2012. For the options granted in 2009, one third of the total options granted become exercisable on each of December 31, 2009, 2010 and 2011. The option period for each grant expires no more than 10 years from the date of grant.

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

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

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

7

A summary of activity in the plans is as follows:

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

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

	March 31, 2011
Intrinsic value of options exercised		n/a
Cash received from option exercises		n/a
Tax benefit realized from option exercises		n/a
Weighted average fair value of options granted, per share	$	0.97

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

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

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

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

Restricted Stock Awards:

The 2007 Plan permits the issuance of awards to nonemployee directors. Compensation expense is recognized over the vesting period of the awards based on the market value of the shares at the issue date. Total restricted shares issued under the 2007 plan were 53,207, 13,328 of which were issued on January 6, 2011 and 39,879 were issued in 2010. These restricted shares vest on the first anniversary of the grant date. Expenses related to restricted stock awards are included with salaries and employee benefits. The cost will be recognized over a weighted average period of one year. The Company recognized approximately $18,000 in restricted stock award expenses for the three months ended March 31, 2011. The Company expects to recognize additional expenses of approximately $70,000 for the remainder of 2011.

8

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

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

5. SECURITIES

Components of the available for sale portfolio are as follows:

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

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

9

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

	March 31, 2011
	(Dollars in thousands)
	Amortized		Fair
	Cost		Value
Due in one year or less	$	—	$	—
Due after one year through five years		—		—
Due after five years through ten years		64,849		62,865
Mortgage-backed securities: residential		229,702		226,196
Total	$	294,551	$	289,061

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

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

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

										��
	March 31, 2011
	(Dollars in thousands)
	Less Than 12 Months					12 Months or More				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Loss			Value		Loss		Value		Loss
U.S. Treasury and government sponsored entities’ securities	$	62,865	$	(1,984	)	$	—	$	—	$	62,865	$	(1,984	)
Mortgage-backed securities GSE issued: residential		228,392		(3,605	)		—		—		228,392		(3,605	)
Total	$	291,257	$	(5,589	)	$	—	$	—	$	291,257	$	(5,589	)

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

All of the U.S. Treasury and government sponsored entities’ mortgage backed securities that are temporarily impaired at March 31, 2011, are impaired due to the current level of interest rates. All of these securities continue to pay on schedule and management expects to receive all principal and interest owed on the securities.

Proceeds from sales of securities available for sale were $87.6 million and $118.9 million for the three months ended March 31, 2011 and 2010, respectively. Gross gains of $1.3 million and $2.8 million and no gross losses were realized on these sales during the first quarter of 2011 and 2010, respectively.

10

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

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

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

6. LOANS

Portfolio loans consist of the following:

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

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

11

Changes in the allowance for loan losses are as follows:

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

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

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

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

12

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

** Revised to include impaired loans without specific allocations.

Impaired loans consisted of the following:

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

13

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

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

14

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

15

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2010:

Impaired Loans
(Dollars in thousands)
					Allowance
	Unpaid				for Loan
	Principal		Recorded		Losses
	Balance		Investment		Allocated
With no specific allowance recorded
Permanent real estate	$	60,516	$	44,666	$	—
Construction loans		31,715		23,465		—
Consumer loans		3,407		1,547		—
Commercial loans		16,148		2,175		—
Total		111,786		71,853		—
With a specific allowance recorded
Permanent real estate		65,869		56,744		7,509
Construction loans		35,777		23,589		3,360
Consumer loans		—		—		—
Commercial loans		5,419		4,269		2,575
Total		107,065		84,602		13,444
Total	$	218,851	$	156,455	$	13,444

Nonaccrual loans, including some troubled debt restructured loans, were $143.0 million and $133.2 million at March 31, 2011 and December 31, 2010, respectively. Restructured loans were $54.5 million and $44.6 million at March 31, 2011 and December 31, 2010, respectively. Loans that are greater than ninety days past due and still accruing were $2.9 million at March 31, 2011, and $6.3 million at December 31, 2010.

16

The following tables present the recorded investment in nonaccrual and loans past due over 90 days and still on accrual by class of loans as of March 31, 2011:

Nonaccrual Loans and Loans Past Due Over 90 Days and Still Accruing
As of March 31, 2011
(Dollars in thousands)
			Loans past due
			over 90 days
			and still
	Nonaccrual		accruing
Real Estate Loans
Permanent
One-to four-family residential	$	29,062	$	—
Multifamily residential		8,239		—
Nonresidential		37,353		—
Land		6,721		—
Total		81,375		—
Construction Loans
One-to four-family residential		43,272		2,868
Multifamily and nonresidential		382		—
Total		43,654		2,868
Consumer Loans
Home Equity		3,122		—
Auto		114		—
Marine		—		—
Recreational vehicle		982		—
Other		6		—
Total		4,224		—
Commercial Loans
Secured		10,359		—
Unsecured		3,376		—
Total		13,735		—
Total	$	142,988	$	2,868

17

Nonaccrual Loans and Loans Past Due Over 90 Days and Still Accruing
As of December 31, 2010
(Dollars in thousands)
			Loans past due
			over 90 days
			and still
	Nonaccrual		accruing
Real Estate Loans
Permanent
One-to four-family residential	$	27,417	$	—
Multifamily residential		10,983		—
Nonresidential		39,838		—
Land		5,188		—
Total		83,426		—
Construction Loans
One-to four-family residential		40,077		3,944
Multifamily and nonresidential		382		2,032
Total		40,459		5,976
Consumer Loans
Home Equity		3,179		210
Auto		89		—
Marine		—		—
Recreational vehicle		93		144
Other		10		—
Total		3,371		354
Commercial Loans
Secured		1,822		—
Unsecured		4,123		—
Total		5,945		—
Total	$	133,201	$	6,330

18

The following tables present an age analysis of past-due loans, segregated by class of loans as of March 31, 2011:

Past Due Loans
(Dollars in thousands)
					Greater
	30-59		60-89		than 90
	Days Past		Days Past		Days Past		Total Past		Current		Total
	Due		Due		Due		Due		Loans		Loans
Real Estate Loans
Permanent
One-to four-family residential	$	4,610	$	1,083	$	24,646	$	30,339	$	731,726	$	762,065
Multifamily residential		124		251		6,911		7,286		123,960		131,246
Nonresidential		3,773		8,647		28,207		40,627		288,145		328,772
Land		1,331		423		4,824		6,578		19,046		25,624
Total		9,838		10,404		64,588		84,830		1,162,877		1,247,707
Construction Loans
One-to four-family residential		5,970		—		43,566		49,536		38,539		88,075
Multifamily and nonresidential		942		—		382		1,324		9,877		11,201
Total		6,912		—		43,948		50,860		48,416		99,276
Consumer Loans
Home Equity		2,430		195		2,111		4,736		211,650		216,386
Auto		100		2		80		182		10,997		11,179
Marine		698		—		—		698		6,109		6,807
Recreational vehicle		2,583		591		391		3,565		30,501		34,066
Other		33		—		7		40		4,000		4,040
Total		5,844		788		2,589		9,221		263,257		272,478
Commercial Loans
Secured		155		8,706		1,617		10,478		21,096		31,574
Unsecured		91		—		2,831		2,922		11,276		14,198
Total		246		8,706		4,448		13,400		32,372		45,772
Total	$	22,840	$	19,898	$	115,573	$	158,311	$	1,506,922	$	1,665,233

19

The following table presents an age analysis of past-due loans, segregated by class of loans as of December 31, 2010:

