United Community Financial (UCFC) 10-Q 2013 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2013

¨ 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	000-024399	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.     Yes  x    No  ¨

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

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

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller reporting company	¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 50,248,288 common shares as of July 31, 2013.

TABLE OF CONTENTS

	PAGE
Part I. FINANCIAL INFORMATION
Item 1.Financial Statements
Consolidated Statements of Financial Condition as of June 30, 2013 (Unaudited) and December 31, 2012		1
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2013 and 2012 (Unaudited)		2
Consolidated Statement of Shareholders’ Equity for the Six Months ended June 30, 2013 and 2012 (Unaudited)		4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012 (Unaudited)		5
Notes to Consolidated Financial Statements (Unaudited)		6-54
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		55-68
Item 3. Quantitative and Qualitative Disclosures About Market Risk		69
Item 4. Controls and Procedures		70
Part II. OTHER INFORMATION
Item 1. Legal Proceedings		71
Item 1A. Risk Factors		71
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		71
Item 3. Defaults Upon Senior Securities (None)
Item 4. Mine Safety Disclosures (None)
Item 5. Other Information (None)
Item 6. Exhibits		71
Signatures		72
Exhibits		73

PART I—FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

	June 30,			December 31,
	2013			2012
	(Dollars in thousands)
Assets:
Cash and deposits with banks	$	24,705		$	26,041
Federal funds sold		85,551			16,572
Total cash and cash equivalents		110,256			42,613
Securities:
Available for sale, at fair value		555,188			574,562
Loans held for sale		9,332			13,031
Loans, net of allowance for loan losses of $19,037 and $21,130		1,008,843			1,066,240
Federal Home Loan Bank stock, at cost		26,464			26,464
Premises and equipment, net		21,183			21,549
Accrued interest receivable		5,838			6,238
Real estate owned and other repossessed assets, net		11,359			18,440
Core deposit intangible		192			238
Cash surrender value of life insurance		29,340			28,881
Other assets		9,076			10,109
Total assets	$	1,787,071		$	1,808,365
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Interest bearing	$	1,268,591		$	1,302,307
Non-interest bearing		165,224			159,767
Total deposits		1,433,815			1,462,074
Borrowed funds:
Federal Home Loan Bank advances		50,000			50,000
Repurchase agreements and other		90,588			90,598
Total borrowed funds		140,588			140,598
Advance payments by borrowers for taxes and insurance		13,428			23,590
Accrued interest payable		597			563
Accrued expenses and other liabilities		14,884			10,780
Total liabilities		1,603,312			1,637,605
Shareholders’ Equity:
Preferred stock-no par value; 1,000,000 shares authorized and no shares issued and outstanding		—			—
Common stock-no par value; 499,000,000 shares authorized; 54,138,910 and 37,804,457 shares, respectively, issued and 50,188,664 and 33,027,886 shares, respectively, outstanding		175,346			128,026
Retained earnings		79,209			86,345
Accumulated other comprehensive income (loss)		(29,203	)		6,682
Treasury stock, at cost, 3,950,246 and 4,776,571 shares, respectively		(41,593	)		(50,293	)
Total shareholders’ equity		183,759			170,760
Total liabilities and shareholders’ equity	$	1,787,071		$	1,808,365

See Notes to Consolidated Financial Statements.

1

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
	(Dollars in thousands, except per share data)
Interest income
Loans	$	12,207		$	16,959		$	24,834		$	34,615
Loans held for sale		78			104			167			204
Available for sale securities		3,384			3,540			6,812			7,034
Federal Home Loan Bank stock dividends		277			280			560			580
Other interest earning assets		41			11			50			23
Total interest income		15,987			20,894			32,423			42,456
Interest expense
Deposits		1,909			2,942			3,996			6,974
Federal Home Loan Bank advances		524			613			1,047			1,345
Repurchase agreements and other		918			919			1,827			1,838
Total interest expense		3,351			4,474			6,870			10,157
Net interest income		12,636			16,420			25,553			32,299
Provision for loan losses		1,113			6,264			3,177			6,944
Net interest income after provision for loan losses		11,523			10,156			22,376			25,355
Non-interest income
Non-deposit investment income		373			506			914			1,047
Service fees and other charges		1,691			901			3,473			3,218
Net gains (losses):
Securities available for sale (includes $1,857, $3,555, $2,578, and $3,969 respectively, accumulated other comprehensive income reclassifications for unrealized net gains on available for sale securities)		1,857			3,555			2,578			3,969
Mortgage banking income		1,389			1,727			3,032			3,198
Real estate owned and other repossessed assets		(1,140	)		(923	)		(1,571	)		(1,652	)
Other income		2,214			1,183			3,651			2,260
Total non-interest income		6,384			6,949			12,077			12,040
Non-interest expense
Salaries and employee benefits		7,709			8,684			15,160			17,017
Occupancy		851			851			1,673			1,650
Equipment and data processing		1,782			1,720			3,542			3,409
Franchise tax		400			437			831			875
Advertising		281			211			420			352
Amortization of core deposit intangible		23			28			46			57
Prepayment penalty		—			738			—			738
Deposit insurance premiums		603			1,055			1,157			2,164
Professional fees		874			1,039			1,282			1,919
Real estate owned and other repossessed asset expenses		293			419			786			1,121
Other expenses		1,552			1,861			3,335			4,235
Total non-interest expenses		14,368			17,043			28,232			33,537
Income before income taxes		3,539			62			6,221			3,858
Income tax expense (includes $0 income tax expense from reclassification items)		150			—			150			—
Net income		3,389			62			6,071			3,858
Amortization of discount on preferred stock		(5,930	)		—			(6,751	)		—
Earnings (loss) available to common shareholders	$	(2,541	)	$	62		$	(680	)	$	3,858

(Continued)

2

(Continued)

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	For the Three Months Ended					For the Six Months Ended
	June 30,					June 30,
	2013			2012		2013			2012
Net income	$	3,389		$	62	$	6,071		$	3,858
Other comprehensive income (loss)
Unrealized gains (losses) on securities, net of tax		(32,922	)		5,425		(35,885	)		2,542
Total other comprehensive income (loss)	$	(32,922	)	$	5,425	$	(35,885	)	$	2,542
Comprehensive income (loss)	$	(29,533	)	$	5,487	$	(29,814	)	$	6,400
Earnings (loss) per common share
Basic	$	(0.06	)	$	—	$	(0.02	)	$	0.12
Diluted		(0.06	)		—		(0.02	)		0.12

3

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Unaudited)

	Preferred Shares Outstanding			Common Shares Outstanding		Preferred Stock			Common Stock		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
	(Dollars thousands, except share data)
Balance December 31, 2011		—			32,597,762	$	—		$	128,031	$	110,681		$	5,032		$	(54,999	)	$	188,745
Net income												3,858									3,858
Comprehensive loss															2,542						2,542
Stock option expenses										8											8
Restricted stock awards		—			286,979					99		(2,820	)					3,199			478
Balance June 30, 2012		—			32,884,741	$	—		$	128,138	$	111,719		$	7,574		$	(51,800	)	$	195,631
Balance December 31, 2012		—			33,027,886	$	—		$	128,026	$	86,345		$	6,682		$	(50,293	)	$	170,760
Net income												6,071									6,071
Other comprehensive loss															(35,885	)					(35,885	)
Stock option exercises					68,600							(585	)					722			137
Stock option expenses										9											9
Restricted stock awards					1,905					150		9						20			179
Issuance of common stock, net of issuance costs of $4,510					9,148,273					18,569		(5,880	)					7,958			20,647
Issuance preferred stock		7,942					15,090			6,751											21,841
Amortization of preferred stock discount							6,751			—		(6,751	)								—
Conversion of preferred stock to common stock		(7,942	)		7,942,000		(21,841	)		21,841											—
Balance June 30, 2013		—			50,188,664	$	—		$	175,346	$	79,209		$	(29,203	)	$	(41,593	)	$	183,759

See Notes to Consolidated Financial Statements.

4

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
	2013			2012
	(Dollars in thousands)
Cash Flows from Operating Activities
Net income	$	6,071		$	3,858
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		3,177			6,944
Mortgage banking income		(3,032	)		(3,198	)
Net losses on real estate owned and other repossessed assets sold		1,571			1,652
Net gain on available for sale securities sold		(2,578	)		(3,969	)
Net gain on other assets sold		(10	)		—
Amortization of premiums and accretion of discounts		1,876			1,273
Depreciation and amortization		927			775
Net change in interest receivable		400			782
Net change in interest payable		34			(7	)
Net change in prepaid and other assets		1,691			(2,358	)
Net change in other liabilities		4,104			3,028
Stock based compensation		188			486
Net principal disbursed on loans originated for sale		(138,386	)		(149,804	)
Proceeds from sale of loans held for sale		145,117			155,185
Net change in interest rate caps		(441	)		1,102
Net cash from operating activities		20,709			15,749
Cash Flows from Investing Activities
Proceeds from principal repayments and maturities of:
Securities available for sale		31,676			38,117
Proceeds from sale of:
Securities available for sale		97,127			229,453
Real estate owned and other repossessed assets		6,563			9,592
Loans held for investment		10,173			2,109
Premises and equipment		20			—
Purchases of:
Securities available for sale		(144,992	)		(234,483	)
Principal disbursed on loans, net of repayments		42,777			118,448
Loans purchased		(50	)		(198	)
Purchases of premises and equipment		(554	)		(802	)
Net cash from investing activities		42,740			162,236
Cash Flows from Financing Activities
Net increase in checking, savings and money market accounts		4,909			75,985
Net decrease in certificates of deposit		(33,168	)		(122,783	)
Net decrease in advance payments by borrowers for taxes and insurance		(10,162	)		(8,602	)
Proceeds from Federal Home Loan Bank advances		142,000			295,551
Repayment of Federal Home Loan Bank advances		(142,000	)		(373,002	)
Prepayment penalty on Federal Home Loan Bank advances		—			(738	)
Net change in repurchase agreements and other borrowed funds		(10	)		(10	)
Proceeds from the exercise of stock options		137			—
Issuance of preferred stock, net of issuance costs		21,841			—
Issuance of common stock, net of issuance costs		20,647			—
Net cash from financing activities		4,194			(133,599	)
Change in cash and cash equivalents		67,643			44,386
Cash and cash equivalents, beginning of period		42,613			54,136
Cash and cash equivalents, end of period	$	110,256		$	98,522

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 (the 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, 33 full-service branches and nine loan production offices located throughout Ohio and western Pennsylvania.

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

The results of operations for the three and six months ended June 30, 2013, are not necessarily indicative of the results to be expected for the year ending December 31, 2013. 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, 2012, contained in United Community’s Form 10-K for the year ended December 31, 2012.

Some items in the prior year financial statements were reclassified to conform to the current presentation. These reclassifications had no effect on prior period net income or shareholders’ equity.

2. REGULATORY ENFORCEMENT ACTION

United Community is a unitary thrift holding company regulated by the Board of Governors of the Federal Reserve System (FRB). On August 8, 2008, the board of directors of United Community approved a Stipulation and Consent to the Issuance of an Order with the Office of Thrift Supervision (OTS) (the Holding Company Order). 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 Ohio Division of Financial Institutions (the Ohio Division), which was terminated as of March 30, 2012 and replaced with a Consent Order (the Consent Order). The Consent Order was terminated on January 31, 2013. On January 31, 2013, Home Savings consented to a Memorandum of Understanding (the Bank MOU), as described below. Although United Community and Home Savings agreed to the issuance of the Holding Company Order, the Bank Order, the Consent Order and the Bank MOU, as the case may be, 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 when these orders were issued or since that time.

The Holding Company Order required United Community to obtain FRB approval prior to: (i) incurring or increasing its debt position; (ii) repurchasing any United Community stock; or (iii) paying any dividends. The Holding Company Order also required United Community to develop a debt reduction plan and submit the plan to the OTS for approval. The Holding Company Order was amended November 5, 2010. The amendment removed the requirement in the original Holding Company Order to provide the OTS with a debt reduction plan and added a requirement to provide the OTS with a capital plan. The capital plan was consistent with and incorporated into the strategic planning process that Home Savings undertook when the Bank Order was issued. The capital plan was submitted to the OTS in December 2010. A revised capital plan was submitted to the FRB, FDIC and Ohio Division in December 2011 and a further revised capital plan was submitted in December 2012. The Holding Company Order was terminated on July 2, 2013. On July 9, 2013, United Community entered into a Memorandum of Understanding (the Holding Company MOU) with the FRB, under which we will not pay dividends, repurchase shares, or take on debt without the FRB’s prior approval.

The Consent Order required Home Savings, within specified timeframes, to take or refrain from certain actions, including that it had to: (i) continue to retain qualified management; (ii) seek 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 extend additional credit to classified borrowers; (iv) revise its plan to reduce its classified assets, and, within six months, reduce total adversely classified assets to 75% of the level of classified assets as of May 31, 2011 (i.e., to $219.0 million by September 30, 2012) and, within twelve months, to 50% of the level of classified assets as of May 31, 2011 (i.e., to $146.0 million by March 31, 2013); (v) establish a comprehensive policy and methodology for determining the adequacy of the allowance for loan and lease losses (ALLL); (vi) adopt plans to reduce its classified assets and delinquent loans; (vii) adopt a plan to reduce certain loan concentrations; (viii) amend its strategic plan and budget and profit plan; (ix) increase its Tier 1 Leverage Capital Ratio to 9.0% and its Total Risk Based Capital Ratio to 12.0% by June 30, 2012, and revise its capital plan to achieve such capital levels; and (x) seek regulatory approval prior to declaring or paying any cash dividend.

6

On January 31, 2013, the Consent Order was terminated and Home Savings entered into a MOU with the FDIC and Ohio Division. The MOU requires Home Savings to submit certain plans and reports to the FDIC and the Ohio Division, to seek the FDIC’s and Ohio Division’s prior consent before issuing any dividends to United Community, and to maintain its Tier 1 Leverage Capital Ratio at 8.50% and its Total Risk Based Capital Ratio at 12.0%. Management believes Home Savings is in compliance with the capital requirements of the MOU. As of June 30, 2013, Home Savings Tier 1 Leverage Capital Ratio was 10.03% and its Total Risk Based Capital Ratio was 19.42%.

As of December 31, 2012, the FDIC categorized Home Savings as adequately capitalized pursuant to the Bank Order and the Consent Order, respectively. However, because the Consent Order was terminated on January 31, 2013, Home Savings is now considered well capitalized.

A failure to comply with the provisions of the Bank MOU or the Holding Company MOU could result in additional enforcement actions by the FDIC, Ohio Division or the FRB.

The regulators, at their discretion, have the ability to place additional requirements on both Home Savings and United Community.