Past Due Loans
(Dollars in thousands)
					Greater
	30-59		60-89		than 90
	Days Past		Days Past		Days Past		Total Past		Current		Total
	Due		Due		Due		Due		Loans		Loans
Real Estate Loans
Permanent
One-to four-family residential	$	6,620	$	2,351	$	24,914	$	33,885	$	723,541	$	757,426
Multifamily residential		326		—		9,898		10,224		125,547		135,771
Nonresidential		1,888		13,146		30,382		45,416		285,974		331,390
Land		12		426		5,188		5,626		19,512		25,138
Total		8,846		15,923		70,382		95,151		1,154,574		1,249,725
Construction Loans
One-to four-family residential		3,688		7,579		42,855		54,122		54,461		108,583
Multifamily and nonresidential		—		—		2,414		2,414		12,663		15,077
Total		3,688		7,579		45,269		56,536		67,124		123,660
Consumer Loans
Home Equity		2,003		880		2,519		5,402		215,180		220,582
Auto		194		56		87		337		11,188		11,525
Marine		61		—		—		61		7,224		7,285
Recreational vehicle		1,693		618		188		2,499		33,172		35,671
Other		25		10		9		44		4,346		4,390
Total		3,976		1,564		2,803		8,343		271,110		279,453
Commercial Loans
Secured		163		—		1,822		1,985		26,891		28,876
Unsecured		43		—		3,554		3,597		13,831		17,428
Total		206		—		5,376		5,582		40,722		46,304
Total	$	16,716	$	25,066	$	123,830	$	165,612	$	1,533,530	$	1,699,142

The Company has allocated $521,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2011. The Company has allocated $1.2 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2010. Troubled debt restructurings are considered impaired and are included in the table above. United Community has no commitments to customers whose loans are classified as a troubled debt restructuring.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes homogenous loans past due 90 cumulative days, and all non-homogenous loans including commercial loans and commercial real estate loans.

Asset quality ratings are divided into two groups: Pass (unclassified) and Classified. Within the unclassified group, loans that display potential weakness are risk rated as special mention. In addition, there are three classified risk ratings: substandard, doubtful and loss. These specific credit risk categories are defined as follows:

Special Mention.Loans classified as special mention have potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institutions credit position at some future date. Loans may be housed in this category for no longer than 12 months during which time information is obtained to determine if the credit should be downgraded to the substandard category.

20

Substandard.Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful.Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Loss.Loans classified as loss are considered uncollectible and of such little value, that continuance as assets is not warranted. Although there may be a chance of recovery on these assets, it is not practical or desirable to defer writing off the asset.

The Company monitors loans on a monthly basis to determine if they should be included in one of the categories listed above. All impaired non-homogeneous credits classified as Substandard, Doubtful or Loss are analyzed on an individual basis for a specific reserve requirement. This analysis is performed on each individual credit at least annually or more frequently if warranted. Loans that are not individually impaired and housed in the unclassified risk category have a loss factor percentage applied to the balance of the outstanding loan.

21

As of March 31, 2011 and December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Loans
March 31, 2011

(Dollars in thousands)

	Unclassified				Classified
			Special								Total
	Unclassified		Mention		Substandard		Doubtful		Loss		Classified		Total Loans
Real Estate Loans
Permanent
One-to four-family residential	$	726,188	$	2,966	$	32,911	$	—	$	—	$	32,911	$	762,065
Multifamily residential		105,032		6,858		19,356		—		—		19,356		131,246
Nonresidential		197,896		60,583		70,293		—		—		70,293		328,772
Land		9,250		1,074		15,300		—		—		15,300		25,624
Total		1,038,366		71,481		137,860		—		—		137,860		1,247,707
Construction Loans
One-to four-family residential		35,062		5,636		47,348		29		—		47,377		88,075
Multifamily and nonresidential		386		10,433		382		—		—		382		11,201
Total		35,448		16,069		47,730		29		—		47,759		99,276
Consumer Loans
Home Equity		213,019		21		3,346		—		—		3,346		216,386
Auto		11,059		—		120		—		—		120		11,179
Marine		6,807		—		—		—		—		—		6,807
Recreational vehicle		33,068		—		998		—		—		998		34,066
Other		4,026		—		14		—		—		14		4,040
Total		267,979		21		4,478		—		—		4,478		272,478
Commercial Loans
Secured		17,989		818		12,181		586		—		12,767		31,574
Unsecured		6,758		2,175		3,600		1,665		—		5,265		14,198
Total		24,747		2,993		15,781		2,251		—		18,032		45,772
Total	$	1,366,540	$	90,564	$	205,849	$	2,280	$	—	$	208,129	$	1,665,233

22

Loans
December 31, 2010
(Dollars in thousands)

	Unclassified				Classified
			Special								Total
	Unclassified		Mention		Substandard		Doubtful		Loss		Classified		Total Loans
Real Estate Loans
Permanent
One-to four-family residential	$	723,814	$	2,404	$	31,208	$	—	$	—	$	31,208	$	757,426
Multifamily residential		106,839		6,900		22,032		—		—		22,032		135,771
Nonresidential		200,816		55,197		75,377		—		—		75,377		331,390
Land		9,677		1,100		14,361		—		—		14,361		25,138
Total		1,041,146		65,601		142,978		—		—		142,978		1,249,725
Construction Loans
One-to four-family residential		47,308		6,122		55,021		132		—		55,153		108,583
Multifamily and nonresidential		1,091		13,604		382		—		—		382		15,077
Total		48,399		19,726		55,403		132		—		55,535		123,660
Consumer Loans
Home Equity		216,994		—		3,588		—		—		3,588		220,582
Auto		11,420		—		105		—		—		105		11,525
Marine		7,285		—		0		—		—		—		7,285
Recreational vehicle		35,430		—		241		—		—		241		35,671
Other		4,375		—		15		—		—		15		4,390
Total		275,504		—		3,949		—		—		3,949		279,453
Commercial Loans
Secured		14,608		1,327		12,134		807		—		12,941		28,876
Unsecured		9,327		2,132		4,304		1,665		—		5,969		17,428
Total		23,935		3,459		16,438		2,472		—		18,910		46,304
Total	$	1,388,984	$	88,786	$	218,768	$	2,604	$	—	$	221,372	$	1,699,142

23

7. MORTGAGE BANKING ACTIVITIES

Mortgage loans serviced for others, which are not reported in United Community’s assets, totaled $1.1 billion at March 31, 2011, and December 31, 2010.

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

	Three Months Ended			Year Ended
	March 31, 2011			December 31, 2010
	(Dollars in thousands)
Balance, beginning of year	$	6,400		$	6,228
Originations		433			2,621
Amortized to expense		(529	)		(2,449	)
Balance, end of period		6,304			6,400
Less valuation allowance		(144	)		(285	)
Net balance	$	6,160		$	6,115

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

	Three Months Ended			Year Ended
	March 31, 2011			December 31, 2010
	(Dollars in thousands)
Balance, beginning of year	$	(285	)	$	(423	)
Impairment charges		—			(1,279	)
Recoveries		141			1,417
Balance, end of period	$	(144	)	$	(285	)

Fair value of mortgage servicing rights as of March 31, 2011 was approximately $8.6 million and at December 31, 2010 was approximately $8.2 million.

Key economic assumptions in measuring the value of mortgage servicing rights at March 31, 2011 and December 31, 2010 were as follows:

	March 31,			December 31,
	2011			2010
Weighted average prepayment rate		307 PSA			322 PSA
Weighted average life (in years)		3.66			3.71
Weighted average discount rate		8	%		8	%

24

8. OTHER REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS

Real estate owned and other repossessed assets at March 31, 2011 and December 31, 2010 were as follows:

	March 31,			December 31,
	2011			2010
	(Dollars in thousands)
Real estate owned and other repossessed assets	$	49,577		$	47,668
Valuation allowance		(6,704	)		(7,332	)
End of period	$	42,873		$	40,336

Activity in the valuation allowance was as follows:

	March 31,			December 31,
	2011			2010
	(Dollars in thousands)
Beginning of year	$	7,332		$	7,867
Additions charged to expense		582			4,572
Direct write-downs		(1,210	)		(5,107	)
End of period	$	6,704		$	7,332

Expenses related to foreclosed and repossessed assets include:

	For the three months ended March 31,
	2011		2010
	(Dollars in thousands)
Net loss on sales	$	410	$	100
Provision for unrealized losses, net		582		1,384
Operating expenses, net of rental income		873		607
Total expenses	$	1,865	$	2,091

25

9. 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,
	2011			2010
	(In thousands)
Service cost	$	—		$	—
Interest cost		33			47
Expected return on plan assets		—			—
Net amortization of prior service cost		—			—
Recognized net actuarial gain		(19	)		—
Net periodic benefit cost	$	14		$	47
Assumptions used in the valuations were as follows:
Weighted average discount rate		5.00	%		5.75	%

10. FAIR VALUE MEASUREMENT

Fair value is the exchange price that would be received for an asset if 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. There are three levels of inputs that may be used to measure fair value:

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 beliefs about the assumptions that market participants would use in pricing an asset or liability.

United Community uses the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Available for sale securities: 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).

Impaired loans: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.

Foreclosed assets:Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

26

Mortgage servicing rights:Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income.

Loans held for sale:Loans held for sale are carried at the lower of cost or fair value, as determined by outstanding commitments, from third party investors.

Assets and Liabilities Measured on a Recurring Basis:Assets and liabilities measured at fair value on a recurring basis are summarized below:

			Fair Value Measurements at March 31, 2011 Using:
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	March 31,		Assets		Inputs		Inputs
	2011		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Available for sale securities
US Treasury and government sponsored entities’ securities	$	62,865	$	—	$	62,865	$	—
Equity securities		327		327		—		—
Mortgage-backed GSE securities: residential		226,196		—		226,196		—
			Fair Value Measurements at December 31, 2010 Using:
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	December 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	$	62,935	$	—	$	62,935	$	—
Equity securities		394		394		—		—
Mortgage-backed GSE securities: residential		298,713		—		298,713		—

27

Assets and Liabilities Measured on a Non-Recurring Basis

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

			Fair Value Measurements at March 31, 2011 Using:
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	March 31,		Identical Assets		Inputs		Inputs
	2011		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Impaired loans
Permanent real estate loans	$	37,482	$	—	$	—	$	37,482
Construction loans		25,252		—		—		25,252
Commercial loans		8,894		—		—		8,894
Mortgage servicing assets		2,201		—		2,201		—
Foreclosed assets
Permanent real estate loans		3,771		—		—		3,771
Construction loans		10,201		—		—		10,201
			Fair Value Measurements at December 31, 2010 Using:
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	December 31,		Identical Assets		Inputs		Inputs
	2010		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Impaired loans
Permanent real estate loans	$	49,235	$	—	$	—	$	49,235
Construction loans		20,229		—		—		20,229
Commercial loans		1,694		—		—		1,694
Loans held for sale		10,845		—		10,845		—
Mortgage servicing assets		2,278		—		2,278		—
Foreclosed assets
Permanent real estate loans		3,930		—		—		3,930
Construction loans		10,527		—		—		10,527

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 $83.9 million at March 31, 2011, with a specific valuation allowance of $12.3 million. This resulted in an additional provision for loan losses of $5.6 million during the three months ended March 31, 2011. 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 three months ended March 31, 2010. 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 $84.6 million at December 31, 2010, with a specific valuation allowance of $13.4 million, resulting in additional provision for loan losses of $47.9 million during 2010.

Mortgage servicing rights had a carrying amount of $2.3 million with a valuation allowance of $144,000 at March 31, 2011, resulting in no additional expenses during the three months ended March 31, 2011. 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.

28

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 $20.7 million, with a valuation allowance of $6.7 million at March 31, 2011. This resulted in additional expenses of $582,000 during the three months ended March 31, 2011.

In accordance with generally accepted accounting principles, the carrying value and estimated fair values of financial instruments, at March 31, 2011 and December 31, 2010, were as follows:

	March 31, 2011						December 31, 2010
	Carrying			Fair			Carrying			Fair
	Value			Value			Value			Value
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	38,678		$	38,678		$	37,107		$	37,107
Available for sale securities		289,388			289,388			362,042			362,042
Loans held for sale		2,531			2,543			10,870			10,870
Loans, net		1,620,094			1,642,289			1,649,486			1,675,610
Federal Home Loan Bank stock		26,464			n/a			26,464			n/a
Accrued interest receivable		7,684			7,684			7,720			7,720
Liabilities:
Deposits:
Checking, savings and money market accounts		(807,763	)		(807,763	)		(779,301	)		(779,301	)
Certificates of deposit		(904,760	)		(919,854	)		(910,480	)		(925,325	)
Federal Home Loan Bank advances		(100,954	)		(107,623	)		(202,818	)		(210,497	)
Repurchase agreements and other		(100,446	)		(109,485	)		(97,797	)		(107,299	)
Advance payments by borrowers for taxes and insurance		(13,219	)		(13,219	)		(20,668	)		(20,668	)
Accrued interest payable		(905	)		(905	)		(809	)		(809	)

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 effect 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.

29

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.

11. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURE

Supplemental disclosures of cash flow information are summarized below.

	For the three months ended
	March 31, 2011		March 31, 2010
	(Dollars in thousands)
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest on deposits and borrowings	$	7,982	$	10,759
Supplemental schedule of noncash activities:
Transfers from loans to real estate owned and other repossessed assets		8,507		8,119
Transfers from available for sale securities to other assets		24,395		—

12. SEGMENT INFORMATION

All of the Company’s financial service operations are considered by management to be aggregated in one reportable operating segment, which is banking services.

30

13. 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 2,049,844 shares were anti-dilutive for the three months ended March 31, 2011. There were 1,863,528 stock options for shares that were anti-dilutive for the three months ended March 31, 2010.

	Three Months Ended
	March 31,
	2011		2010
Numerator:
Net income (loss)	$	2,962	$	(5,142	)
Denominator:
Weighted average common shares outstanding—basic		30,917		29,955
Dilutive effect of stock options		2		—
Weighted average common shares outstanding��dilutive		30,919		29,955
Basic earnings (loss) per share:		0.10		(0.17	)
Dilutive earnings (loss) per share:		0.10		(0.17	)

14. OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) included in the Consolidated Statements of Shareholders’ Equity consists of unrealized gains and losses on available for sale securities and changes in unrealized gains and losses on postretirement liability. The change includes reclassification of gains on sales of securities of $1.3 million and impairment charges of $10,000 at March 31, 2011, and gains on sales of securities of $2.8 million and no impairment charges at March 31, 2010.