3. RECENT ACCOUNTING DEVELOPMENTS

In February 2013, the FASB issued ASU No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The primary objective of this ASU is improving the reporting of reclassifications out of accumulated other comprehensive income (AOCI). For significant reclassifications that are required to be presented in their entirety in net income in the same reporting period by U.S. Generally Accepted Accounting Principles (U.S. GAAP), the ASU requires an entity to report the effect of these reclassifications out of AOCI on the respective line items of net income either on the face of the statement that reports net income or in the financial statement notes. For AOCI items that that are not reclassified to net income in their entirety, presentation in the financial statement notes is required. The ASU does not change the current requirements for reporting net income or AOCI in the financial statements. This ASU is effective for public companies for fiscal years and interim periods within those years beginning after December 15, 2012. The ASU should be applied prospectively for all companies. Early application is permitted. The adoption of this ASU did not have a material effect on United Community’s financial statements.

4. STOCK COMPENSATION

Stock Options:

On April 26, 2007, shareholders approved the United Community Financial Corp. 2007 Long-Term Incentive Plan (as amended, the 2007 Plan). The purpose of the 2007 Plan is to promote and advance the interests of United Community and its shareholders by enabling United Community to attract, retain and reward directors, directors emeritus, managerial and other key employees of United Community, including Home Savings, by facilitating their purchase of an ownership interest in United Community. The 2007 Plan provides for the issuance of up to 2,000,000 shares that are to be used for awards of restricted stock, stock options, performance awards, stock appreciation rights (SARs), or other forms of stock-based incentive awards. There were 11,020 stock options granted in 2013 and there were 10,898 stock options granted in 2012 under the 2007 Plan. The options must be exercised within 10 years from the date of grant.

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

The 1999 Plan provided for the grant of either incentive or nonqualified stock options. Options were awarded at exercise prices that were not less than the fair market value of the share at the grant date. The maximum number of common shares that could be issued under the 1999 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 $5,720 in stock option expenses for the three months ended June 30, 2013. The Company recognized $9,469 in stock option expenses for the six months ended June 30, 2013. The Company recognized $4,347 in stock option expenses for the three months ended June 30, 2012. The Company recognized $8,226 in stock option expenses for the six months ended June 30, 2012. With respect to options currently outstanding, the Company expects to recognize additional expense of $10,376 in 2013, $14,815 in 2014, and $7,787 in 2015.

7

A summary of activity in the plans is as follows:

	For the six months ended June 30, 2013
	Shares			Weighted average exercise price		Aggregate intrinsic value (in thousands)
Outstanding at beginning of year		1,309,942		$	5.77	$	640
Granted		11,020			3.45		13
Exercised		(68,600	)		2.00		—
Forfeited		(237,476	)		8.78		—
Outstanding at end of period		1,014,886			5.30	$	1,688
Options exercisable at end of period		983,870			5.39	$	1,617

Information related to the stock option plans for the six months ended June 30, 2013 follows:

	June 30, 2013
Intrinsic value of options exercised	$	151,370
Cash received from option exercises		137,220
Tax benefit realized from option exercises		—
Weighted average fair value of options granted, per share	$	2.32

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

The fair value of options granted during the second quarter 2013 was determined using the following weighted-average assumptions as of the grant date.

	April 4, 2013
Risk-free interest rate		0.69	%
Expected term (years)		5
Expected stock volatility		86.23	%
Dividend yield		—	%

Outstanding stock options have a weighted average remaining life of 4.75 years and may be exercised in the range of $1.20 to $12.38.

Restricted Stock Awards:

The 2007 Plan permits the issuance of restricted stock awards to employees and nonemployee directors. Nonvested shares at June 30, 2013 aggregated 112,500, of which 39,500 will vest during 2013, 42,801 will vest during 2014, and 30,199 will vest during 2015. Expenses related to restricted stock awards are charged to salaries and employee benefits and are recognized over the vesting period of the awards based on the market value of the shares at the grant date. The Company recognized approximately $88,000 in restricted stock award expenses for the three months ended June 30, 2013 and approximately $179,000 in restricted stock award expenses for the six months ended June 30, 2013. The Company recognized approximately $124,000 in restricted stock award expenses for the three months ended June 30, 2012 and approximately $500,000 in restricted stock award expenses for the six months ended June 30, 2012. Based upon past awards of restricted stock, the Company expects to recognize additional expenses of approximately $164,000 for the remainder of 2013, $215,000 in 2014, and $80,000 in 2015.

8

A summary of changes in the Company’s nonvested restricted shares for the first six months of 2013 is as follows:

	Shares			Weighted average grant date fair value
Nonvested shares at January 1, 2013		129,321		$	2.86
Granted		12,602			3.64
Vested		(18,726	)		1.60
Forfeited		(10,697	)		3.06
Nonvested shares at June 30, 2013		112,500		$	3.14

5. SECURITIES

Components of the available for sale portfolio are as follows:

	June 30, 2013
	(Dollars in thousands)
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for Sale
U.S. Treasury and government sponsored entities’ securities	$	250,538	$	—	$	(16,671	)	$	233,867
Equity securities		101		269		—			370
Mortgage-backed GSE securities: residential		332,381		117		(11,547	)		320,951
Total	$	583,020	$	386	$	(28,218	)	$	555,188

	December 31, 2012
	(Dollars in thousands)
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for Sale
U.S. Treasury and government sponsored entities’ securities	$	161,845	$	2,409	$	(562	)	$	163,692
Equity securities		101		212		—			313
Mortgage-backed GSE securities: residential		404,563		6,142		(148	)		410,557
Total	$	566,509	$	8,763	$	(710	)	$	574,562

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

	June 30, 2013
	(Dollars in thousands)
	Amortized Cost		Fair Value
Due in one year or less	$	—	$	—
Due after one year through five years		500		500
Due after five years through ten years		156,349		147,060
Due after ten years through fifteen years		93,689		86,307
Mortgage-related securities		332,381		320,951
Total	$	582,919	$	554,818

9

Home Savings had no securities pledged for the Company’s participation in the VISA payment processing program at June 30, 2013 and had pledged approximately $5.8 million at December 31, 2012. The requirement for Home Savings to pledge securities for participation in the VISA payment processing program was rescinded due to the termination of the Consent Order, as previously disclosed. Securities pledged for participation in the Ohio Linked Deposit Program were approximately $388,000 and $417,000 at June 30, 2013 and December 31, 2012, respectively.

Securities available for sale in an unrealized loss position are as follows:

	June 30, 2013
	(Dollars in thousands)
	Less Than 12 Months					12 Months or More				Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S. Treasury and government sponsored entities’ securities	$	233,367	$	(16,671	)	$	—	$	—	$	233,367	$	(16,671	)
Mortgage-related securities		307,590		(11,547	)		—		—		307,590		(11,547	)
Total	$	540,957	$	(28,218	)	$	—	$	—	$	540,957	$	(28,218	)

	December 31, 2012
	(Dollars in thousands)
	Less Than 12 Months					12 Months or More				Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S. Treasury and government sponsored entities’ securities	$	42,480	$	(562	)	$	—	$	—	$	42,480	$	(562	)
Mortgage-related securities		72,020		(148	)		—		—		72,020		(148	)
Total	$	114,500	$	(710	)	$	—	$	—	$	114,500	$	(710	)

Unrealized losses on U.S. Treasury and government sponsored entities and mortgage-backed securities have not been recognized into income at June 30, 2013 and December 31, 2012 because the issuer’s securities are of high credit quality (rated AA or higher), management does not intend to sell, and it is likely that management will not be required to sell, the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The primarily reason for the decline in fair value was the rise in longer term interest rates at the end of the second quarter. The fair value is expected to recover as the investments approach maturity.

Proceeds from sales of securities available for sale were $97.1 million and $229.5 million for the six months ended June 30, 2013 and 2012, respectively. Gross gains of $1.9 million and $3.6 million were realized on these sales during the second quarter of 2013 and 2012, respectively. Gross gains of $2.6 million and $4.0 million were realized on these sales during the first six months of 2013 and 2012, respectively.

10

6. LOANS

Portfolio loans consist of the following:

	June 30,			December 31,
	2013			2012
	(Dollars in thousands)
Real Estate:
One-to four-family residential	$	572,575		$	577,249
Multi-family residential		62,559			80,923
Nonresidential		120,586			138,188
Land		9,821			15,808
Construction:
One-to four-family residential and land development		32,512			28,318
Multi-family and nonresidential		4,584			4,534
Total real estate		802,637			845,020
Consumer
Home equity		167,414			177,230
Auto		6,390			7,648
Marine		4,544			4,942
Recreational vehicles		19,191			22,250
Other		2,095			2,523
Total consumer		199,634			214,593
Commercial
Secured		23,236			24,243
Unsecured		1,290			2,300
Total commercial		24,526			26,543
Total loans		1,026,797			1,086,156
Less:
Allowance for loan losses		19,037			21,130
Deferred loan costs, net		(1,083	)		(1,214	)
Total		17,954			19,916
Loans, net	$	1,008,843		$	1,066,240

Loan commitments are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments extend over various periods of time with the majority of such commitments disbursed within a sixty-day period. Commitments generally have fixed expiration dates or other termination clauses, may require payment of a fee and may expire unused. Commitments to extend credit at fixed rates expose Home Savings to some degree of interest rate risk. Home Savings evaluates each customer’s creditworthiness on a case-by-case basis. The type or amount of collateral obtained varies and is based on management’s credit evaluation of the potential borrower. Home Savings normally has a number of outstanding commitments to extend credit.

11

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2013 and December 31, 2012 and activity for the three and six months ended June 30, 2013 and 2012. In accordance with GAAP, the net losses associated with loans sold as part of the bulk asset sale in the third quarter of 2012 were recorded as net chargeoffs of $38.2 million through the allowance for loan losses.

Allowance For Loan Losses
(Dollars in thousands)
	Permanent Real Estate Loans			Construction Loans			Consumer Loans			Commercial Loans			Total
For the three months ended June 30, 2013
Beginning balance (03/31/13)	$	14,907		$	1,443		$	4,254		$	1,223		$	21,827
Provision		749			464			335			(435	)		1,113
Chargeoffs		(3,937	)		(139	)		(514	)		0			(4,590	)
Recoveries		410			35			127			115			687
Ending balance (06/30/13)	$	12,129		$	1,803		$	4,202		$	903		$	19,037
For the six months ended June 30, 2013
Beginning balance (12/31/12)	$	13,819		$	1,404		$	4,459		$	1,448		$	21,130
Provision		2,778			446			573			(620	)		3,177
Chargeoffs		(5,143	)		(365	)		(1,114	)		(128	)		(6,750	)
Recoveries		675			318			284			203			1,480
Ending balance (06/30/13)	$	12,129		$	1,803		$	4,202		$	903		$	19,037
June 30, 2013
Period-end amount allocated to:
Loans individually evaluated for impairment	$	351		$	685		$	—		$	10		$	1,046
Loans collectively evaluated for impairment		11,778			1,118			4,202			893			17,991
Ending balance	$	12,129		$	1,803		$	4,202		$	903		$	19,037
Period-end balances:
Loans individually evaluated for impairment	$	26,033		$	4,397		$	11,763		$	4,717		$	46,910
Loans collectively evaluated for impairment		739,508			32,699			187,871			19,809			979,887
Ending balance	$	765,541		$	37,096		$	199,634		$	24,526		$	1,026,797

The ASC 310 reserve, or where applicable the ASC 450 reserve, as it related to loans included in the bulk asset sale were treated as chargeoffs in the ASC 450 methodology of determining loan loss ratios.

12

Allowance For Loan Losses
(Dollars in thousands)
	Permanent Real Estate Loans			Construction Loans			Consumer Loans			Commercial Loans			Total
For the three months ended June 30, 2012
Beginning balance (03/31/12)	$	24,601		$	2,918		$	4,962		$	2,042		$	34,523
Provision		6,171			92			3			(2	)		6,264
Chargeoffs		(8,705	)		(526	)		(499	)		(550	)		(10,280	)
Recoveries		54			6			339			27			426
Ending balance (06/30/12)	$	22,121		$	2,490		$	4,805		$	1,517		$	30,933
For the six months ended June 30, 2012
Beginning balance (12/31/11)	$	31,323		$	4,493		$	4,576		$	1,879		$	42,271
Provision		4,634			615			1,134			561			6,944
Chargeoffs		(14,061	)		(2,670	)		(1,359	)		(974	)		(19,064	)
Recoveries		225			52			454			51			782
Ending balance (06/30/12)	$	22,121		$	2,490		$	4,805		$	1,517		$	30,933
December 31, 2012
Period-end amount allocated to:
Loans individually evaluated for impairment	$	2,380		$	478		$	—		$	166		$	3,024
Loans collectively evaluated for impairment		11,439			926			4,459			1,282			18,106
Ending balance	$	13,819		$	1,404		$	4,459		$	1,448		$	21,130
Period-end balances:
Loans individually evaluated for impairment	$	43,013		$	7,547		$	8,784		$	1,673		$	61,017
Loans collectively evaluated for impairment		769,155			25,305			205,809			24,870			1,025,139
Ending balance	$	812,168		$	32,852		$	214,593		$	26,543		$	1,086,156

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 chargeoffs or partial chargeoffs 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.