Other comprehensive income (loss) components and related tax effects for the three month periods are as follows:

	Three months ended
	March 31,			March 31,
	2011			2010
	(Dollars in thousands)
Unrealized holding gain (loss) on securities available for sale	$	(470	)	$	2,188
Reclassification adjustment for gains realized in income		(1,303	)		(2,843	)
Net unrealized losses		(1,773	)		(655	)
Tax effect (35%)		—			230
Net of tax amount	$	(1,773	)	$	(425	)

The following is a summary of accumulated other comprehensive income (loss) balances, net of tax:

				Current
	Balance at			Period			Balance at
	December 31, 2010			Change			March 31, 2011
Unrealized losses on securities available for sale	$	(5,673	)	$	(1,773	)	$	(7,446	)
Unrealized gains on post-retirement benefits		895			—			895
Total	$	(4,778	)	$	(1,773	)	$	(6,551	)

31

15. REGULATORY CAPITAL REQUIREMENTS

Home Savings is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on Home Savings and United Community. The regulations require Home Savings to meet specific capital adequacy guidelines and the regulatory framework for prompt corrective action that involve quantitative measures of Home Savings’ assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. Home Savings’ capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation for capital adequacy require Home Savings to maintain minimum amounts and ratios of Tier 1 (or Core) capital (as defined in the regulations) to average total assets (as defined) and of total risk-based capital (as defined) to risk-weighted assets (as defined). Actual and statutory required capital amounts and ratios for Home Savings are presented below.

	As of March 31, 2011
						Minimum Capital
	Actual					Requirements Per Bank Order
	Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total risk-based capital to risk-weighted assets	$	200,898		13.02	%	$	185,219		12.00	%
Tier 1 capital to risk-weighted assets		181,269		11.74	%		*		*
Tier 1 capital to average total assets		181,269		8.44	%		171,755		8.00	%

	As of March 31, 2011
						To Be Well Capitalized Under
	Minimum Capital					Prompt Corrective Action
	Requirements Per Regulation					Provisions
	Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total risk-based capital to risk-weighted assets	$	123,479		8.00	%	$	154,349		10.00	%
Tier 1 capital to risk-weighted assets		*		*			92,610		6.00	%
Tier 1 capital to average total assets		85,877		4.00	%		107,347		5.00	%

	As of December 31, 2010
						Minimum Capital
	Actual					Requirements Per Bank Order
	Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total risk-based capital to risk-weighted assets	$	197,891		12.54	%	$	189,412		12.00	%
Tier 1 capital to risk-weighted assets		177,776		11.26	%		*		*
Tier 1 capital to average total assets		177,776		7.84	%		181,513		8.00	%

	As of December 31, 2010
						To Be Well Capitalized Under
	Minimum Capital					Prompt Corrective Action
	Requirements Per Regulation					Provisions
	Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total risk-based capital to risk-weighted assets	$	126,274		8.00	%	$	157,843		10.00	%
Tier 1 capital to risk-weighted assets		*		*			94,706		6.00	%
Tier 1 capital to average total assets		90,757		4.00	%		113,446		5.00	%

* Amount/Ratio is not required under the Bank Order or regulations.

32

As of March 31, 2011 and December 31, 2010, respectively, the FDIC and OTS categorized Home Savings as adequately capitalized pursuant to the Bank Order and OTS Order (as amended) discussed in Note 2. Home Savings cannot be considered well capitalized while the Bank Order is in place. The Bank Order requires Home Savings to measure its Tier 1 Leverage Ratio and Total Risk-based Capital Ratio at the end of every quarter. Under the terms of the Bank Order, if Home Savings’ Tier 1 Leverage Ratio falls below 8.0% or if its Total Risk-based Capital Ratio falls below 12.0% at the end of any given quarter, then Home Savings must restore its capital ratios to the required levels within 90 days. At December 31, 2010, Home Savings’ Tier 1 Leverage Ratio was 7.84% and its Total Risk-based Capital Ratio was 12.54%. Under the terms of the Bank Order, Home Savings had to achieve the 8.0% Tier 1 Leverage Ratio by March 31, 2011. Home Savings achieved this as its Tier 1 Leverage Ratio was 8.44% and its Total Risk-based Capital Ratio was 13.02% at March 31, 2011.

Events beyond management’s control, such as fluctuations in interest rates or a downturn in the economy in areas in which Home Savings’ loans and securities are concentrated, could adversely affect future earnings, and consequently Home Savings’ ability to meet its future capital requirements. Refer to Note 2 for a complete discussion of the regulatory enforcement actions.

16. INCOME TAXES

Management recorded a valuation allowance against deferred tax assets at March 31, 2011 and December 31, 2010, based on its estimate of future reversal and utilization. When determining the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded as a benefit, the Company conducts a regular assessment of all available information. This information includes, but is not limited to, taxable income in prior periods, projected future income, and projected future reversals of deferred tax items. Based on these criteria, the Company determined that it was necessary to establish a full valuation allowance against the entire net deferred tax asset.

33

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNITED COMMUNITY FINANCIAL CORP.

	At or For the Three
	Months Ended
	March 31,
	2011			2010
Selected financial ratios and other data: (1)
Performance ratios:
Return on average assets (2)		0.55	%		-0.90	%
Return on average equity (3)		6.56	%		-9.18	%
Interest rate spread (4)		3.30	%		3.00	%
Net interest margin (5)		3.50	%		3.28	%
Noninterest expense to average assets		3.07	%		2.96	%
Efficiency ratio (6)		77.12	%		78.59	%
Average interest-earning assets to average interest-bearing liabilities		112.50	%		113.36	%
Capital ratios:
Average equity to average assets		8.41	%		9.77	%
Equity to assets, end of period		8.39	%		9.41	%
Tier 1 leverage ratio		8.44	%		8.47	%
Tier 1 risk-based capital ratio		11.74	%		11.47	%
Total risk-based capital ratio		13.02	%		12.73	%
Asset quality ratio:
Nonperforming loans to total loans at end of period (7)		9.00	%		7.60	%
Nonperforming assets to average assets (8)		8.78	%		7.59	%
Nonperforming assets to total assets at end of period		8.92	%		7.63	%
Allowance for loan losses as a percent of loans		2.79	%		2.55	%
Allowance for loan losses as a percent of nonperforming loans (7)		31.82	%		34.47	%
Texas ratio (9)		84.50	%		66.50	%
Total classified assets as a percent of Tier 1 Capital		114.82	%		119.22	%
Net chargeoffs as a percent of average loans		1.63	%		1.51	%
Total 90+ days past due as a percent of total loans		7.13	%		7.26	%
Office data:
Number of full service banking offices		38			38
Number of loan production offices		7			6
Per share data:
Basic earnings (loss) (10)	$	0.10		$	(0.17	)
Diluted earnings (loss) (10)		0.10			(0.17	)
Book value (11)		5.73			6.94
Tangible book value (12)		5.72			6.92

Notes:
1.	Ratios for the three month periods are annualized where appropriate
2.	Net income (loss) divided by average total assets
3.	Net income (loss) divided by average total equity
4.	Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities
5.	Net interest income as a percentage of average interest-earning assets
6.	Noninterest expense, excluding the amortization of core deposit intangible, divided by the sum of net interest income and noninterest income, excluding gains and losses on securities, other than temporary impairment charges, gains and losses on foreclosed assets, and gain on the sale of a retail branch
7.	Nonperforming loans consist of nonaccrual loans and loans past due ninety days and still accruing
8.	Nonperforming assets consist of nonperforming loans and real estate owned and other repossessed assets
9.	Nonperforming assets divided by the sum of tangible common equity and the allowance for loan losses
10.	Net income (loss) divided by the number of basic or diluted shares outstanding
11.	Shareholders’ equity divided by number of shares outstanding
12.	Shareholders’ equity minus core deposit intangible divided by number of shares outstanding

34

Forward Looking Statements

When used in this Form 10-Q the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including changes in economic conditions in United Community’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in Home Savings’ market area, and competition, that could cause actual results to differ materially from results presently anticipated or projected. United Community cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. United Community advises readers that the factors listed above could affect United Community’s financial performance and could cause United Community’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. United Community undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made.

Comparison of Financial Condition at March 31, 2011 and December 31, 2010

Total assets decreased $82.2 million to $2.1 billion at March 31, 2011, compared to December 31, 2010. Contributing to the change were decreases in available for sale securities of $72.7 million, net loans of $29.4 million and loans held for sale of $8.3 million. These decreases were partially offset by increases in real estate owned and other repossessed assets of $2.5 million and other assets of $24.2 million.

Net loans decreased $29.4 million during the first three months of 2011. The primary source of the decrease was the overall decline in construction loans and commercial real estate loans. Home Savings has, in the current economic environment, made a conscious effort to decrease its exposure in construction and segments of its commercial real estate loan portfolios.

Available for sale securities decreased $72.7 million during the first three months of 2011 as a result of various securities transactions initiated in the first three months of the year. During the first three months of 2011, the Company sold approximately $87.6 million in securities, realizing $1.3 million in gains on the sales. These sales were taken in part to realize a portion of the gains in the portfolio due to continued spread tightening on mortgage-backed and agency securities. The Company offset these sales with $26.9 million in purchases of additional securities. The additional purchases were primarily made in higher coupon mortgage-backed securities, which will afford the Company some yield protection should longer term rates begin to rise and/or prepayment speeds begin to slow. Maturities and paydowns of $10.7 million accounted for the remainder of the change.

The allowance for loan losses decreased to $46.4 million, or 2.79% of the net loan portfolio and 31.82% of nonperforming loans as of March 31, 2011, down from $50.9 million or 2.99% of the net loan portfolio and 36.47% of nonperforming loans as of December 31, 2010. Loan loss provisions totaling $2.2 million during the three months ended March 31, 2011 were offset by net charge-offs totaling $6.7 million. Loan losses are charged against the allowance when the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are added back to the allowance. Home Savings’ allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies”. Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. Home Savings’ process for determining the appropriate level of the allowance for possible loan losses is designed to account for credit deterioration as it occurs. The provision for possible loan losses reflects loan quality trends, including the levels of and trends related to nonaccrual loans, past due loans, classified loans and net charge-offs or recoveries, among other factors.

35

	Allowance For Loan Losses
	(Dollars in thousands)
	December 31,										March 31,
	2010		Provision			Recovery		Chargeoff			2011
Real Estate Loans
Permanent
One-to four-family residential	$	8,139	$	1,829		$	150	$	(1,074	)	$	9,044
Multifamily residential		5,082		(315	)		79		(242	)		4,604
Nonresidential		12,559		(277	)		1		(1,039	)		11,244
Land		2,286		317			19		(523	)		2,099
Total		28,066		1,554			249		(2,878	)		26,991
Construction Loans
One-to four-family residential		8,260		(402	)		57		(2,352	)		5,563
Multifamily and nonresidential		273		(62	)		—		—			211
Total		8,533		(464	)		57		(2,352	)		5,774
Consumer Loans
Home Equity		2,964		203			57		(516	)		2,708
Auto		104		(6	)		10		(3	)		105
Marine		361		119			0		(223	)		257
Recreational vehicle		1,519		337			17		(215	)		1,658
Other		312		(61	)		90		(73	)		268
Total		5,260		592			174		(1,030	)		4,996
Commercial Loans
Secured		2,611		511			51		(391	)		2,782
Unsecured		6,413		(1	)		35		(575	)		5,872
Total		9,024		510			86		(966	)		8,654
Total	$	50,883	$	2,192		$	566	$	(7,226	)	$	46,415

In the first quarter of 2011, the level of the allowance for loan losses decreased $4.5 million when compared to December 31, 2010. Furthermore, during the first quarter of 2011, the level of net loans charged off exceeded the loan loss provision by approximately $4.8 million.

Management estimates the required allowance balance based on an analysis using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations, estimated collateral values, general economic conditions in the market area and other factors. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component of the allowance covers pools of loans evaluated as a homogeneous group using a historical charge-off experience factor applied to each pool of loans. The historical charge-off experience factor is also adjusted for certain environmental factors. These historical chargeoff factors increased in the first quarter of 2011. During the first quarter of 2011, the total level of impaired loans increased $13.1 million. The effect of this increase in impaired loans caused the allowance for loan losses to decrease $2.2 million. Additionally, during the first quarter of 2011, the level of loans collectively evaluated for impairment decreased $47.1 million. This reduction caused the allowance for loan losses to further decrease. This decrease occurred irrespective of the increase in the historical charge-off factors.

It can further be noted that timing differences can exist between the period in which a provision is made and the period in which the loss is confirmed and resulting charge-off is taken. In the last quarter of 2010, Home Savings incurred substantial provision expense for probable incurred losses in the form of both general and specific reserves. In the first quarter of 2011, certain loans were charged off that had adequate reserves applied in prior periods. Most notably as indicated above, one-to four-family residential construction loan charge offs of $2.3 million exceeded the provision for loan losses in this category by approximately $2.0 million in the first quarter. The level of charge-offs of one-to four-family residential construction loans is comprised of 39 loans previously reserved.

Construction loans charged off in the first quarter of 2011 amounted to $2.3 million. This chargeoff total is an aggregation of approximately 29 loans. The level of specific reserves allocated to impaired construction loans remained flat at March 31, 2011, as compared to December 31, 2010. This is the result of $7.6 million in loans with an existing specific reserve being re-evaluated in the first quarter. This re-evaluation decreased the allowance for loan losses by $763,000. This decrease was offset partially by loans, having an outstanding balance of $3.6 million at March 31, 2011, being evaluated for impairment for the first time. This resulted in an additional provision for loan losses of $346,000.

36

The level of commercial loans individually evaluated for impairment increased $1.3 million as a result of one relationship that became impaired in the first quarter of 2011. Commercial loans collectively evaluated for impairment decreased $1.7 million primarily as a result of a decrease in overall loan balances.

A loan is considered impaired when, 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. Factors considered by management in determining impairment include payment status, collateral value and the strength of guarantors (if any). Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the facts and circumstances surrounding the loans and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, the amount of shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by the fair value of the collateral if the loan is collateral dependent, the present value of expected future cash flows discounted at the loan’s effective interest rate, or the market value of the loan. The following table summarizes the change in impaired loans during the first three months of 2011.

Impaired Loans(Dollars in thousands)

	March 31,		December 31,
	2011		2010		Change
Real Estate Loans
Permanent
One-to four-family residential	$	27,968	$	25,493	$	2,475
Multifamily residential		8,775		11,487		(2,712	)
Nonresidential		62,379		58,861		3,518
Land		6,901		5,569		1,332
Total		106,023		101,410		4,613
Construction Loans
One-to four-family residential		47,305		46,672		633
Multifamily and nonresidential		382		382		—
Total		47,687		47,054		633
Consumer Loans
Home Equity		1,250		1,438		(188	)
Auto		69		55		14
Boat		—		—		—
Recreational vehicle		47		47		—
Other		7		7		—
Total		1,373		1,547		(174	)
Commercial Loans
Secured		11,097		2,171		8,926
Unsecured		3,418		4,273		(855	)
Total		14,515		6,444		8,071
Total Impaired Loans	$	169,598	$	156,455	$	13,143

37

The increase in impaired loans can largely be attributed to one loan aggregating $8.7 million, for which, in the opinion of management, Home Savings will not be able to collect all payments of principal or interest due thereon according to its contractual terms.

Included in impaired loans above are certain loans Home Savings considers to be troubled debt restructurings. A loan is considered a troubled debt restructuring if Home Savings grants a concession to a borrower that would otherwise not be given based on economic or legal reasons related to the borrower’s financial difficulties. The objective of a troubled debt restructuring is to make the best of a bad situation. A troubled debt restructuring may include, but is not necessarily limited to, one or a combination of the following:

• Transfer from the borrower to Home Savings of receivables from third parties, real estate, or other assets to fully or partially satisfy a debt (including a transfer resulting from foreclosure or repossession).