13

The following table presents loans individually evaluated for impairment by class of loans as of and for the six months ended June 30, 2013:

Impaired Loans
(Dollars in thousands)
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With no specific allowance recorded
Permanent real estate
One-to four-family residential	$	19,608	$	17,484	$	—	$	16,870	$	305	$	323
Multifamily residential		755		660		—		734		2		4
Nonresidential		6,461		5,313		—		8,688		10		27
Land		3,913		487		—		2,951		—		—
Total		30,737		23,944		—		29,243		317		354
Construction loans
One-to four-family residential		13,409		2,081		—		2,435		—		2
Multifamily and nonresidential		—		—		—		—		—		—
Total		13,409		2,081		—		2,435		—		2
Consumer loans
Home Equity		11,041		10,423		—		8,053		232		255
Auto		65		44		—		44		1		2
Marine		186		186		—		184		—		5
Recreational vehicle		1,252		1,110		—		835		16		17
Other		—		—		—		4		—		—
Total		12,544		11,763		—		9,120		249		279
Commercial loans
Secured		5,380		4,512		—		2,061		—		33
Unsecured		4,371		1		—		199		1		28
Total		9,751		4,513		—		2,260		1		61
Total	$	66,441	$	42,301	$	—	$	43,058	$	567	$	696

14

(Continued) Impaired Loans
(Dollars in thousands)
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With a specific allowance recorded
Permanent real estate
One-to four-family residential	$	17	$	10	$	1	$	370	$	—	$	—
Multifamily residential		185		85		25		785		—		—
Nonresidential		2,326		1,994		325		6,477		5		35
Land		—		—		—		1,656		—		—
Total		2,528		2,089		351		9,288		5		35
Construction loans
One-to four-family residential		3,921		2,316		685		4,280		—		—
Multifamily and nonresidential		—		—		—		—		—		—
Total		3,921		2,316		685		4,280		—		—
Consumer loans
Home Equity		—		—		—		—		—		—
Auto		—		—		—		—		—		—
Marine		—		—		—		—		—		—
Recreational vehicle		—		—		—		9		—		—
Other		—		—		—		—		—		—
Total		—		—		—		9		—		—
Commercial loans
Secured		571		204		10		314		—		—
Unsecured		—		—		—		—		—		—
Total		571		204		10		314		—		—
Total		7,020		4,609		1,046		13,891		5		35
Total	$	73,461	$	46,910	$	1,046	$	56,949	$	572	$	731

15

The following table presents loans individually evaluated for impairment by class of loans as of and for the six months ended June 30, 2012:

Impaired Loans
(Dollars in thousands)
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With no specific allowance recorded
Permanent real estate
One-to four-family residential	$	33,074	$	29,040	$	—	$	27,751	$	311	$	426
Multifamily residential		7,190		4,861		—		4,317		19		97
Nonresidential		26,409		24,740		—		27,257		69		201
Land		7,091		5,796		—		6,308		16		52
Total		73,764		64,437		—		65,633		415		776
Construction loans
One-to four-family residential		14,116		7,760		—		10,267		53		137
Multifamily and nonresidential		707		—		—		—		—		—
Total		14,823		7,760		—		10,267		53		137
Consumer loans
Home Equity		6,122		4,953		—		3,388		90		109
Auto		78		58		—		60		1		3
Marine		368		354		—		178		—		9
Recreational vehicle		940		659		—		367		—		21
Other		7		7		—		7		—		—
Total		7,515		6,031		—		4,000		91		142
Commercial loans
Secured		2,317		1,497		—		1,747		12		69
Unsecured		16,704		207		—		452		1		13
Total		19,021		1,704		—		2,199		13		82
Total	$	115,123	$	79,932	$	—	$	82,099	$	572	$	1,137

16

Impaired Loans
(Dollars in thousands)
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With a specific allowance recorded
Permanent real estate
One-to four-family residential	$	3,969	$	3,604	$	648	$	2,608	$	49	$	61
Multifamily residential		5,572		5,193		731		3,201		41		76
Nonresidential		27,410		23,820		3,469		34,570		132		650
Land		5,332		3,139		480		4,129		—		—
Total		42,283		35,756		5,328		44,508		222		787
Construction loans
One-to four-family residential		29,580		12,398		1,498		17,140		10		29
Multifamily and nonresidential		—		—		—		—		—		—
Total		29,580		12,398		1,498		17,140		10		29
Consumer loans
Home Equity		—		—		—		—		—		—
Auto		—		—		—		—		—		—
Marine		—		—		—		121		—		—
Recreational vehicle		88		36		18		27		—		—
Other		—		—		—		—		—		—
Total		88		36		18		148		—		—
Commercial loans
Secured		943		585		185		2,161		—		3
Unsecured		—		—		—		119		—		—
Total		943		585		185		2,280		—		3
Total	$	72,894	$	48,775	$	7,029	$	64,076	$	232	$	819
Total	$	188,017	$	128,707	$	7,029	$	146,175	$	804	$	1,956

17

The following table presents loans individually evaluated for impairment by class of loans as of and for the three months ended June 30, 2013:

Impaired Loans
(Dollars in thousands)
	Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With no specific allowance recorded
Permanent real estate
One-to four-family residential	$	17,469	$	148	$	155
Multifamily residential		671		—		1
Nonresidential		5,485		2		5
Land		2,094		—		—
Total		25,719		150		161
Construction loans
One-to four-family residential		1,804		—		—
Multifamily and nonresidential		—		—		—
Total		1,804		—		—
Consumer loans
Home Equity		9,649		107		119
Auto		41		—		1
Marine		187		—		2
Recreational vehicle		1,055		5		6
Other		4		—		—
Total		10,936		112		128
Commercial loans
Secured		2,827		—		15
Unsecured		357		—		6
Total		3,184		—		21
Total	$	41,643	$	262	$	310

18

Impaired Loans
(Dollars in thousands)
	Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With a specific allowance recorded
Permanent real estate
One-to four-family residential	$	373	$	—	$	—
Multifamily residential		575		—		—
Nonresidential		7,045		—		17
Land		1,064		—		—
Total		9,057		—		17
Construction loans
One-to four-family residential		2,864		—		—
Multifamily and nonresidential		—		—		—
Total		2,864		—		—
Consumer loans
Home Equity		—		—		—
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—
Total		—		—		—
Commercial loans
Secured		204		—		—
Unsecured		—		—		—
Total		204		—		—
Total	$	12,125	$	—	$	17
Total	$	53,768	$	262	$	327

19

The following table presents loans individually evaluated for impairment by class of loans as of and for the three months ended June 30, 2012:

Impaired Loans
(Dollars in thousands)
	Average Recorded Investment		Interest Income Recognized			Cash Basis Income Recognized
With no specific allowance recorded
Permanent real estate
One-to four-family residential	$	28,780	$	221		$	266
Multifamily residential		4,367		50			85
Nonresidential		26,959		(75	)		(45	)
Land		6,028		8			36
Total		66,134		204			342
Construction loans
One-to four-family residential		9,036		10			55
Multifamily and nonresidential		—		—			—
Total		9,036		10			55
Consumer loans
Home Equity		4,683		51			58
Auto		56		1			2
Marine		356		—			4
Recreational vehicle		704		—			11
Other		7		—			—
Total		5,806		52			75
Commercial loans
Secured		1,665		5			27
Unsecured		482		(5	)		—
Total		2,147		—			27
Total	$	83,123	$	266		$	499

20

Impaired Loans
(Dollars in thousands)
	Average Recorded Investment		Interest Income Recognized			Cash Basis Income Recognized
With a specific allowance recorded
Permanent real estate
One-to four-family residential	$	2,117	$	—		$	5
Multifamily residential		3,784		—			22
Nonresidential		28,931		(22	)		319
Land		2,957		—			—
Total		37,789		(22	)		346
Construction loans
One-to four-family residential		13,325		5			12
Multifamily and nonresidential		—		—			—
Total		13,325		5			12
Consumer loans
Home Equity		—		—			—
Auto		—		—			—
Marine		—		—			—
Recreational vehicle		36		—			—
Other		—		—			—
Total		36		—			—
Commercial loans
Secured		551		(1	)		1
Unsecured		—		—			—
Total		551		(1	)		1
Total	$	51,701	$	(18	)	$	359
Total	$	134,824	$	248		$	858

21

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2012:

Impaired Loans
(Dollars in thousands)
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no specific allowance recorded
Permanent real estate
One-to four-family residential	$	18,672	$	16,947	$	—
Multifamily residential		1,173		1,078		—
Nonresidential		13,240		12,638		—
Land		4,577		3,804		—
Total		37,662		34,467		—
Construction loans
One-to four-family residential		17,912		3,580		—
Multifamily and nonresidential		571		—		—
Total		18,483		3,580		—
Consumer loans
Home Equity		8,867		7,958		—
Auto		68		44		—
Marine		190		190		—
Recreational vehicle		887		592		—
Other		—		—		—
Total		10,012		8,784		—
Commercial loans
Secured		2,122		1,212		—
Unsecured		2,861		38		—
Total		4,983		1,250		—
Total	$	71,140	$	48,081	$	—

22

(Continued) Impaired Loans
(Dollars in thousands)
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With a specific allowance recorded
Permanent real estate
One-to four-family residential	$	735	$	735	$	260
Multifamily residential		996		981		57
Nonresidential		5,218		4,703		1,336
Land		3,913		2,127		727
Total		10,862		8,546		2,380
Construction loans
One-to four-family residential		6,455		3,967		478
Multifamily and nonresidential		—		—		—
Total		6,455		3,967		478
Consumer loans
Home Equity		—		—		—
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—
Total		—		—		—
Commercial loans
Secured		798		423		166
Unsecured		—		—		—
Total		798		423		166
Total		18,115		12,936		3,024
Total	$	89,255	$	61,017	$	3,024

23

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 June 30, 2013:

Nonaccrual Loans and Loans Past Due Over 90 Days and Still Accruing
(Dollars in thousands)
	Nonaccrual		Loans past due over 90 days and still accruing
Real Estate Loans
Permanent
One-to four-family residential	$	4,993	$	—
Multifamily residential		727		—
Nonresidential		6,928		3,501
Land		656		—
Total		13,304		3,501
Construction Loans
One-to four-family residential		4,385		—
Multifamily and nonresidential		—		—
Total		4,385		—
Consumer Loans
Home Equity		2,809		—
Auto		89		—
Marine		167		—
Recreational vehicle		389		—
Other		5		—
Total		3,459		—
Commercial Loans
Secured		4,251		—
Unsecured		202		—
Total		4,453		—
Total	$	25,601	$	3,501

24

Nonaccrual Loans and Loans Past Due Over 90 Days and Still Accruing
As of December 31, 2012
(Dollars in thousands)
	Nonaccrual		Loans past due over 90 days and still accruing
Real Estate Loans
Permanent
One-to four-family residential	$	5,437	$	—
Multifamily residential		2,027		—
Nonresidential		17,065		3,678
Land		6,047		—
Total		30,576		3,678
Construction Loans
One-to four-family residential		7,466		—
Multifamily and nonresidential		—		—
Total		7,466		—
Consumer Loans
Home Equity		3,298		—
Auto		105		—
Marine		176		—
Recreational vehicle		1,259		—
Other		4		—
Total		4,842		—
Commercial Loans
Secured		1,194		—
Unsecured		31		—
Total		1,225		—
Total	$	44,109	$	3,678

25

The following tables present an age analysis of past-due loans, segregated by class of loans as of June 30, 2013:

Past Due Loans
(Dollars in thousands)
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current Loans		Total Loans
Real Estate Loans
Permanent
One-to four-family residential	$	1,586	$	1,549	$	3,642	$	6,777	$	565,798	$	572,575
Multifamily residential		—		2,663		727		3,390		59,169		62,559
Nonresidential		—		11		9,432		9,443		111,143		120,586
Land		27		19		656		702		9,119		9,821
Total		1,613		4,242		14,457		20,312		745,229		765,541
Construction Loans
One-to four-family residential		—		—		4,385		4,385		28,127		32,512
Multifamily and nonresidential		—		—		—		—		4,584		4,584
Total		—		—		4,385		4,385		32,711		37,096
Consumer Loans
Home Equity		890		581		2,279		3,750		163,664		167,414
Auto		20		1		48		69		6,321		6,390
Marine		—		—		22		22		4,522		4,544
Recreational vehicle		353		168		368		889		18,302		19,191
Other		18		1		3		22		2,073		2,095
Total		1,281		751		2,720		4,752		194,882		199,634
Commercial Loans
Secured		221		—		4,224		4,445		18,791		23,236
Unsecured		—		—		202		202		1,088		1,290
Total		221		—		4,426		4,647		19,879		24,526
Total	$	3,115	$	4,993	$	25,988	$	34,096	$	992,701	$	1,026,797

26

The following table presents an age analysis of past-due loans, segregated by class of loans as of December 31, 2012:

Past Due Loans
(Dollars in thousands)
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current Loans		Total Loans
Real Estate Loans
Permanent
One-to four-family residential	$	1,995	$	784	$	4,495	$	7,274	$	569,975	$	577,249
Multifamily residential		158		—		1,630		1,788		79,135		80,923
Nonresidential		—		176		19,942		20,118		118,070		138,188
Land		83		—		6,044		6,127		9,681		15,808
Total		2,236		960		32,111		35,307		776,861		812,168
Construction Loans
One-to four-family residential		54		—		7,398		7,452		20,866		28,318
Multifamily and nonresidential		—		—		—		—		4,534		4,534
Total		54		—		7,398		7,452		25,400		32,852
Consumer Loans
Home Equity		1,135		475		2,071		3,681		173,549		177,230
Auto		35		7		83		125		7,523		7,648
Marine		—		—		8		8		4,934		4,942
Recreational vehicle		447		32		353		832		21,418		22,250
Other		—		1		3		4		2,519		2,523
Total		1,617		515		2,518		4,650		209,943		214,593
Commercial Loans
Secured		16		—		23		39		24,204		24,243
Unsecured		—		728		6		734		1,566		2,300
Total		16		728		29		773		25,770		26,543
Total	$	3,923	$	2,203	$	42,056	$	48,182	$	1,037,974	$	1,086,156

27

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended June 30, 2013:

	Number of loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Recorded Investment
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family		9	$	1,099	$	844
Multifamily residential		1		469		469
Nonresidential		1		41		41
Land		2		3,913		487
Total		13		5,522		1,841
Construction Loans
One-to four-family residential		1		1,161		823
Multifamily and nonresidential		—		—		—
Total		1		1,161		823
Consumer Loans
Home Equity		37		1,655		1,660
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—
Total		37		1,655		1,660
Commercial Loans
Secured		—		—		—
Unsecured		—		—		—
Total		—		—		—
Total Restructured Loans		51	$	8,338	$	4,324

The troubled debt restructurings described above increased the allowance for loan losses by $199,000, and increased chargeoffs by $1.8 million during the three months ended June 30, 2013.

28

The following table presents loans by class modified as troubled debt restructurings that occurred during the six months ended June 30, 2013:

	Number of loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Recorded Investment
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family		22	$	1,842	$	1,606
Multifamily residential		1		469		469
Nonresidential		1		41		41
Land		2		3,913		487
Total		26		6,265		2,603
Construction Loans
One-to four-family residential		1		1,161		823
Multifamily and nonresidential		—		—		—
Total		1		1,161		823
Consumer Loans
Home Equity		63		2,526		2,537
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		4		791		804
Other		—		—		—
Total		67		3,317		3,341
Commercial Loans
Secured		—		—		—
Unsecured		—		—		—
Total		—		—		—
Total Restructured Loans		94	$	10,743	$	6,767

The troubled debt restructurings described above increased the allowance for loan losses by $572,000, and increased chargeoffs by $1.8 million during the six months ended June 30, 2013.