• Issuance or other granting of an equity interest to Home Savings by the borrower to satisfy fully or partially a debt unless the equity interest is granted pursuant to existing terms for converting the debt into an equity interest.

• Modification of the terms of a debt, such as one or a combination of:

• Reduction of the stated interest rate for the remaining original life of the debt

• Extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk

• Reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement and/or

• Reduction of accrued interest.

A debt restructuring is not necessarily a troubled debt restructuring for purposes of this definition even if the borrower is experiencing some financial difficulties. In general, a borrower that can obtain funds from other sources at market interest rates at or near those on non-troubled debt is not considered to be involved in a troubled debt restructuring. A troubled debt restructuring is not involved if:

• the fair value of cash, other assets, or an equity interest accepted by Home Savings from a borrower in full satisfaction of its receivable at least equals the recorded investment in the loan;

• the fair value of cash, other assets, or an equity interest transferred by a borrower to Home Savings in full settlement of its loan at least equals the carrying amount of the loan;

• Home Savings reduces the effective interest rate on the loan primarily to reflect a decrease in market interest rates in general or a decrease in the risk so as to maintain a relationship with a borrower that can readily obtain funds from other sources at the current market interest rate; or

• Home Savings issues, in exchange for the original loan, a new marketable loan having an effective interest rate based on its market price that is at or near the current market interest rates of loans with similar maturity dates and stated interest rates issued by other banks.

38

The change in troubled debt restructurings for the three months ended March 31, 2011 is as follows:

Troubled Debt Restructurings

	March 31,		December 31,
	2011		2010		Change
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family	$	12,034	$	10,830	$	1,204
Multifamily residential		2,411		2,410		1
Nonresidential		22,178		22,313		(135	)
Land		1,885		1,344		541
Total		38,508		36,897		1,611
Construction Loans
One-to four-family residential		6,683		6,879		(196	)
Multifamily and nonresidential		—		—		—
Total		6,683		6,879		(196	)
Consumer Loans
Home Equity		108		347		(239	)
Auto		27		9		18
Marine		—		—		—
Recreational vehicle		—		—		—
Other		7		7		—
Total		142		363		(221	)
Commercial Loans
Secured		9,147		348		8,799
Unsecured		69		84		(15	)
Total		9,216		432		8,784
Total Restructured Loans	$	54,549	$	44,571	$	9,978

Once a restructured loan has fallen into nonaccrual status, the restructured loan will remain on nonaccrual status for a period of at least six months until the borrower has demonstrated a willingness and ability to make the restructured loan payments. Troubled debt restructured loans that were on nonaccrual status aggregated $24.4 million and $11.2 million at March 31, 2011 and December 31, 2010, respectively. Such loans are considered nonperforming loans. Troubled debt restructured loans that were accruing according to their terms aggregated $30.1 million and $33.3 million at March 31, 2011 and December 31, 2010, respectively. The increase in troubled debt restructured loans can largely be attributed to one loan aggregating $8.7 million, for which, in the opinion of management, Home Savings will not be able to collect all payments of principal or interest due according to contractual terms.

Nonperforming loans consist of nonaccrual loans and loans past due ninety days and still accruing. Nonperforming loans were $145.9 million, or 9.00% of net loans, at March 31, 2011, compared to $139.5 million, or 8.46% of net loans, at December 31, 2010. The schedule below summarizes the change in nonperforming loans for the first three months of 2011.

39

Nonperforming Loans(Dollars in thousands)

	March 31,		December 31,
	2011		2010		Change
Real Estate Loans
Permanent
One-to four-family residential	$	29,062	$	27,417	$	1,645
Multifamily residential		8,239		10,983		(2,744	)
Nonresidential		37,353		39,838		(2,485	)
Land		6,722		5,188		1,534
Total		81,376		83,426		(2,050	)
Construction Loans
One-to four-family residential		46,139		44,022		2,117
Multifamily and nonresidential		382		2,413		(2,031	)
Total		46,521		46,435		86
Consumer Loans
Home Equity		3,122		3,389		(267	)
Auto		114		89		25
Marine		—		—		—
Recreational vehicle		982		237		745
Other		6		10		(4	)
Total		4,224		3,725		499
Commercial Loans
Secured		10,359		1,822		8,537
Unsecured		3,376		4,122		(746	)
Total		13,735		5,944		7,791
Total Nonperforming Loans	$	145,856	$	139,530	$	6,326

During the first three months of 2011, one secured commercial loan relationship aggregating $8.7 million became nonperforming. While the loan is past due less than ninety days at March 31, 2011, management deemed it prudent to move the loan to a nonaccrual status.

Loans held for sale decreased $8.3 million, or 76.7%, to $2.5 million at March 31, 2011, compared to $10.5 million at December 31, 2010. Over the three months ended March 31, 2011, Home Savings has intentionally reduced the volume of loans originated for sale and focused on portfolio originations. Home Savings continues to sell a portion of newly originated mortgage loans into the secondary market as part of its risk management strategy and anticipates continuing to do so in the future.

Federal Home Loan Bank stock remained at $26.5 million for March 31, 2011, and December 31, 2010. During the first three months of 2011, the Federal Home Loan Bank paid a cash dividend in lieu of a stock dividend to its member banks.

40

Real estate owned and other repossessed assets increased $2.5 million, or 6.3%, during the three months ended March 31, 2011, as compared to the year ended December 31, 2010. The following table summarizes the activity in real estate owned and other repossessed assets during the period:

	Real Estate Owned			Repossessed Assets			Total
	(In thousands)
Balance at December 31, 2010	$	39,914		$	422		$	40,336
Acquisitions		8,404			280			8,684
Sales		(5,350	)		(215	)		(5,565	)
Provision for unrealized losses		(582	)		—			(582	)
Balance at March 31, 2011	$	42,386		$	487		$	42,873

The following table depicts the type of property secured in the satisfaction of loans and the valuation allowance associated with each type as of March 31, 2011:

			Valuation			Net
	Balance		Allowance			Balance
	(In thousands)
Real estate owned
One-to four-family	$	15,978	$	(178	)	$	15,800
Multifamily residential		2,587		(32	)		2,555
Nonresidential		3,244		(306	)		2,938
One-to four-family residential construction		26,426		(6,188	)		20,238
Land		855		—			855
Total real estate owned		49,090		(6,704	)		42,386
Repossessed assets
Auto		8		—			8
Marine		200		—			200
Recreational vehicle		279		—			279
Total repossessed assets		487		—			487
Total real estate owned and other repossessed assets	$	49,577	$	(6,704	)	$	42,873

Property acquired in the settlement of loans is recorded at the lower of (a) the loan’s acquisition balance less cost to sell or (b) the fair market value of the property secured less costs to sell. Appraisals are obtained at least annually on properties that exceed $1.0 million in value. Based on current appraisals, a valuation allowance may be established to reflect properly the asset at fair market value. The increase in the valuation allowance on property acquired in relation to one-to four-family residential construction loans was due to the decline in market value of those properties. Home Savings engages experienced professionals to sell real estate owned and other repossessed assets in a timely manner.

Total deposits increased $22.7 million to $1.7 billion at March 31, 2011, compared to December 31, 2010. The primary cause for the increase in deposits was due to the overall increase in core deposits. As certificates of deposit renewed, the Company was able to successfully retain these deposits in other interest-bearing non-time deposit accounts and prevent them from leaving Home Savings entirely. Home Savings has also engaged a service to assist in attracting deposits from bank holding companies, credit unions and other financial institutions. As of March 31, 2011, Home Savings had no brokered deposits.