29

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended June 30, 2012:

	Number of loans		Pre-Modification Outstanding Recorded Investment		Post- Modification Recorded Investment
Real Estate Loans
Permanent
One-to four-family		7	$	350	$	345
Multifamily residential		—		—		—
Nonresidential		—		—		—
Land		—		—		—
Total		7		350		345
Construction Loans
One-to four-family residential		—		—		—
Multifamily and nonresidential		—		—		—
Total		—		—		—
Consumer Loans
Home Equity		20		950		918
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—
Total		20		950		918
Commercial Loans
Secured		—		—		—
Unsecured		—		—		—
Total		—		—		—
Total Restructured Loans		27	$	1,300	$	1,263

The troubled debt restructurings described above had no effect on the allowance for loan losses and resulted in no chargeoffs during the three months ended June 30, 2012.

30

The following table presents loans by class modified as troubled debt restructurings that occurred during the six months ended June 30, 2012:

	Number of loans		Pre-Modification Outstanding Recorded Investment		Post- Modification Recorded Investment
Real Estate Loans
Permanent
One-to four-family		21	$	2,306	$	2,264
Multifamily residential		6		1,439		1,438
Nonresidential		1		424		424
Land		—		—		—
Total		28		4,169		4,126
Construction Loans
One-to four-family residential		3		853		830
Multifamily and nonresidential		—		—		—
Total		3		853		830
Consumer Loans
Home Equity		42		1,783		1,752
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—
Total		42		1,783		1,752
Commercial Loans
Secured		—		—		—
Unsecured		1		446		446
Total		1		446		446
Total Restructured Loans		74	$	7,251	$	7,154

The troubled debt restructurings described above increased the allowance for loan losses by $78,000 and resulted in no chargeoffs during the six months ended June 30, 2012.

31

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the period ended June 30, 2013:

	Number of loans		Recorded Investment
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family		7	$	851
Multifamily residential		—		—
Nonresidential		—		—
Land		2		487
Total		9		1,338
Construction Loans
One-to four-family residential		1		823
Multifamily and nonresidential		—		—
Total		1		823
Consumer Loans
Home Equity		7		354
Auto		—		—
Marine		—		—
Recreational vehicle		1		93
Other		—		—
Total		8		447
Commercial Loans
Secured		—		—
Unsecured		—		—
Total		—		—
Total Restructured Loans		18	$	2,608

32

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the period ended December 31, 2012:

	Number of loans		Recorded Investment
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family		9	$	851
Multifamily residential		—		—
Nonresidential		—		—
Land		—		—
Total		9		851
Construction Loans
One-to four-family residential		—		—
Multifamily and nonresidential		—		—
Total		—		—
Consumer Loans
Home Equity		2		77
Auto		—		—
Marine		—		—
Recreational vehicle		—		—
Other		—		—
Total		2		77
Commercial Loans
Secured		—		—
Unsecured		—		—
Total		—		—
Total Restructured Loans		11	$	928

A troubled debt restructuring is considered to be in payment default once it is 30 days contractually past due under the modified terms.

The troubled debt restructurings that subsequently defaulted described above resulted in no chargeoffs during the twelve months ended December 31, 2012, and had no effect on the provision for loan losses.

The terms of certain other loans were modified during the period ended June 30, 2013, but they did not meet the definition of a troubled debt restructuring. These loans have a total recorded investment as of June 30, 2013 of $38.2 million. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be significant.

In order to determine whether a borrower is experiencing financial difficulty an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed in accordance with the Company’s internal underwriting policy.

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 homogeneous loans past due 90 cumulative days, and all non-homogeneous loans including commercial loans and commercial real estate loans. Smaller balance homogeneous loans are primarily monitored by payment status.

33

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 institution’s 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.

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.

34

As of June 30, 2013 and December 31, 2012, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

	Loans
	June 30, 2013
	(Dollars in thousands)
	Unclassified				Classified
			Special								Total
	Unclassified		Mention		Substandard		Doubtful		Loss		Classified		Total Loans
Real Estate Loans
Permanent
One-to four-family residential	$	564,034	$	423	$	8,118	$	—	$	—	$	8,118	$	572,575
Multifamily residential		52,757		7,081		2,721		—		—		2,721		62,559
Nonresidential		95,998		5,464		19,124		—		—		19,124		120,586
Land		9,068		266		487		—		—		487		9,821
Total		721,857		13,234		30,450		—		—		30,450		765,541
Construction Loans
One-to four-family residential		27,977		138		4,397		—		—		4,397		32,512
Multifamily and nonresidential		4,584		—		—		—		—		—		4,584
Total		32,561		138		4,397		—		—		4,397		37,096
Consumer Loans
Home Equity		164,483		—		2,931		—		—		2,931		167,414
Auto		6,235		47		108		—		—		108		6,390
Marine		4,353		5		186		—		—		186		4,544
Recreational vehicle		18,789		—		402		—		—		402		19,191
Other		2,089		—		6		—		—		6		2,095
Total		195,949		52		3,633		—		—		3,633		199,634
Commercial Loans
Secured		15,930		1,641		5,665		—		—		5,665		23,236
Unsecured		440		51		799		—		—		799		1,290
Total		16,370		1,692		6,464		—		—		6,464		24,526
Total	$	966,737	$	15,116	$	44,944	$	—	$	—	$	44,944	$	1,026,797

35

	Loans
	December 31, 2012
	(Dollars in thousands)
	Unclassified				Classified
			Special								Total
	Unclassified		Mention		Substandard		Doubtful		Loss		Classified		Total Loans
Real Estate Loans
Permanent
One-to four-family residential	$	569,204	$	459	$	7,586	$	—	$	—	$	7,586	$	577,249
Multifamily Residential		69,060		8,409		3,454		—		—		3,454		80,923
Nonresidential		99,275		12,234		26,679		—		—		26,679		138,188
Land		9,596		280		5,932		—		—		5,932		15,808
Total		747,135		21,382		43,651		—		—		43,651		812,168
Construction Loans
One-to four-family Residential		20,577		196		7,545		—		—		7,545		28,318
Multifamily and Nonresidential		4,534		—		—		—		—		—		4,534
Total		25,111		196		7,545		—		—		7,545		32,852
Consumer Loans
Home Equity		173,696		—		3,534		—		—		3,534		177,230
Auto		7,453		82		113		—		—		113		7,648
Marine		4,745		7		190		—		—		190		4,942
Recreational vehicle		20,859		—		1,391		—		—		1,391		22,250
Other		2,507		—		16		—		—		16		2,523
Total		209,260		89		5,244		—		—		5,244		214,593
Commercial Loans
Secured		20,843		769		2,631		—		—		2,631		24,243
Unsecured		1,481		11		808		—		—		808		2,300
Total		22,324		780		3,439		—		—		3,439		26,543
Total	$	1,003,830	$	22,447	$	59,879	$	—	$	—	$	59,879	$	1,086,156

36

7. MORTGAGE BANKING ACTIVITIES

Mortgage loans serviced for others, which are not reported in United Community’s assets, totaled $1.1 billion at June 30, 2013 and December 31, 2012. Mortgage banking income is comprised of gains recognized on the sale of loans and changes in fair value of mortgage banking derivatives.

Mortgage loans serviced for others are not reported as assets. The principal balances of these loans are as follows:

	June 30, 2013		December 31, 2012
Mortgage loan portfolios serviced for:
FHLMC	$	820,320	$	817,108
FNMA		300,101		316,142

Escrow balances are maintained at the FHLB in connection with serviced loans totaling $1.3 million and $1.7 million at June 30, 2013 and December 31, 2012, respectively.

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

	Six Months Ended June 30, 2013			Six Months Ended June 30, 2012
	(Dollars in thousands)
Balance, beginning of year	$	5,506		$	6,375
Originations		1,791			1,167
Amortized to expense		(1,230	)		(1,282	)
Balance, end of period		6,067			6,260
Less valuation allowance		(34	)		(1,344	)
Net balance	$	6,033		$	4,916

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

	Six Months Ended June 30, 2013			Six Months Ended June 30, 2012
	(Dollars in thousands)
Balance, beginning of year	$	(680	)	$	(1,785	)
Impairment charges		—			(507	)
Recoveries		646			948
Balance, end of period	$	(34	)	$	(1,344	)

The fair value of mortgage servicing rights as of June 30, 2013, was approximately $9.8 million and at December 31, 2012, the fair value was approximately $6.8 million.

Key economic assumptions in measuring the value of mortgage servicing rights at June 30, 2013, and December 31, 2012, were as follows:

	June 30, 2013	December 31, 2012
Weighted average prepayment rate	229 PSA	401 PSA
Weighted average life (in years)	4.00	3.93
Weighted average discount rate	8.00%	8.00%

37

8. OTHER REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS

Real estate owned and other repossessed assets at June 30, 2013 and 2012 were as follows:

	June 30,			June 30,
	2013			2012
	(Dollars in thousands)
Real estate owned and other repossessed assets	$	17,864		$	30,794
Valuation allowance		(6,505	)		(6,016	)
End of period	$	11,359		$	24,778

Activity in the valuation allowance was as follows:

	June 30,			June 30,
	2013			2012
	(Dollars in thousands)
Beginning of year	$	6,796		$	8,764
Additions charged to expense		1,337			633
Direct write-downs		(1,628	)		(3,381	)
End of period	$	6,505		$	6,016

Expenses related to foreclosed and repossessed assets include:

	Three Months Ended		Three Months Ended
	June 30,		June 30,
	2013		2012
	(Dollars in thousands)
Net loss on sales	$	126	$	418
Provision for unrealized losses, net		1,014		505
Operating expenses, net of rental income		293		419
Total expenses	$	1,433	$	1,342
	Six Months Ended		Six Months Ended
	June 30,		June 30,
	2013		2012
	(Dollars in thousands)
Net loss on sales	$	234	$	1,019
Provision for unrealized losses, net		1,337		633
Operating expenses, net of rental income		786		1,121
Total expenses	$	2,360	$	2,773

38

9. OTHER POSTRETIREMENT BENEFIT PLANS

Home Savings sponsors a defined benefit health care plan that 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 June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(Dollars in thousands)
Service cost	$	—		$	—		$	—		$	—
Interest cost		13			19			26			38
Expected return on plan assets		—			—			—			—
Net amortization of prior service cost		(19	)		(20	)		(38	)		(40	)
Recognized net actuarial gain		(28	)		(23	)		(56	)		(46	)
Net periodic benefit cost/(gain)	$	(34	)	$	(24	)	$	(68	)	$	(48	)
Assumptions used in the valuations were as follows:
Weighted average discount rate		3.00	%		4.00	%		3.00	%		4.00	%

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). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2).

Impaired loans:At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly 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 independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

39

Other real estate owned:Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly 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 independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Special Assets Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with the independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value.

Mortgage servicing rights:On a quarterly basis, loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value. Fair value is determined at a tranche level, based on market prices for comparable mortgage servicing contracts (Level 1), when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data (Level 2).

Loans held for sale:Loans held for sale are carried at the lower of cost or fair value, which is evaluated on a pool-level basis. The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2).

Interest rate caps:The Company uses an independent third party that performs a market valuation analysis for interest rate caps. The methodology used consists of a discounted cash flow model, all future floating cash flows are projected and both floating and fixed cash flows are discounted to the valuation date. The yield curve utilized for discounting and projecting is built by obtaining publicly available third party market quotes from Reuters, which handle up to 30-year swap maturities (Level 3).

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 June 30, 2013 Using:
	June 30,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2013		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Available for sale securities
US Treasury and government sponsored entities’ securities	$	233,867	$	—	$	233,867	$	—
Equity securities		370		370		—		—
Mortgage-backed GSE securities: residential		320,951		—		320,951		—
Interest rate caps		877		—		—��		877

40

	Fair Value Measurements at December 31, 2012 Using:
	December 31,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2012		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Available for sale securities
US Treasury and government sponsored entities’ securities	$	163,692	$	—	$	163,692	$	—
Equity securities		313		313		—		—
Mortgage-backed GSE securities: residential		410,557		—		410,557		—
Interest rate caps		436		—		—		436

There were no transfers between Level 1 and Level 2 during 2013 or 2012.

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2013 and 2012, in thousands:

	Interest Rate Caps
	Six Months Ended			Six Months Ended
	June 30, 2013			June 30, 2012
	(Dollars in thousands)
Balance of recurring Level 3 assets at beginning of period	$	436		$	1,646
Total gains (losses) for the period
Included in other income		700			(686	)
Included in other comprehensive income		—			—
Purchases		—			—
Amortization		(259	)		(129	)
Sales		—			—
Balance of recurring Level 3 assets at end of period	$	877		$	831

There were no transfers between Level 2 and Level 3 during 2013 or 2012.

The following table presents quantitative information about recurring Level 3 fair value measurements at June 30, 2013:

	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range
	(Dollars in thousands)
Interest rate caps	$	877	Discounted cash flow	Discount rate		0.47	%-1.5%

The fair value of interest rate caps was determined using proprietary models from third-party sources taking into account such factors as size of the transaction, the lack of a quoted market and the custom-tailored nature of the transaction. The fair value is inclusive of interest accruals, as applicable.

41

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 June 30, 2013 Using:
	June 30,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2013		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Impaired loans:
Permanent real estate loans	$	1,738	$	—	$	—	$	1,738
Construction loans		1,631		—		—		1,631
Commercial loans		194		—		—		194
Mortgage servicing assets		632		—		632		—
Other real estate owned, net:
Permanent real estate loans		2,311		—		—		2,311
Construction loans		4,915		—		—		4,915

			Fair Value Measurements at December 31, 2012 Using:
	December 31,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2012		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Impaired loans:
Permanent real estate loans	$	6,166	$	—	$	—	$	6,166
Construction loans		3,489		—		—		3,489
Commercial loans		257		—		—		257
Mortgage servicing assets		4,920		—		4,920		—
Other real estate owned, net:
Permanent real estate loans		3,172		—		—		3,172
Construction loans		6,918		—		—		6,918

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 net carrying amount of $3.6 million at June 30, 2013, which includes a specific valuation allowance of $1.0 million. This resulted in a decrease in the provision for loan losses of $1.7 million during the three months ended June 30, 2013 and an increase in the provision for loan losses of $2.3 million during the six months ended June 30, 2013. 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 $48.8 million at June 30, 2012, with a specific valuation allowance of $7.0 million. This resulted in an increase of the provision for loan losses of $2.1 million during the three months ended June 30, 2012 and an increase of the provision for loan losses of $1.5 million during the six months ended June 30, 2012. 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 net carrying amount of $9.9 million at December 31, 2012, which includes a specific valuation allowance of $3.0 million. This resulted in an increase of the provision for loan losses of $27,000 during the twelve months ended December 31, 2012.

42

The significant unobservable (Level 3) inputs used in the fair value measurement of collateral for collateral dependent impaired loans included in the above table primarily relate to the adjustment between carrying value versus appraised value. During the reported periods, discounts applied to appraisals for estimated selling costs were 10%.

At June 30, 2013, mortgage servicing rights, carried at fair value, totaled $632,000, which is made up of the outstanding balance of $666,000, net of a valuation allowance of $34,000. At June 30, 2012, mortgage servicing rights, carried at fair value, totaled $4.9 million, which is made up of the outstanding balance of $6.3 million, net of a valuation allowance of $1.3 million. At December 31, 2012, mortgage servicing rights, carried at fair value, totaled $4.9 million, which is made up of the outstanding balance of $5.6 million, net of a valuation allowance of $680,000, resulting in a net recovery of $1.1 million for the year ended December 31, 2012. 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.

At June 30, 2013, other real estate owned, carried at fair value, which is measured for impairment using the fair value of the property less estimated selling costs, had a net carrying amount of $7.2 million with a valuation allowance of $6.6 million. This resulted in additional expenses of $1.1 million during the three months ended June 30, 2013 and additional expenses of $1.3 million during the six months ended June 30, 2013. At June 30, 2012, other real estate owned had a net carrying amount of $24.8 million, with a valuation allowance of $6.0 million. This resulted in additional expenses of $633,000 during the three months ended June 30, 2012, and additional expenses of $1.8 million during the six months ended June 30, 2012. At December 31, 2012, other real estate owned had a net carrying amount of $10.1 million with a valuation allowance of $6.8 million. This resulted in additional expenses of $2.2 million during the twelve months ended December 31, 2012.

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The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at June 30, 2013:

	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Average)
			(Dollars in thousands)
Impaired loans:
Permanent real estate loans	$	1,738	Sales comparison approach Income approach	Adjustment for differences between comparable sales Adjustment for differences in net operating income Capitalization rate	12.07%-45.44% (28.75%) 7.52%-10.73% (9.49%)
Construction loans		1,631	Sales comparison approach Income approach	Adjustment for differences between comparable sales Adjustment for differences in net operating income Capitalization rate	0.00%-25.00% (9.83%) 10.00%
Commercial loans		194	Sales comparison approach Income approach	Adjustment for differences between comparable sales Adjustment for differences in net operating income Capitalization rate	1.6%-24.18% (11.15%) 8.5%-10% (9.25%)
Foreclosed assets:
Permanent real estate loans		2,311	Sales comparison approach	Adjustment for differences between comparable sales	3.60%-16.47% (10.20%)
Construction loans		4,915	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-47.24% (17.63%)

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The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at December 31, 2012:

	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Average)
			(Dollars in thousands)
Impaired loans:
Permanent real estate loans	$	6,166	Sales comparison approach Income approach	Adjustment for differences between comparable sales Adjustment for differences in net operating income Capitalization rate	12.07%-45.44% (28.75%) 7.52%-10.73% (9.49%)
Construction loans		3,489	Sales comparison approach Income approach	Adjustment for differences between comparable sales Adjustment for differences in net operating income Capitalization rate	0.00%-25.00% (9.83%) 10.00%
Commercial loans		257	Sales comparison approach Income approach	Adjustment for differences between comparable sales Adjustment for differences in net operating income Capitalization rate	1.6%-24.18% (11.15%) 8.5%-10% (9.25%)
Foreclosed assets:
Permanent real estate loans		3,172	Sales comparison approach	Adjustment for differences between comparable sales	3.60%-16.47% (10.20%)
Construction loans		6,918	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-47.24% (17.63%)

45

In accordance with generally accepted accounting principles, the carrying value and estimated fair values of financial instruments at June 30, 2013 and December 31, 2012, were as follows:

				Fair Value Measurements at June 30, 2013 Using:
	June 30, 2013			Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs
	Carrying Value			(Level 1)			(Level 2)			(Level 3)
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	110,256		$	110,256		$	—		$	—
Available for sale securities		555,188			370			554,818			—
Loans held for sale		9,332			—			9,332			—
Loans, net		1,008,843			—			—			1,013,912
FHLB stock		26,464			n/a			n/a			n/a
Accrued interest receivable		5,838			—			2,684			3,154
Interest rate caps		877			—			—			877
Liabilities:
Deposits:
Checking, savings and money market accounts		(907,685	)		(907,685	)		—			—
Certificates of deposit		(526,130	)		—			(537,865	)		—
FHLB advances		(50,000	)		—			(55,892	)		—
Repurchase agreements and other		(90,588	)		—			(99,634	)		—
Advance payments by borrowers for taxes and insurance		(13,428	)		—			(13,428	)		—
Accrued interest payable		(597	)		—			(597	)		—

46

				Fair Value Measurements at December 31, 2012 Using:
	December 31, 2012
	Carrying Value			(Level 1)			(Level 2)			(Level 3)
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	42,613		$	42,613		$	—		$	—
Available for sale securities		574,562			313			574,249			—
Loans held for sale		13,031			—			13,428			—
Loans, net		1,066,240			—			—			1,087,205
FHLB stock		26,464			n/a			n/a			n/a
Accrued interest receivable		6,238			—			2,380			3,858
Interest rate caps		436			—			—			436
Liabilities:
Deposits:
Checking, savings and money market accounts		(902,776	)		(902,776	)		—			—
Certificates of deposit		(559,298	)		—			(571,836	)		—
FHLB advances		(50,000	)		—			(57,077	)		—
Repurchase agreements and other		(90,598	)		—			(102,086	)		—
Advance payments by borrowers for taxes and insurance		(23,590	)		—			(23,590	)		—
Accrued interest payable		(563	)		—			(563	)		—

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

(a) Cash and Cash Equivalents

The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

(b) FHLB Stock

It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

(c) Loans

Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

(d) Deposits

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. The carrying amounts of variable rate, fixed-term money market accounts approximate their fair values at the reporting date resulting in a Level 1 classification. Fair values for fixed and variable rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of deposit to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

47

(e) Short-term Borrowings

The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within 90 days, approximate their fair values resulting in a Level 2 classification.

(f) Other Borrowings

The fair values of Home Savings long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

(g) Accrued Interest Receivable/Payable

The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification, depending on the classification of the underlying asset or liability.

(h) Off-balance Sheet Instruments

Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

11. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURE

Supplemental disclosures of cash flow information are summarized below.

	Six Months Ended		Six Months Ended
	June 30,		June 30,
	2013		2012
	(Dollars in thousands)
Supplemental disclosures of cash flow information
Cash paid (received) during the period for:
Interest on deposits and borrowings	$	6,836	$	10,164
Income taxes		150		—
Supplemental schedule of noncash activities:
Loans transferred from portfolio to held for sale		—		1,214
Transfers from loans to real estate owned and other repossessed assets		1,053		4,282
Transfers from real estate owned to premises and equipment		—		1,746
Amortization of preferred stock discount		6,751		—
Conversion of preferred stock to common stock		21,841		—

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12. EARNINGS PER SHARE

The Company has granted stock compensation awards with nonforfeitable dividend rights which are considered participating securities. As such, earnings per share is computed using the two-class method as required by ASC 206-10-45. Basic earnings per common share is computed by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during the period which excludes the participating securities. Diluted earnings per common share includes the dilutive effect of additional potential common shares from stock compensation awards, but also excludes awards considered participating securities. Stock options for 1,014,886 shares were anti-dilutive for the three and six months ended June 30, 2013. Stock options for 1,658,390 shares were anti-dilutive for the three months ended June 30, 2012. Stock options for 1,686,674 shares were anti-dilutive for the six months ended June 30, 2012.

	Three months ended			Three months ended
	June 30,			June 30,
	2013			2012
	(Dollars in thousands, except per share data)
Net income per consolidated statements of income	$	3,389		$	62
Net income allocated to participating securities		(9	)		—
Amortization of discount on preferred stock		(5,930	)		—
Net income (loss) allocated to common stock	$	(2,550	)	$	62
Basic earnings per common share computation:
Distributed earnings allocated to common stock	$	—		$	—
Undistributed earnings (loss) allocated to common stock		(2,550	)		62
Net income (loss) allocated to common stock	$	(2,550	)	$	62
Weighted average common shares outstanding, including shares considered participating securities		43,276			32,942
Less: Average participating securities		(116	)		(140	)
Weighted average shares		43,160			32,802
Basic earnings (loss) per common share	$	(0.06	)	$	—
Diluted earnings per common share computation:
Net income (loss) allocated to common stock	$	(2,550	)	$	62
Weighted average common shares outstanding for basic earnings per common share		43,160			32,802
Add: Dilutive effects of assumed exercises of stock options		—			41
Weighted average shares and dilutive potential common shares		43,160			32,843
Diluted earnings (loss) per common share	$	(0.06	)	$	—

49

	Six months ended			Six months ended
	June 30,			June 30,
	2013			2012
	(Dollars in thousands, except per share data)
Net income per consolidated statements of income	$	6,071		$	3,858
Net income allocated to participating securities		(19	)		(10	)
Amortization of discount on preferred stock		(6,751	)		0
Net income (loss) allocated to common stock	$	(699	)	$	3,848
Basic earnings per common share computation:
Distributed earnings allocated to common stock	$	—		$	—
Undistributed earnings (loss) allocated to common stock		(699	)		3,848
Net income (loss) allocated to common stock	$	(699	)	$	3,848
Weighted average common shares outstanding, including shares considered participating securities		38,509			32,749
Less: Average participating securities		(121	)		(89	)
Weighted average shares		38,388			32,660
Basic earnings (loss) per common share	$	(0.02	)	$	0.12
Diluted earnings per common share computation:
Net income (loss) allocated to common stock	$	(699	)	$	3,848
Weighted average common shares outstanding for basic earnings per common share		38,388			32,660
Add: Dilutive effects of assumed exercises of stock options		—			13
Weighted average shares and dilutive potential common shares		38,388			32,673
Diluted earnings (loss) per common share	$	(0.02	)	$	0.12

As previously announced and described under Note 15 below, on March 22, 2013, United Community sold 7,942 preferred shares to various investors. In accordance with U.S. Generally Accepted Accounting Principles, United Community recorded a beneficial conversion feature (“BCF”) related to the issuance of these preferred shares because they contained a conversion feature at a fixed rate that was in-the-money when issued. A BCF is “in-the-money” when the investor is deemed to be able to obtain the underlying common shares at a below-market price upon conversion of the preferred shares. The BCF was recognized in United Community’s Shareholders’ Equity and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The effective purchase price of the common shares into which the preferred shares are convertible was deemed to be $2.75, which was used to compute the intrinsic value. The intrinsic value is calculated as the difference between the deemed purchase price of the common shares ($2.75 per share) and the market value ($3.60 per share) on the date the preferred shares were issued (March 22, 2013), multiplied by the number of shares into which the preferred shares were convertible. The BCF resulting from the issuance of the preferred shares of United Community is calculated as follows:

Total common shares that may be issued upon conversion of preferred shares		7,942,000
Intrinsic value (difference between consideration allocated to preferred stock upon conversion at $2.75 per share and market price of $3.60 per share on March 22, 2013)	$	0.85
Beneficial conversion feature	$	6,750,700

The BCF has no effect on net income. The BCF calculated above is deemed to be an implied dividend for purposes of determining earnings per common share in accordance with U.S. Generally Accepted Accounting Principles, and is amortized over the period the preferred shares are expected to be outstanding. The preferred shares converted to common shares upon shareholder approval which was obtained in the second quarter 2013. This amortization resulted in a reduction to retained earnings and thus net income available to common shareholders for earnings per common share purposes. Therefore, United Community will take into account the BCF discount when computing earnings per common share in 2013.

50

13. 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 reflects no change in unrealized gains and losses on postretirement liability. The change includes reclassification of gains on sales of securities of $1.8 million and no impairment charges for the three months ended June 30, 2013, and gains on sales of securities of $3.6 million and no impairment charges for the three months ended June 30, 2012. The change includes reclassification of gains on sales of securities of $2.6 million and no impairment charges for the six months June 30, 2013, and gains on sales of securities of $4.0 million and no impairment charges for the six months ended June 30, 2012.

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

	Three months ended June 30,						Six months ended June 30,
	2013			2012			2013			2012
	(Dollars in thousands)
Unrealized holding gain (loss) on securities available for sale	$	(31,065	)	$	8,980		$	(33,307	)	$	6,511
Unrealized holding gain (loss) on postretirement benefits		—			—			—			—
Reclassification adjustment for gains realized in income		(1,857	)		(3,555	)		(2,578	)		(3,969	)
Net unrealized gains (losses)		(32,922	)		5,425			(35,885	)		2,542
Tax effect		—			—			—			—
Net of tax amount	$	(32,922	)	$	5,425		$	(35,885	)	$	2,542

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

	Balance at December 31, 2012		Current Period Change			Balance at June 30, 2013
	(Dollars in thousands)
Unrealized gains (losses) on securities available for sale	$	5,082	$	(35,885	)	$	(30,803	)
Unrealized gains (losses) on post-retirement benefits		1,600		—			1,600
Total	$	6,682	$	(35,885	)	$	(29,203	)

The following is a summary of each component of accumulated other comprehensive income (loss) that was reclassified into net income during the three and six months ended June 30, 2013:

	Unrealized gains/losses on Available for Sale Securities			Postretirement Benefits		Total
	(Dollars in thousands)
Beginning balance (03/31/2013)	$	2,119		$	1,600	$	3,719
Other comprehensive loss before reclassification		(31,065	)		—		(31,065	)
Amounts reclassified from accumulated other compressive loss		(1,857	)		—		(1,857	)
Net current period other comprehensive loss		(32,922	)		—		(32,922	)
Ending balance (06/30/2013)	$	(30,803	)	$	1,600	$	(29,203	)

	Unrealized gains/losses on Available for Sale Securities			Postretirement Benefits		Total
	(Dollars in thousands)
Beginning balance (12/31/12)	$	5,082		$	1,600	$	6,682
Other comprehensive loss before reclassification		(33,307	)		—		(33,307	)
Amounts reclassified from accumulated other compressive loss		(2,578	)		—		(2,578	)
Net current period other comprehensive loss		(35,885	)		—		(35,885	)
Ending balance (06/30/2013)	$	(30,803	)	$	1,600	$	(29,203	)

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14. 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 in keeping with 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 of capital, risk weightings, and other factors.

Quantitative measures established by regulation for capital adequacy require Home Savings to maintain minimum 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 regulatory required capital ratios for Home Savings, along with the dollar amount of capital implied by such ratios, are presented below.