Federal Home Loan Bank advances decreased $101.9 million during the first three months of 2011, due primarily to lower funding needs as a result of lower net loans and available securities during the period. Home Savings had approximately $264.2 million in unused borrowing capacity at the FHLB at March 31, 2011.

Advance payments by borrowers for taxes and insurance decreased $7.4 million during the first three months of 2011. Remittance of real estate taxes and property insurance made on behalf of customers of Home Savings accounted for $2.6 million of the decrease. In addition, funds held for payments received on loans sold where servicing was retained by Home Savings decreased $4.8 million.

41

Shareholders’ equity increased $1.3 million to $177.4 million at March 31, 2011, from $176.1 million at December 31, 2010. The change occurred primarily due to the net income recognized by the Company in the period offset partially by the adjustment to other comprehensive income for the valuation of available for sale securities during the period.

Comparison of Operating Results for the Three Months Ended
March 31, 2011 and March 31, 2010

Net Income (Loss).United Community recognized net income for the three months ended March 31, 2011, of $3.0 million, or $0.10 per diluted share, compared to a net loss of $5.2 million, or $(0.17) per diluted share, for the three months ended March 31, 2010. The primary cause of the change was lower provision for loan losses recognized during the first quarter of 2011. Compared with the first quarter of 2010, net interest income decreased $62,000, the provision for loan losses decreased $10.3 million, non-interest income decreased $2.6 million, and non-interest expense decreased $480,000. United Community’s annualized return on average assets and return on average equity were 0.55% and 6.56%, respectively, for the three months ended March 31, 2011. The annualized return on average assets and return on average equity for the comparable period in 2010 were (0.90)% and (9.18)%, respectively.

Net Interest Income.Net interest income for the three months ended March 31, 2011 and March 31, 2010, was $17.7 million. Total interest income decreased $3.1 million in the first quarter of 2011 compared to the first quarter of 2010, primarily as a result of a decrease of $215.3 million in the average balance of outstanding loans. United Community also experienced a decrease in the yield on net loans of 8 basis points. The Company’s construction and segments of its commercial real estate loan portfolios declined as a result of executing its strategic objective of reducing specific concentrations in these portfolios in the current economic environment.

Total interest expense decreased $3.0 million for the quarter ended March 31, 2011, as compared to the same quarter last year. The change was due primarily to reductions of $3.0 million in interest paid on deposits. The overall decrease in interest expense was attributable to a shift in deposit balances from certificates of deposit to relatively less expensive non-time deposits. The average outstanding balance of certificates of deposit declined by $117.8 million, while non-time deposits increased by $44.9 million. Also contributing to the change was a reduction of 77 basis points in the cost of certificates of deposit, as well as a decrease in the cost of non-time deposits of 28 basis points.

The primary cause of the decrease in interest expense on Federal Home Loan Bank advances was a decrease in the average balance of those funds of $42.4 million, despite an increase in the average rate on those borrowings of 50 basis points in the first quarter of 2011 compared to the same quarter in 2010. The increase in rate is due to the change in the mix of borrowings, in that Home Savings paid off all overnight advances in the first quarter of 2011, leaving only term balances with the FHLB. The decrease in interest expense on repurchase agreements and other borrowings was due primarily to a decrease in the cost of those liabilities of 9 basis points despite an increase in their average balances of $2.1 million.

42

The following table shows the impact of interest rate and outstanding balance (volume) changes compared to the first quarter of last year. The interest rate spread for the three months ended March 31, 2011, grew to 3.29% compared to 3.00% for the quarter ended March 31, 2010. The net interest margin increased 21 basis points to 3.49% for the three months ended March 31, 2011 compared to 3.28% for the same quarter in 2010.

	For the Three Months Ended March 31,
	2011 vs. 2010
	Increase						Total
	(decrease) due to						increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	(360	)	$	(2,973	)	$	(3,333	)
Loans held for sale		—			(4	)		(4	)
Investment securities:
Available for sale		(260	)		522			262
FHLB stock		—			—			—
Other interest-earning assets		2			—			2
Total interest-earning assets	$	(618	)	$	(2,455	)	$	(3,073	)
Interest-bearing liabilities:
Savings accounts		(63	)		22			(41	)
NOW and money market accounts		(303	)		62			(241	)
Certificates of deposit		(1,830	)		(875	)		(2,705	)
Federal Home Loan Bank advances		(174	)		151			(23	)
Repurchase agreements and other		(42	)		41			(1	)
Total interest-bearing liabilities	$	(2,412	)	$	(599	)		(3,011	)
Change in net interest income							$	(62	)

Provision for Loan Losses.A provision for loan losses is charged to income to bring the total allowance for loan losses to a level considered by management to be adequate, based on management’s evaluation of such factors as the delinquency status of loans, current economic conditions, the net realizable value of the underlying collateral, changes in the composition of the loan portfolio and prior loan loss experience. The provision for loan losses decreased to $2.2 million in the first quarter of 2011, compared to $12.5 million in the first quarter of 2010. This $10.3 million decrease in the provision for loan losses is primarily a result of a decrease in the permanent real estate portfolio of $5.4 million and a decrease in the construction portfolio of $3.9 million. Both of these decreases are being driven primarily by a decrease in the volume of outstanding permanent real estate loans of $88.2 million and $77.0 million in the volume of outstanding construction loans.

Noninterest Income.Noninterest income decreased in the first quarter of 2011 to $4.0 million, as compared to the first quarter of 2010 of $6.6 million. Driving the decrease in noninterest income was the recognition of lower gains on the sale of fewer available for sale securities and the gain recognized on the sale of Home Savings’ Findlay, Ohio branch in the prior year.

Noninterest Expense.Noninterest expense was $16.8 million in the first quarter of 2011, compared to $17.0 million in the first quarter of 2010. The decrease in noninterest expense was driven by lower salaries and employee benefits paid to employees. This decrease was driven primarily because of the suspension of a matching contribution to the 401(k) plan for 2011 and, to a lesser extent, the Employee Stock Ownership Plan’s repayment in 2010 of the loan made by the Company to the ESOP.

43

UNITED COMMUNITY FINANCIAL CORP.

AVERAGE BALANCE SHEETS

The following table presents the total dollar amounts of interest income and interest expense on the indicated amounts of average interest-earning assets or interest-bearing liabilities together with the weighted average interest rates for the three month periods ended March 31, 2011 and 2010. Average balance calculations were based on daily balances.

	Three Months Ended March 31,
	2011							2010
	Average		Interest					Average		Interest
	Outstanding		Earned/		Yield/			Outstanding		Earned/		Yield/
	Balance		Paid		Cost			Balance		Paid		Cost
	(Dollars in thousands)
Interest-earning assets:
Net loans (1)	$	1,632,182	$	22,510		5.52	%	$	1,847,443	$	25,843		5.60	%
Net loans held for sale		7,024		66		3.76	%		7,459		70		3.75	%
Investment securities:
Available for sale		328,312		2,847		3.47	%		256,748		2,585		4.03	%
Federal Home Loan Bank stock		26,464		300		4.53	%		26,464		300		4.43	%
Other interest-earning assets		24,822		9		0.15	%		24,246		7		0.12	%
Total interest-earning assets		2,018,804		25,732		5.10	%		2,162,360		28,805		5.33	%
Noninterest-earning assets		129,879							129,270
Total assets	$	2,148,683						$	2,291,630
Interest-bearing liabilities:
NOW and money market accounts	$	425,699	$	635		0.60	%	$	399,624	$	876		0.88	%
Savings accounts		226,273		167		0.30	%		207,438		208		0.40	%
Certificates of deposit		904,024		5,529		2.45	%		1,021,843		8,234		3.22	%
Federal Home Loan Bank advances		139,253		825		2.37	%		181,637		848		1.87	%
Repurchase agreements and other		99,185		922		3.72	%		96,987		923		3.81	%
Total interest-bearing liabilities		1,794,434		8,078		1.80	%		1,907,529		11,089		2.33	%
Noninterest-bearing liabilities		173,649							160,162
Total liabilities		1,968,083							2,067,691
Equity		180,600							223,939
Total liabilities and equity	$	2,148,683						$	2,291,630
Net interest income and interest rate spread			$	17,654		3.30	%			$	17,716		3.00	%
Net interest margin						3.50	%						3.28	%
Average interest-earning assets to average interest-bearing liabilities						112.50	%						113.36	%

(1) Nonaccrual loans are included in the average balance at a yield of 0%.