	As of June 30, 2013
	Actual					Minimum Capital Requirements Per Memorandum of Understanding
	Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total risk-based capital to risk-weighted assets	$	196,966		19.42	%	$	121,065		12.00	%
Tier 1 capital to risk-weighted assets		183,276		18.17	%		*		*
Tier 1 capital to average total assets**		183,276		10.03	%		164,394		8.50	%
	As of June 30, 2013
	Minimum Capital Requirements Per Regulation					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total risk-based capital to risk-weighted assets	$	80,710		8.00	%	$	100,888		10.00	%
Tier 1 capital to risk-weighted assets		*		*			60,533		6.00	%
Tier 1 capital to average total assets**		73,064		4.00	%		91,330		5.00	%

52

	As of December 31, 2012
	Actual					Minimum Capital Requirements Per Bank Order
	Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total risk-based capital to risk-weighted assets	$	174,139		16.21	%	$	128,948		12.00	%
Tier 1 capital to risk-weighted assets		160,612		14.95	%		*		*
Tier 1 capital to average total assets**		160,612		8.70	%		166,226		9.00	%
		As of December 31, 2012
		Minimum Capital Requirements Per Regulation					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total risk-based capital to risk-weighted assets	$	85,965		8.00	%	$	107,457		10.00	%
Tier 1 capital to risk-weighted assets		*		*			64,474		6.00	%
Tier 1 capital to average total assets**		73,878		4.00	%		92,348		5.00	%

* Ratio is not required under regulations

** Tier 1 Leverage Capital Ratio

As of June 30, 2013, Home Savings is considered well capitalized, but must maintain a ratio of total risk based capital to risk-weighted assets of 12.0% and a Tier 1 Capital to average total assets ratio of 8.5% in accordance with the Bank MOU. As of December 31, 2012, the FDIC categorized Home Savings as adequately capitalized pursuant to the Consent Order. However, once the Consent Order was terminated on January 31, 2013, Home Savings was considered well capitalized.

In July 2013, United Community’s primary federal regulator, the Federal Reserve, and the Bank’s primary federal regulator, the FDIC, and other regulatory agencies published final rules (the Basel III Capital Rules) that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain available-for-sale securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-in or opt-out is exercised. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital risk-based weighted assets in addition to the amount necessary to meeting its minimum risk-based capital requirements.

The final rule becomes effective for the Bank on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective. The final rule also implements consolidated capital requirements, effective January 1, 2015.

53

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.

15. CAPITAL RAISE

On January 11, 2013, United Community entered into securities purchase agreements with 28 accredited investors, pursuant to which the investors agreed to invest an aggregate of approximately $39.9 million in United Community for 6,574,272 newly issued common shares of United Community at a purchase price of $2.75 per share, and 7,942 newly created and issued perpetual mandatorily convertible non-cumulative preferred shares of United Community at a purchase price of $2,750 per share. On March 22, 2013, United Community received $39.9 million from the completion of this portion of the private placement of the capital raise. Upon receipt of United Community shareholder approval, each of the preferred shares automatically converted into 1,000 United Community common shares. Shareholder approval was obtained on May 28, 2013, at a special meeting of shareholders. The preferred shares did not pay any preferred dividends.

Also on January 11, 2013, United Community entered into subscription agreements with certain of United Community’s directors, officers and their affiliates pursuant to which these insider investors agreed to invest an aggregate of approximately $2.1 million in United Community for 755,820 newly issued common shares, at the same purchase price of $2.75 per share. The issuance and sale of common shares to the insider investors, pursuant to the subscription agreements, was subject to United Community shareholder approval, which was obtained on May 28, 2013.

On April 26, 2013, United Community issued a prospectus for the purpose of offering existing shareholders the right to purchase up to $5.0 million of United Community common shares at $2.75 per share. The rights offering closed on May 28, 2013 and United Community issued 1,818,181 shares to existing shareholders that elected to participate.

Legal, investment banking and other consulting expenses incurred by United Community to complete the capital raise aggregated $4.5 million. The increase in equity from the capital raise was reduced by these expenses.

16. INCOME TAXES

As of June 30, 2013 and December 31, 2012, the deferred tax asset was $28.8 million. Management recorded a valuation allowance against deferred tax assets at June 30, 2013 and December 31, 2012 based primarily on its cumulative pre-tax losses during the past three years. 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.

Based on the capital raise in the first half of 2013, management has made a preliminary assessment that a change in ownership in accordance with the guidelines of section 382 of the Internal Revenue Code of 1986 has not occurred.

54

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNITED COMMUNITY FINANCIAL CORP.

	At or For the Three						At or For the Six
	Months Ended						Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
Selected financial ratios and other data: (1)
Performance ratios:
Return on average assets (2)		0.75	%		0.01	%		0.67	%		0.38	%
Return on average equity (3)		6.47	%		0.12	%		6.31	%		3.95	%
Interest rate spread (4)		2.76	%		3.37	%		2.81	%		3.24	%
Net interest margin (5)		2.93	%		3.55	%		2.97	%		3.42	%
Noninterest expense to average assets		3.15	%		3.47	%		3.10	%		3.34	%
Efficiency ratio (6)		78.38	%		78.50	%		76.96	%		77.92	%
Average interest-earning assets to average interest-bearing liabilities		121.64	%		117.50	%		120.03	%		116.54	%
Capital ratios:
Average equity to average assets		11.52	%		10.09	%		10.56	%		9.75	%
Equity to assets, end of period		10.28	%		10.26	%		10.28	%		10.26	%
Tangible common equity to tangible common assets (13)		10.27	%		10.24	%		10.27	%		10.24	%
Tier 1 leverage ratio		10.03	%		9.32	%		10.03	%		9.32	%
Tier 1 risk-based capital ratio		18.17	%		15.16	%		18.17	%		15.16	%
Total risk-based capital ratio		19.42	%		16.43	%		19.42	%		16.43	%
Asset quality ratio:
Nonperforming loans to net loans at end of period (7)		2.88	%		9.17	%		2.88	%		9.17	%
Nonperforming assets to average assets (8)		2.22	%		7.09	%		2.22	%		6.95	%
Nonperforming assets to total assets at end of period		2.26	%		7.31	%		2.26	%		7.31	%
Allowance for loan losses as a percent of loans		1.85	%		2.42	%		1.85	%		2.42	%
Allowance for loan losses as a percent of nonperforming loans (7)		65.41	%		27.01	%		65.41	%		27.01	%
Texas ratio (9)		19.97	%		61.57	%		19.97	%		61.57	%
Total classified assets as a percent of Tier 1 Capital		30.72	%		93.31	%		30.72	%		93.31	%
Total classified loans as a percent of Tier 1 Capital and ALLL		22.22	%		79.89	%		22.22	%		79.89	%
Total classified assets as a percent of Tier 1 Capital and ALLL		27.83	%		91.41	%		27.83	%		91.41	%
Net chargeoffs as a percent of average loans		1.54	%		3.03	%		1.02	%		2.75	%
Total 90+ days past due as a percent of net loans		2.58	%		7.79	%		2.58	%		7.79	%
Office data:
Number of full service banking offices		33			34			33			34
Number of loan production offices		9			8			9			8
Per share data:
Basic earnings (loss) per common share (10)	$	(0.06	)	$	—		$	(0.02	)	$	0.12
Diluted earnings (loss) per common share (10)		(0.06	)		—			(0.02	)		0.12
Book value per common share (11)		3.66			5.95			3.66			5.95
Tangible book value per common share (12)		3.66			5.94			3.66			5.94

Notes:

1. Ratios for the three and six month periods are annualized where appropriate

2. Net income divided by average total assets

3. Net income 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 percent of average interest-earning assets

6. Noninterest expense, excluding the amortization of the 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 and gains and losses on foreclosed assets

7. Nonperforming loans consist of nonaccrual loans and loans past due ninety days and still accruing

8. Nonperforming assets consist of nonperforming loans, 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 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

13. We use certain non-GAAP financial measures, such as the tangible common equity to tangible common assets ratio (TCE), to provide information for investors to effectively analyze financial trends of ongoing business activities, and to enhance comparability with peers across the financial sector. We believe TCE is useful because it is a measure utilized by regulators, market analysis and investors in evaluating a company’s financial condition and capital strength. TCE, as defined by us, represents common equity less core deposit intangible assets. A reconciliation form our GAAP total equity to total assets ratio to the non-GAAP tangible common equity to tangible assets ratio is presented below:

	At or For the Three						At or For the Six
	Months Ended June 30,						Months Ended June 30,
	2013			2012			2013			2012
	(Dollars in thousands)
Total assets	$	1,787,071		$	1,906,995		$	1,787,071		$	1,906,995
Less: Core deposit intangible		192			289			192			289
Tangible assets (Non-GAAP)	$	1,786,879		$	1,906,706		$	1,786,879		$	1,906,706
Total common equity	$	183,759		$	195,631		$	183,759		$	195,631
Less: Core deposit intangible		192			289			192			289
Tangible common equity (Non-GAAP)	$	183,567		$	195,342		$	183,567		$	195,342
Total equity/Total assets		10.28	%		10.26	%		10.28	%		10.26	%
Tangible common equity/Tangible assets (non-GAAP)		10.27	%		10.24	%		10.27	%		10.24	%

55

Forward Looking Statements

When used in this Form 10-Q, the words or phrases “will likely result,” “are expected to,” “plan 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 June 30, 2013 and December 31, 2012

Total assets decreased $21.9 million to $1.8 billion at June 30, 2013, compared to December 31, 2012. Contributing to the change were decreases in available for sale securities of $19.4 million, net loans of $57.4 million, net loans held for sale of $3.7 million and a decrease in real estate owned and other repossessed assets of $7.1 million, offset by an increase in cash and cash equivalents of $67.6 million.

Funds not currently utilized for general corporate purposes are invested in overnight funds and available for sale securities. Cash and cash equivalents increased during the first half of 2013 as a result of the increase in balances maintained at the Federal Reserve due to United Community’s capital raise. On March 22, 2013, United Community received $39.9 from the private placement portion of the capital raise. On May 28, 2013, United Community received an additional $2.1 million in the insider placement portion of the capital raise.

In the first six months of 2013, the Company sold approximately $97.1 million in available for sale securities, recognizing $2.6 million in net gains on the sales. The Company also purchased securities with a book value of $145.0 million to replace the securities sold during the period and to replace loan balances that continued to decline. Maturities, paydowns, amortization and the increase in the unrealized losses on the portfolio also contributed to the change in the size of the securities portfolio.

Loans held for sale were $9.3 million at June 30, 2013, compared to $13.0 million at December 31, 2012. This change was primarily attributable to the timing of sales during the period. Home Savings sells a portion of newly originated loans into the secondary market as part of its risk management strategy and anticipates continuing to do so in the future.

Net loans decreased $57.4 million during the first six months of 2013. Contributing to the decrease were a decline in overall loan demand during the period, continued refinance activity in Home Savings’ mortgage portfolio, and continued resolution of nonperforming and classified credits.

56

The following table summarizes the trend in the allowance for loan losses as of June 30, 2013:

	Allowance For Loan Losses
	(Dollars in thousands)
	December 31, 2012		Provision			Recovery		Chargeoff			June 30, 2013
Real Estate Loans
Permanent
One-to four-family residential	$	6,958	$	909		$	92	$	(1,216	)	$	6,743
Multifamily residential		1,223		(204	)		123		(277	)		865
Nonresidential		4,801		1,386			264		(2,011	)		4,440
Land		837		687			196		(1,639	)		81
Total		13,819		2,778			675		(5,143	)		12,129
Construction Loans
One-to four-family residential		1,267		431			311		(344	)		1,665
Multifamily and nonresidential		137		15			7		(21	)		138
Total		1,404		446			318		(365	)		1,803
Consumer Loans
Home Equity		3,150		631			62		(631	)		3,212
Auto		49		(6	)		7		(8	)		42
Marine		264		(177	)		2		(28	)		61
Recreational vehicle		829		267			70		(293	)		873
Other		167		(142	)		143		(154	)		14
Total		4,459		573			284		(1,114	)		4,202
Commercial Loans
Secured		783		(186	)		68		(128	)		537
Unsecured		665		(434	)		135		—			366
Total		1,448		(620	)		203		(128	)		903
Total	$	21,130	$	3,177		$	1,480	$	(6,750	)	$	19,037

The allowance for loan losses is a valuation allowance for probable incurred credit losses established through a provision for possible loan losses charged to expense. The allowance for loan losses decreased to $19.0 million at June 30, 2013, from $21.1 million at December 31, 2012, a decrease of $2.1 million. The allowance for loan losses as a percentage of loans was 1.85% at June 30, 2013, compared to 1.94% at December 31, 2012. The allowance for loan losses as a percentage of nonperforming loans was 65.41% at June 30, 2013, compared to 44.22% at December 31, 2012. 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 applied to specific risk pools, plus specific loss allocations and 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 chargeoffs or recoveries, among other factors.

Chargeoffs exceeded provision for permanent real estate in 2013 primarily as a result of the resolution of the Bank’s largest classified relationship. This relationship consisted of 8 loans. Four of these loans were sold resulting in a charge off of reserves that had been set aside in a prior period of $588,000. In addition, the four loans that remain in Home Savings’ portfolio were written down to current market value. This resulted in an additional charge of $2.0 million against reserves that had been established in a prior period.

As the commercial loan portfolio has decreased over time, the level of reserves required has declined as well. The historical loss rates have improved and the company has experienced a lower rate of chargeoffs in this category. In addition, the company has been successful in recovering some of the commercial loan balances charged off in prior periods. These improvements have resulted in a decline in provision during the current year.

57

A loan is considered impaired when there is a deterioration of the credit worthiness of the borrower to the extent that there is no longer reasonable assurance of the timely collection of the full amount of principal and interest. The total outstanding balance of all impaired loans was $46.9 million at June 30, 2013 as compared to $61.0 million at December 31, 2012. The schedule below summarizes impaired loans for June 30, 2013 and December 31, 2012.

	Impaired Loans
	(Dollars in thousands)
	June 30, 2013		December 31, 2012		Change
Real Estate Loans
Permanent
One-to four-family residential	$	17,493	$	17,682	$	(189	)
Multifamily residential		746		2,059		(1,313	)
Nonresidential		7,307		17,341		(10,034	)
Land		487		5,931		(5,444	)
Total		26,033		43,013		(16,980	)
Construction Loans
One-to four-family residential		4,397		7,547		(3,150	)
Multifamily and nonresidential		—		—		—
Total		4,397		7,547		(3,150	)
Consumer Loans
Home Equity		10,423		7,958		2,465
Auto		44		44		—
Boat		186		190		(4	)
Recreational vehicle		1,110		592		518
Other		—		—		—
Total		11,763		8,784		2,979
Commercial Loans
Secured		4,716		1,635		3,081
Unsecured		1		38		(37	)
Total		4,717		1,673		3,044
Total Impaired Loans	$	46,910	$	61,017	$	(14,107	)

The decrease in impaired loans can be largely attributed to the resolution of loans through principal payments, charge offs, sale of the loan or collateral, or by Home Savings taking possession of the collateral.