44

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Qualitative Aspects of Market Risk.The principal market risk affecting United Community is interest rate risk. United Community is subject to interest rate risk to the extent that its interest earning assets reprice differently than its interest bearing liabilities. Interest rate risk is defined as the sensitivity of United Community’s earnings and net asset values to changes in interest rates. As part of its efforts to monitor and manage the interest rate risk, the Board of Directors of Home Savings has adopted an interest rate risk policy that requires the Home Savings Board to review quarterly reports related to interest rate risk and annually set exposure limits for Home Savings as a guide to management in setting and implementing day to day operating strategies.

Quantitative Aspects of Market Risk.As part of its interest rate risk analysis, Home Savings uses the “net portfolio value” (NPV) and net interest income methodology. Generally, NPV is the discounted present value of the difference between incoming cash flows on interest earning and other assets and outgoing cash flows on interest bearing and other liabilities. The application of the methodology attempts to quantify interest rate risk as the change in the NPV and net interest income that would result from various levels of theoretical basis point changes in market interest rates.

Home Savings uses an NPV and earnings simulation model prepared internally as its primary method to identify and manage its interest rate risk profile. The model is based on actual cash flows and repricing characteristics for all financial instruments and incorporates market-based assumptions regarding the impact of changing interest rates on future volumes and the prepayment rate of applicable financial instruments. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates also are incorporated into the model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure NPV or net interest income or precisely predict the impact of fluctuations in interest rates on net interest rate changes as well as changes in market conditions and management strategies.

Presented below are analyses of Home Savings’ interest rate risk as measured by changes in NPV and net interest income for instantaneous and sustained parallel shifts of 100 basis point increments in market interest rates. As noted, for the quarter ended March 31, 2011, the percentage changes fall within the policy limits set by the Board of Directors of Home Savings as the minimum NPV ratio and the maximum change in interest income the Home Savings Board deems advisable in the event of various changes in interest rates. See the table below for Board adopted policy limits.

Quarter Ended March 31, 2011
NPV as % of portfolio value of assets													Next 12 months net interest income
													(Dollars in thousands)
										Internal
Change in										policy
rates				Internal						limitations					Internal
(Basis	NPV			policy			Change in			on NPV					policy
points)	Ratio			limitations			%			Change			$ Change		limitations			% Change
300		8.25	%		6.00	%		-1.65	%		25.00	%	$	2,758		-15.00	%		4.37	%
200		9.06			7.00			-0.84			25.00			2,038		-10.00			3.23
100		9.66			7.00			-0.24			25.00			1,182		-5.00			1.87
Static		9.90			8.00			—			—			—		—			—

45

Year Ended December 31, 2010
NPV as % of portfolio value of assets													Next 12 months net interest income
													(Dollars in thousands)
										Internal
Change in										policy
rates				Internal						limitations						Internal
(Basis	NPV			policy			Change in			on NPV						policy
points)	Ratio			limitations			%			Change			$ Change			limitations			% Change
300		7.37	%		6.00	%		-2.04	%		25.00	%	$	(121	)		-15.00	%		-0.17	%
200		8.33			7.00			-1.08			25.00			123			-10.00			0.17
100		9.08			7.00			-0.33			25.00			215			-5.00			0.30
Static		9.41			8.00			—			—			—			—			—

Due to a low interest rate environment, it was not possible to calculate results for a drop in interest rates.

As with any method of measuring interest rate risk, certain shortcomings are inherent in the NPV approach. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. In addition, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, expected rates of prepayment on loans and early withdrawal levels from certificates of deposit may deviate significantly from those assumed in making risk calculations.

Potential Impact of Changes in Interest Rates.Home Savings’ profitability depends to a large extent on its net interest income, which is the difference between interest income from loans and securities and interest expense on deposits and borrowings. Like most financial institutions, Home Savings’ short-term interest income and interest expense are affected significantly by changes in market interest rates and other economic factors beyond its control.

In the last twelve months, Home Savings has experienced the positive impact of a steeper yield curve. The net interest margin has benefited from the repricing of certificates of deposit at lower levels as loan yields have stabilized.

ITEM 4. Controls and Procedures

An evaluation was carried out by United Community’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of United Community’s disclosure controls and procedures (as defined in Rules 13a-15(e)/15d-15(e) of the Securities Exchange Act of 1934) as of March 31, 2011. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that United Community’s disclosure controls and procedures were effective as of March 31, 2011. During the quarter ended March 31, 2011, there were no changes in United Community’s internal controls over financial reporting that have materially affected or are reasonably likely to materially affect United Community’s internal controls over financial reporting.

46

PART II. OTHER INFORMATION

UNITED COMMUNITY FINANCIAL CORP.

ITEM 1— Legal Proceedings

United Community and its subsidiaries are parties to litigation arising in the normal course of business. While it is impossible to determine the ultimate resolution of these contingent matters, management believes any resulting liability would not have a material effect upon United Community’s financial statements.

ITEM 1A— Risk Factors

There have been no significant changes in United Community’s risk factors as outlined in United Community’s Form 10-K for the period ended December 31, 2010. The risk factors described in the Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that management currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results. Moreover, the Company undertakes no obligation and disclaims any intention to publish revised information or updates to forward looking statements contained in such risk factors or in any other statement made at any time by the Company or any of its directors, officers, employees or other representatives, unless and until any such revisions or updates are expressly required to be disclosed by securities laws or regulations.

ITEM 2— Unregistered Sales of Equity Securities and Use of Proceeds

There were no purchases of UCFC shares during the quarter ended March 31, 2011.

ITEM 6— Exhibits

Exhibits

Exhibit Number		Description
	3.1	Articles of Incorporation
	3.2	Amended Code of Regulations
	31.1	Section 302 Certification by Chief Executive Officer
	31.2	Section 302 Certification by Chief Financial Officer
	32	Certification of Statements by Chief Executive Officer and Chief Financial Officer

47

UNITED COMMUNITY FINANCIAL CORP.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	UNITED COMMUNITY FINANCIAL CORP.
Date: May 16, 2011	/S/ Patrick W. Bevack
	Patrick W. Bevack
	President and Chief Executive Officer
	(Principal Executive Officer)
Date: May 16, 2011	/S/ James R. Reske
	James R. Reske, CFA
	Treasurer and Chief Financial Officer
	(Principal Financial Officer)

48

UNITED COMMUNITY FINANCIAL CORP.

Exhibit 3.1

Incorporated by reference to the Registration Statement on Form S-1 filed by United Community on March 13, 1998 with the Securities and Exchange Commission (SEC), Exhibit 3.1.

Exhibit 3.2

Incorporated by reference to the 1998 Form 10-K filed by United Community on March 31, 1999 with the SEC, film number 99582343, Exhibit 3.2.

49