Included in impaired loans above are certain loans Home Savings considers to be troubled debt restructurings (TDR). A loan is considered a TDR if Home Savings grants a concession to the debtor that it would otherwise not consider. The concession either stems from an agreement between the creditor and the debtor or is imposed by law or a court. If the debtor is not currently experiencing financial difficulties, but would probably be in payment default in the future without the modification, then this type of restructure also could be considered a TDR.

A TDR may include, but is not necessarily limited to, one or a combination of the following:

• 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 loan;

• Extension of the maturity date 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 loan as stated in the instrument or other agreement; or

• Reduction of accrued interest.

• 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 loan unless the equity interest is granted pursuant to existing terms for converting the debt into an equity interest.

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A debt restructuring is not necessarily a TDR for purposes of this definition even if the borrower is experiencing some financial difficulties. A TDR 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 loan 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.

The change in TDRs for the six months ended June 30, 2013 is as follows:

	Troubled Debt Restructurings
	June 30, 2013		December 31, 2012		Change
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family	$	15,932	$	15,299	$	633
Multifamily residential		469		—		469
Nonresidential		868		946		(78	)
Land		487		105		382
Total		17,756		16,350		1,406
Construction Loans
One-to four-family residential		941		576		365
Multifamily and nonresidential		—		—		—
Total		941		576		365
Consumer Loans
Home Equity		10,245		7,253		2,992
Auto		12		13		(1	)
Marine		—		—		—
Recreational vehicle		867		—		867
Other		—		7		(7	)
Total		11,124		7,273		3,851
Commercial Loans
Secured		799		1,212		(413	)
Unsecured		—		25		(25	)
Total		799		1,237		(438	)
Total Restructured Loans	$	30,620	$	25,436	$	5,184

The increase in the level of TDR loans during the six months ended June 30, 2013 was attributable primarily to focused modification efforts within the home equity portfolio.

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. TDR loans that were on nonaccrual status aggregated $5.5 million and $4.4 million at June 30, 2013 and December 31, 2012, respectively. Such loans are considered nonperforming loans. TDR loans that were accruing according to their terms aggregated $25.2 million and $21.0 million at June 30, 2013 and December 31, 2012, respectively.

59

Nonperforming loans consist of nonaccrual loans and loans past due 90 days and still accruing. Nonperforming loans were $29.1 million, or 2.88% of net loans, at June 30, 2013, compared to $47.8 million, or 4.48% of net loans, at December 31, 2012.

The schedule below summarizes the change in nonperforming loans for the first six months of 2013.

	Nonperforming Loans
	(Dollars in thousands)
	June 30, 2013		December 31, 2012		Change
Real Estate Loans
Permanent
One-to four-family residential	$	4,993	$	5,437	$	(444	)
Multifamily residential		727		2,027		(1,300	)
Nonresidential		10,429		20,743		(10,314	)
Land		656		6,047		(5,391	)
Total		16,805		34,254		(17,449	)
Construction Loans
One-to four-family residential		4,385		7,466		(3,081	)
Multifamily and nonresidential		—		—		—
Total		4,385		7,466		(3,081	)
Consumer Loans
Home Equity		2,809		3,298		(489	)
Auto		89		105		(16	)
Marine		167		176		(9	)
Recreational vehicle		389		1,259		(870	)
Other		5		4		1
Total		3,459		4,842		(1,383	)
Commercial Loans
Secured		4,251		1,194		3,057
Unsecured		202		31		171
Total		4,453		1,225		3,228
Total Nonperforming Loans	$	29,102	$	47,787	$	(18,685	)

Loans held for sale decreased $3.7 million, or 28.4%, to $9.3 million at June 30, 2013, compared to $13.0 million at December 31, 2012. The change was primarily attributable to the timing of sales during the period. The rise in interest rates also affected the decline in origination volume. 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.

FHLB stock remained at $26.5 million for June 30, 2013 and December 31, 2012. During the first six months of 2013, the FHLB paid a cash dividend of $560,000 in lieu of a stock dividend to its member banks.

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Real estate owned and other repossessed assets decreased $7.1 million, or 38.4%, during the six months ended June 30, 2013. The following table summarizes the activity in real estate owned and other repossessed assets during the period:

	Real Estate Owned			Repossessed Assets			Total
	(Dollars in thousands)
Balance at Beginning of period	$	18,075		$	365		$	18,440
Acquisitions		517			536			1,053
Sales, net of gains		(6,072	)		(745	)		(6,797	)
Change in valuation allowance		(1,337	)		—			(1,337	)
Balance at End of period	$	11,203		$	156		$	11,359

The following table depicts the type of property secured in the satisfaction of loans and the valuation allowance associated with each type as of June 30, 2013:

	Balance		Valuation Allowance			Net Balance
	(Dollars in thousands)
Real estate owned
One-to four-family	$	4,151	$	(574	)	$	3,577
Multifamily residential		—		—			—
Nonresidential		757		(203	)		554
One-to four-family residential construction		12,530		(5,684	)		6,846
Land		270		(44	)		226
Total real estate owned		17,708		(6,505	)		11,203
Repossessed assets
Auto		—		—			—
Marine		76		—			76
Recreational vehicle		80		—			80
Total repossessed assets		156		—			156
Total real estate owned and other repossessed assets	$	17,864	$	(6,505	)	$	11,359

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 value. The increase in the valuation allowance on property acquired was due to the decline in market value of those properties.

Total deposits decreased $28.3 million to $1.4 billion at June 30, 2013, compared to December 31, 2012. The primary cause for the decrease in deposits was due to declines in certificates of deposit. Nevertheless, as certificates of deposit matured, the Company was able to retain most of these deposits in other interest-bearing non-time deposit accounts at substantially lower rates. As of June 30, 2013, Home Savings had no brokered deposits.

Advance payments by borrowers for taxes and insurance decreased $10.2 million during the first six months of 2013. Remittance of real estate taxes and property insurance made on behalf of customers of Home Savings accounted for $1.7 million of the decrease. In addition, funds held for payments received on loans sold where servicing was retained by Home Savings decreased $8.5 million.

During the first six months of 2013, Home Savings received requests for reimbursements from Freddie Mac and Fannie Mae, who purchased loans originated by Home Savings, for the purpose of making them whole on certain loans sold in the secondary market. These loans have certain identified weaknesses such that, in the opinion of management, a settlement to the investor is most appropriate. For the six months ended June 30, 2013, Home Savings incurred expenses of $891,000 associated with such repurchases. Home Savings has included in other liabilities a reserve for future make-whole settlements aggregating $793,000 at June 30, 2013. Management believes this reserve is appropriate given the historical losses incurred to date and the probability that future losses will be deemed certain.

Shareholders’ equity increased $13.0 million to $183.8 million at June 30, 2013, from $170.8 million at December 31, 2012. The change occurred primarily due to the successful completion of the capital raise and net income recognized during the period, offset by the adjustment to other comprehensive income for the change in the valuation of available for sale securities during the period.

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Other comprehensive income declined $35.9 million from December 31, 2012 to June 30, 2012. Unrealized losses on U.S. Treasury and government sponsored entities and mortgage-backed securities included in other comprehensive income have not been recognized into income at June 30, 2013 and December 31, 2012 because the issuer’s securities are of high credit quality (rated AA or higher), management does not intend to sell (and it is likely that management will not be required to sell) the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The primary reason for the decline in fair value was the rise in longer term interest rates at the end of the second quarter. The fair value is expected to recover as the investments approach maturity.

On January 11, 2013, United Community entered into securities purchase agreements with 28 accredited investors, pursuant to which the investors agreed to invest an aggregate of approximately $39.9 million in United Community for 6,574,272 newly issued common shares of United Community at a purchase price of $2.75 per share, and 7,942 newly created and issued perpetual mandatorily convertible non-cumulative preferred shares of United Community at a purchase price of $2,750 per share. On March 22, 2013, United Community received $39.9 million from the completion of this portion of the private placement of the capital raise. Upon receipt of United Community shareholder approval on May 28, 2013, each of the preferred shares automatically converted into 1,000 United Community common shares. The preferred shares did not pay any dividends.

Also on January 11, 2013, United Community entered into subscription agreements with certain United Community’s directors, officers and their affiliates pursuant to which these inside investors agreed to invest an aggregate of approximately $2.1 million in United Community for 755,820 newly issued common shares, at the same purchase price of $2.75 per share. The issuance and sale of common shares to the inside investors, pursuant to the subscription agreements, was subject to United Community shareholder approval, which was obtained on May 28, 2013.

On April 26, 2013, United Community issued a prospectus for the purpose of offering existing shareholders the right to purchase up to $5.0 million of United Community common shares at $2.75 per share. The rights offering closed on May 28, 2013 and United Community issued 1,818,181 shares to existing shareholders that elected to participate.

Legal, investment banking and other consulting expenses incurred by United Community to complete the capital raise aggregated $4.5 million. The increase in equity from the capital raise was reduced by these expenses.

Book value per common share as of June 30, 2013 was $3.66 as compared to $5.17 per common share as of December 31, 2012. Book value per share is calculated as total common equity divided by the number of common shares outstanding. Book value was impacted by the overall change in equity due to the capital raising efforts. Also, while always included in the calculation of book value, the Company’s unrealized losses recognized on available for sale securities during the six months ended June 30, 2013 negatively affected book value per common share. The calculation of book value is as follows:

	As of June 30,		As of December 31,
	2013		2012
	(Dollars in thousands, except per share data)
Number of common shares outstanding		50,188,664		33,027,886
Total equity	$	183,759	$	170,760
Total preferred shares		—		—
Book value per common share	$	3.66	$	5.17

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Book value per share at June 30, 2013, was affected by two items that took place in the first half of 2013: the unrealized loss on available for sale securities and the dilutive effect of the capital raise. The impact of the $35.9 million unrealized loss on available for sale securities on book value per common share is as follows:

	(Dollars in
	thousands, except per share data)
Total equity exclusive of loss	$	219,644
Common stock outstanding		50,188,664
Book value per common share, exclusive of loss	$	4.38
Unrealized loss		35,885
Total equity, as reported	$	183,759
Book value per common share, as reported	$	3.66

Independently, during the first six months of 2013, the Company issued 17.1 million shares in exchange for net proceeds of $42.5 million, after expenses. The impact of this capital raise on book value per common share is as follows:

	(Dollars in
	thousands, except per share data)
Common shares issued in capital raise:
Private placement		6,574,272
Insider placement		755,820
Rights offering		1,818,181
Conversion of preferred shares		7,942,000
Total number of common shares issued		17,090,273
Net proceeds received from capital raise	$	42,488
Total equity exclusive of the capital raise	$	141,271
Common stock outstanding prior to the capital raise		33,098,391
Book value per common share, exclusive of the capital raise	$	4.27
Total equity exclusive of the capital raise	$	141,271
Capital raise		42,488
Total equity, as reported	$	183,759
Common stock outstanding prior to the capital raise		33,098,391
Common shares issued		17,090,273
Common stock outstanding, as reported		50,188,664
Book value per common share, as reported	$	3.66

The calculation of book value per share as presented in the tables above could be considered non-GAAP. We use certain non-GAAP financial measures to provide information for investors to effectively analyze financial trends of ongoing business activities, and to enhance comparability with peers across the financial sector. We believe this information is useful because it can be utilized by regulators, market analysts and investors in the evaluation our financial condition and capital strength. The tables above provide a reconciliation to our GAAP book value per share.

Comparison of Operating Results for the Three Months Ended

June 30, 2013 and June 30, 2012

Net Income. United Community recognized net income for the three months ended June 30, 2013 of $3.4 million compared to net income of $62,000 for the three months ended June 30, 2012. Net interest income decreased $3.8 million. The provision for loan losses decreased $5.2 million during the same period. Additionally, non-interest income decreased and noninterest expense decreased $565,000 and $2.7 million, respectively. United Community’s annualized return on average assets and return on average equity were 0.74% and 6.46%, respectively, for the three months ended June 30, 2013. The annualized return on average assets and return on average equity for the comparable period in 2012 were 0.01% and 0.12%, respectively.

Net Interest Income. Net interest income for the three months ended June 30, 2013 and June 30, 2012 was $12.6 million and $16.4 million, respectively.

Total interest income decreased $4.9 million in the second quarter of 2013 compared to the second quarter of 2012, primarily as a result of a decrease of $282.0 million in the average balance of outstanding loans. United Community also experienced a decrease in the yield on net loans of 42 basis points.

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Total interest expense decreased $1.1 million for the quarter ended June 30, 2013, as compared to the same quarter last year. The change was due primarily to reductions of $1.0 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. Between June 30, 2012, and June 30, 2013, the average outstanding balance of certificates of deposit declined by $131.3 million, while non-time deposits increased by $14.1 million. Also contributing to the decrease was a reduction of 27 basis points in the cost of certificates of deposit, as well as a decrease in the cost of non-time deposits of 10 basis points.

The following table shows the impact of interest rate and outstanding balance (volume) changes compared to the second quarter of last year. The interest rate spread for the three months ended June 30, 2013, decreased to 2.76% compared to 3.38% for the quarter ended June 30, 2012. The net interest margin decreased 62 basis points to 2.93% for the three months ended June 30, 2013 compared to 3.55% for the same quarter in 2012.

	For the Three Months Ended June 30,
	2013 vs. 2012
	Increase (decrease) due to						Total increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	(1,286	)	$	(3,466	)	$	(4,752	)
Loans held for sale		12			(38	)		(26	)
Investment securities:
Available for sale		12,217			(12,373	)		(156	)
FHLB stock		(3	)		—			(3	)
Other interest-earning assets		6			24			30
Total interest-earning assets	$	10,946		$	(15,853	)	$	(4,907	)
Interest-bearing liabilities:
Savings accounts		(28	)		5			(23	)
NOW and money market accounts		(161	)		(1	)		(162	)
Certificates of deposit		(409	)		(439	)		(848	)
Federal Home Loan Bank advances		(429	)		340			(89	)
Repurchase agreements and other		(1	)		—			(1	)
Total interest-bearing liabilities	$	(1,028	)	$	(95	)		(1,123	)
Change in net interest income							$	(3,784	)

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 $1.1 million in the second quarter of 2013, compared to $6.3 million in the second quarter of 2012. This $5.2 million decrease in the provision for loan losses is primarily a result of loans charged off in excess of specific reserves in the second quarter of 2012. Specifically, the resolution of one commercial loan relationship consisting of eight loans, which represented the Company’s largest classified loan relationship at that time, resulted in a chargeoff of $5.9 million in the second quarter of 2012 as a part of this resolution. Reserves of $1.1 million were established on these specific loans in prior periods, resulting in a net loss of $4.8 million in the second quarter of 2012.

Chargeoffs exceeded provision in the first half of 2013 primarily as a result of the resolution of the largest classified relationship in the first quarter of 2013. This relationship consisted of 8 loans. Four of these loans were sold resulting in a charge off of reserves that had been set aside in a prior period of $588,000. In addition, the four loans that remain in Home Savings’ portfolio were written down to current market value. This resulted in an additional charge of $2.0 million in reserves that had been established in a prior period.

Noninterest Income.Noninterest income decreased in the second quarter of 2013 to $6.4 million, as compared to noninterest income for the second quarter of 2012 of $6.9 million. Decreased noninterest income was a result of lower gains recognized on the sale of securities available for sale, higher losses recognized on the valuation and disposal of real estate owned and other repossessed assets and decreased mortgage banking income recognized in the second quarter of 2013 as compared to the same quarter in 2012. These changes were offset by higher service fees and other charges recognized, compared to the first quarter of 2012. The change in service fees was a result of a positive valuation adjustment of $212,000 recognized on deferred mortgage servicing rights in the second quarter of 2013 as compared to the same period in 2012. The positive valuation adjustment is the result of higher interest rates on newly originated loans in the current period. Other income also positively affected the comparison due to a positive valuation adjustment of $561,000 on interest rate caps and increased debit card fee income of $1.0 million during the current quarter, as compared to the same quarter last year.

64

Noninterest Expense. Noninterest expense was $14.4 million in the second quarter of 2013, compared to $17.0 million in the second quarter of 2012. In the second quarter of 2013, salaries and employee benefits were down because of lower expenses associated with incentive payments and a lower level of salaries as a result of fewer full-time equivalent employees at June 30, 2013, as compared to June 30, 2012. Deposit insurance premiums were lower in the second quarter of 2013 due to the Bank being able to avail itself of more favorable insurance rates and a lower average asset base used in the calculation of insurance premiums. Professional fees were $165,000 lower during the quarter ended June 30, 2013, as compared to the same quarter last year. The improvement in asset quality has reduced the need to engage legal and other consultants to assist in the resolution of problem assets. Other expenses were lower in the second quarter of 2013, as compared to the same quarter in 2012. This positive variance is the result of lower expenses incurred for real estate taxes and other expenses paid prior to loans going into foreclosure. Lastly, prepayment penalties incurred on the early payoff of FHLB advances in the second quarter of 2012 were not a recurring expenditure in 2013.

Comparison of Operating Results for the Six Months Ended

June 30, 2013 and June 30, 2012

Net Income. United Community recognized net income for the six months ended June 30, 2013, of $6.2 million compared to net income of $3.9 million for the six months ended June 30, 2012. Net interest income decreased $6.7 million. The provision for loan losses decreased $3.8 million during the same period. Additionally non-interest income increased and noninterest expense decreased $37,000 and $5.3 million, respectively. United Community’s annualized return on average assets and return on average equity were 0.67% and 6.31%, respectively, for the six months ended June 30, 2013. The annualized return on average assets and return on average equity for the comparable period in 2012 were 0.38% and 3.95%, respectively.

Net Interest Income. Net interest income for the six months ended June 30, 2013 and June 30, 2012 was $25.6 million and $32.3 million, respectively.

Total interest income decreased $10.0 million in the first half of 2013 compared to the first half of 2012, primarily as a result of a decrease of $296.5 million in the average balance of outstanding loans. United Community also experienced a decrease in the yield on net loans of 40 basis points.

Total interest expense decreased $3.3 million for the six months ended June 30, 2013, as compared to the same period last year. The change was due primarily to reductions of $3.0 million in interest paid on deposits. The overall decrease in deposit interest expense was attributable to a shift in deposit balances from certificates of deposit to relatively less expensive non-time deposits. Between June 30, 2012, and June 30, 2013, the average outstanding balance of certificates of deposit declined by $151.9 million, while non-time deposits increased by $31.5 million. Also contributing to the decrease in interest expense was a reduction of 49 basis points in the cost of certificates of deposit, as well as a decrease in the cost of non-time deposits of 9 basis points.

65

The following table shows the impact of interest rate and outstanding balance (volume) changes compared to the first half of last year. The interest rate spread for the six months ended June 30, 2013, decreased to 2.81% compared to 3.25% for the six months ended June 30, 2012. The net interest margin decreased 45 basis points to 2.97% for the six months ended June 30, 2013 compared to 3.42% for the same period in 2012.

	For the Six Months Ended June 30,
	2013 vs. 2012
	Increase (decrease) due to						Total increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	(2,496	)	$	(7,285	)	$	(9,781	)
Loans held for sale		(29	)		(8	)		(37	)
Investment securities:
Available for sale		3,635			(3,857	)		(222	)
FHLB stock		(20	)		—			(20	)
Other interest-earning assets		9			18			27
Total interest-earning assets	$	1,099		$	(11,132	)	$	(10,033	)
Interest-bearing liabilities:
Savings accounts		(34	)		15			(19	)
NOW and money market accounts		(360	)		22			(338	)
Certificates of deposit		(1,478	)		(1,143	)		(2,621	)
Federal Home Loan Bank advances		(1,352	)		1,054			(298	)
Repurchase agreements and other		(11	)		—			(11	)
Total interest-bearing liabilities	$	(3,235	)	$	(52	)		(3,287	)
Change in net interest income							$	(6,746	)

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 $3.2 million in the first six months of 2013, compared to $6.9 million in the first six months of 2012. This $3.8 million decrease in the provision for loan losses is primarily a result of loans charged off in excess of specific reserves during the first six months of 2012. Specifically, the resolution of one commercial loan relationship in the second quarter of 2012, consisting of seven loans, which represented the Company’s largest classified loan relationship, at that time included a chargeoff of $5.9 million as a part of this resolution.

Noninterest Income.Noninterest income increased $37,000 in the first half of 2013 to $12.1 million, as compared to noninterest income for the first half of 2012 of $12.0 million. While in total the change was $37,000, components within the various categories changed significantly. During the first six months of 2013, service fees and other charges increased as a result of a positive valuation adjustment on deferred mortgage servicing rights of $646,000. Additionally, other income increased $1.4 million due primarily to Home Savings recognizing a positive valuation adjustment of $700,000 on interest rate caps during 2013 as compared to a negative valuation adjustment of $843,000 during the first six months of 2012. Increased debit card fee income of $303,000 earned during the first half of 2013 also contributed to the increase in noninterest income. These increases in noninterest income were offset by a decline of $1.4 million in gains on the sale of securities in the first six months of 2013, as compared to the same period last year.

Noninterest Expense. Noninterest expense was $28.2 million in the first half of 2013, compared to $33.5 million in the first half of 2012. In the first six months of 2013, salaries and employee benefits were down because of the recognition of expenses associated with a restricted stock grant that occurred in the first quarter of 2012. A similar award was not granted in 2013. Deposit insurance premiums were lower in the first six months of 2013 due to the Bank being able to avail itself of more favorable insurance rates and a lower average asset base used in the calculation of insurance premiums. Professional fees were $637,000 lower during the six months ended June 30, 2013 as compared to the same period last year. The improvement in asset quality has reduced the need to engage legal and other consultants to assist in the resolution of problem assets. Other expenses were lower in the first half of 2013, as compared to the same period in 2012. This positive variance is the result of lower expenses incurred for real estate taxes and other expenses paid prior to loans going into foreclosure. Lastly, prepayment penalties incurred on the early payoff of FHLB advances in the second quarter of 2012 were not a recurring expenditure in 2013.

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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 June 30, 2013 and 2012. Average balance calculations were based on daily balances.

	Three Months Ended June 30,
	2013								2012
	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)	$	1,016,810	$	12,207	��		4.80	%	$	1,298,838	$	16,959		5.22	%
Net loans held for sale		7,683		78			4.06	%		11,293		104		3.68	%
Investment securities:
Available for sale		589,284		3,384			2.30	%		483,916		3,540		2.93	%
Federal Home Loan Bank stock		26,464		277			4.19	%		26,464		280		4.23	%
Other interest-earning assets		83,535		41			0.20	%		32,035		11		0.14	%
Total interest-earning assets		1,723,776		15,987			3.71	%		1,852,546		20,894		4.51	%
Noninterest-earning assets		99,246								113,557
Total assets	$	1,823,022								$1,966,103
Interest-bearing liabilities:
NOW and money market accounts	$	470,704	$	246			0.21	%	$	472,160	$	408		0.35	%
Savings accounts		274,238		59			0.09	%		258,682		82		0.13	%
Certificates of deposit		531,553		1,604			1.21	%		662,890		2,452		1.48	%
Federal Home Loan Bank advances		50,000		524			4.19	%		92,337		613		2.66	%
Repurchase agreements and other		90,591		918			4.05	%		90,611		919		4.06	%
Total interest-bearing liabilities		1,417,086		3,351			0.95	%		1,576,680		4,474		1.14	%
Noninterest-bearing liabilities		195,991								191,011
Total liabilities		1,613,077								1,767,691
Equity		209,945								198,412
Total liabilities and equity	$	1,823,022							$	1,966,103
Net interest income and interest rate spread			$	12,636			2.76	%			$	16,420		3.37	%
Net interest margin							2.93	%						3.55	%
Average interest-earning assets to average interest-bearing liabilities							121.64	%						117.50	%

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

67

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 six month periods ended June 30, 2013 and 2012. Average balance calculations were based on daily balances.

	Six Months Ended June 30,
	2013							2012
	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)	$	1,032,150	$	24,834		4.81	%	$	1,328,682	$	34,615		5.21	%
Net loans held for sale		10,015		167		3.33	%		10,449		204		3.90	%
Investment securities:
Available for sale		595,696		6,812		2.29	%		489,854		7,034		2.87	%
Federal Home Loan Bank stock		26,464		560		4.23	%		26,464		580		4.38	%
Other interest-earning assets		55,827		50		0.18	%		34,069		23		0.14	%
Total interest-earning assets		1,720,152		32,423		3.77	%		1,889,518		42,456		4.49	%
Noninterest-earning assets		101,736							115,914
Total assets	$	1,821,888						$	2,005,432
Interest-bearing liabilities:
NOW and money market accounts	$	473,855	$	538		0.23	%	$	462,307	$	876		0.38	%
Savings accounts		271,874		146		0.11	%		251,944		165		0.13	%
Certificates of deposit		538,995		3,312		1.23	%		690,888		5,933		1.72	%
Federal Home Loan Bank advances		57,740		1,047		3.63	%		125,572		1,345		2.14	%
Repurchase agreements and other		90,594		1,827		4.03	%		90,613		1,838		4.06	%
Total interest-bearing liabilities		1,433,058		6,870		0.96	%		1,621,324		10,157		1.25	%
Noninterest-bearing liabilities		196,373							188,634
Total liabilities		1,629,431							1,809,958
Equity		192,457							195,474
Total liabilities and equity	$	1,821,888						$	2,005,432
Net interest income and interest rate spread			$	25,553		2.81	%			$	32,299		3.25	%
Net interest margin						2.97	%						3.42	%
Average interest-earning assets to average interest-bearing liabilities						120.03	%						116.54	%

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

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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 this 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 inherently are uncertain and, as a result, the model cannot measure precisely 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 both the year ended December 31, 2012 and for the quarter ended June 30, 2013, 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 NPV and interest income that the Home Savings Board deems advisable in the event of various changes in interest rates. See the table below for Board-adopted policy limits.

	Six Months Ended June 30, 2013
	NPV as % of portfolio value of assets												Next 12 months net interest income
													(Dollars in thousands)
Change in rates (Basis points)	NPV Ratio			Internal policy limitations			Change in %			Internal policy limitations on NPV Change			$ Change		Internal policy limitations			% Change
400		8.22	%		6.00	%		-3.37	%		30.00	%	$	6,628		-20.00	%		13.22	%
300		8.78	%		6.00	%		-2.81	%		25.00	%		6,060		-15.00	%		12.08	%
200		9.45	%		7.00	%		-2.14	%		20.00	%		3,198		-10.00	%		6.38	%
100		10.04	%		7.00	%		-1.55	%		15.00	%		1,266		-5.00	%		2.52	%
Static		11.59	%		9.00	%		—	%		—	%		—		—	%		—	%

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	Year Ended December 31, 2012
	NPV as % of portfolio value of assets												Next 12 months net interest income
													(Dollars in thousands)
Change in rates (Basis points)	NPV Ratio			Internal policy limitations			Change in %			Internal policy limitations on NPV Change			$ Change		Internal policy limitations			% Change
400		10.79	%		6.00	%		0.81	%		30.00	%	$	6,080		-20.00	%		11.54	%
300		11.09	%		6.00	%		1.11	%		25.00	%		4,949		-15.00	%		9.39	%
200		11.29	%		7.00	%		1.31	%		20.00	%		3,387		-10.00	%		6.43	%
100		11.24	%		7.00	%		1.26	%		15.00	%		1,382		-5.00	%		2.62	%
Static		9.98	%		9.00	%		—	%		—	%		—		—	%		—	%

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 above 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. Also, 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.

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 June 30, 2013. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that United Community’s disclosure controls and procedures as of June 30, 2013 were effective in ensuring that information required to be disclosed in the reports that United Community files or submits under the Exchange Act (i) was recorded, processed, summarized and reported on a timely basis, and (ii) is accumulated and communicated to management, including United Community’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. During the quarter ended June 30, 2013, 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.

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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, 2012. 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 United Community shares during the quarter ended June 30, 2013.

ITEM 6—Exhibits

Exhibit Number	Description
3.1	Articles of Incorporation
3.2	Amendment to Articles of Incorporation
3.3	Amendment to Articles of Incorporation
3.4	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
101	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations and Comprehensive Income, (iii) the Consolidated Statements of Changes in Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Consolidated Financial Statements.

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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: August 9, 2013	/S/ Patrick W. Bevack
	Patrick W. Bevack President and Chief Executive Officer
	(Principal Executive Officer)

Date: August 9, 2013	/S/ James R. Reske
	James R. Reske, CFA Treasurer and Chief Financial Officer
	(Principal Financial Officer)

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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), film number 98565717, Exhibit 3.1.

Exhibit 3.2

Incorporated by reference to the form 8-A filed by United Community on June 5, 1998 with the SEC, film number 98642962, Exhibit 2(b).

Exhibit 3.3

Incorporated by reference to the Definitive Proxy Statement filed by United Community on April 24, 2013 with the SEC, film number 13777675, Appendix B.

Exhibit 3.4

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.

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