United Community Financial (UCFC) 10-Q 2014 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, 2014

¨ 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. 50,239,383 common shares as of July 31, 2014.

TABLE OF CONTENTS

		PAGE
Part I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Financial Condition as of June 30, 2014 (Unaudited) and December 31, 2013	1
	Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2014 and 2013 (Unaudited)	2
	Consolidated Statement of Shareholders’ Equity for the Three and Six Months ended June 30, 2014 and 2013 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013 (Unaudited)	6
	Notes to Consolidated Financial Statements (Unaudited)	7-57
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	58-74
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	75-76
Item 4.	Controls and Procedures	76
Part II. OTHER INFORMATION
Item 1.	Legal Proceedings	77
Item 1A.	Risk Factors	77
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	77-78
Item 3.	Defaults Upon Senior Securities (None)
Item 4.	Mine Safety Disclosures (None)
Item 5.	Other Information (None)
Item 6.	Exhibits	79
Signatures		80
Exhibits		81

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

	June 30, 2014			December 31, 2013
	(Dollars in thousands)
Assets:
Cash and deposits with banks	$	27,363		$	20,937
Federal funds sold		16,227			56,394
Total cash and cash equivalents		43,590			77,331
Securities:
Available for sale, at fair value		516,637			511,006
Loans held for sale		9,290			4,838
Loans, net of allowance for loan losses of $18,264 and $21,116		1,086,771			1,029,192
Federal Home Loan Bank stock, at cost		18,068			26,464
Premises and equipment, net		20,391			20,924
Accrued interest receivable		5,762			5,694
Real estate owned and other repossessed assets, net		4,548			6,341
Core deposit intangible		117			152
Cash surrender value of life insurance		45,684			44,972
Other assets		39,081			10,936
Total assets	$	1,789,939		$	1,737,850
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Interest bearing	$	1,190,063		$	1,221,162
Non-interest bearing		185,411			170,590
Total deposits		1,375,474			1,391,752
Borrowed funds:
Federal Home Loan Bank advances		65,000			50,000
Repurchase agreements and other		90,567			90,578
Total borrowed funds		155,567			140,578
Advance payments by borrowers for taxes and insurance		12,708			20,060
Accrued interest payable		573			550
Accrued expenses and other liabilities		10,568			9,836
Total liabilities		1,554,890			1,562,776
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 shares issued and 50,452,083 and 50,339,089 shares, respectively, outstanding		174,176			174,719
Retained earnings		123,893			81,515
Accumulated other comprehensive loss		(25,901	)		(41,665	)
Treasury stock, at cost, 3,686,827 and 3,799,821 shares, respectively		(37,119	)		(39,495	)
Total shareholders’ equity		235,049			175,074
Total liabilities and shareholders’ equity	$	1,789,939		$	1,737,850
		��

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 June 30,
	2014			2013
	(Dollars in thousands, except per share data)
Interest income
Loans	$	12,361		$	12,207
Loans held for sale		74			78
Securities available for sale		3,125			3,384
Federal Home Loan Bank stock dividends		230			277
Other interest earning assets		21			41
Total interest income		15,811			15,987
Interest expense
Deposits		1,627			1,909
Federal Home Loan Bank advances		524			524
Repurchase agreements and other		919			918
Total interest expense		3,070			3,351
Net interest income		12,741			12,636
Provision for loan losses		(1,614	)		1,113
Net interest income after provision for loan losses		14,355			11,523
Non-interest income
Non-deposit investment income		407			373
Mortgage servicing fees		686			698
Deposit related fees		1,331			1,334
Mortgage servicing rights valuation		(5	)		211
Mortgage servicing rights amortization		(432	)		(570	)
Other service fees		—			18
Net gains (losses):
Securities available for sale (includes $31 and $1,857, respectively, accumulated other comprehensive income reclassifications for unrealized net gains on available for sale securities)		31			1,857
Mortgage banking income		312			1,389
Real estate owned and other repossessed assets charges, net		(42	)		(1,140	)
Card fees		852			1,179
Other income		298			1,035
Total non-interest income		3,438			6,384
Non-interest expense
Salaries and employee benefits		8,282			7,132
Occupancy		815			851
Equipment and data processing		1,963			1,782
Franchise tax		198			400
Advertising		247			281
Amortization of core deposit intangible		16			23
FDIC insurance premiums		327			603
Other insurance premiums		135			175
Legal and consulting fees		177			(43	)
Other professional fees		617			917
Real estate owned and other repossessed asset expenses		137			293
Other expenses		1,312			1,954
Total non-interest expenses		14,226			14,368
Income before income taxes		3,567			3,539
Income tax (benefit) expense (includes $11 and $0 income tax expense from reclassification items)		(38,837	)		150
Net income		42,404			3,389
Amortization of discount on preferred stock		—			(5,930	)
Earnings available to common shareholders	$	42,404		$	(2,541	)

(Continued)

2

(Continued)

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	For the Six Months Ended June 30,
	2014			2013
	(Dollars in thousands, except per share data)
Interest income
Loans	$	24,483		$	24,834
Loans held for sale		123			167
Securities available for sale		6,366			6,812
Federal Home Loan Bank stock dividends		497			560
Other interest earning assets		47			50
Total interest income		31,516			32,423
Interest expense
Deposits		3,304			3,996
Federal Home Loan Bank advances		1,042			1,047
Repurchase agreements and other		1,827			1,827
Total interest expense		6,173			6,870
Net interest income		25,343			25,553
Provision for loan losses		(1,581	)		3,177
Net interest income after provision for loan losses		26,924			22,376
Non-interest income
Non-deposit investment income		748			914
Mortgage servicing fees		1,375			1,402
Deposit related fees		2,529			2,594
Mortgage servicing rights valuation		(6	)		646
Mortgage servicing rights amortization		(824	)		(1,230	)
Other service fees		—			61
Net gains (losses):
Securities available for sale (includes $34 and $2,578, respectively, accumulated other comprehensive income reclassifications for unrealized net gains on available for sale securities)		34			2,578
Mortgage banking income		924			3,032
Real estate owned and other repossessed assets charges, net		(425	)		(1,571	)
Card fees		1,624			1,913
Other income		683			1,738
Total non-interest income		6,662			12,077
Non-interest expense
Salaries and employee benefits		15,862			14,005
Occupancy		1,748			1,673
Equipment and data processing		3,761			3,542
Franchise tax		396			831
Advertising		436			420
Amortization of core deposit intangible		35			46
FDIC insurance premiums		580			1,157
Other insurance premiums		272			351
Legal and consulting fees		338			149
Other professional fees		1,009			1,133
Real estate owned and other repossessed asset expenses		350			786
Other expenses		2,982			4,139
Total non-interest expenses		27,769			28,232
Income before income taxes		5,817			6,221
Income tax (benefit) expense (includes $12 and $0 income tax expense from reclassification items)		(38,681	)		150
Net income		44,498			6,071
Amortization of discount on preferred stock		—			(6,751	)
Earnings available to common shareholders	$	44,498		$	(680	)

(Continued)

3

(Continued)

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2014		2013			2014		2013
Net income	$	42,404	$	3,389		$	44,498	$	6,071
Other comprehensive income, net of tax
Change in unrealized gains (losses) on securities, net of reclassifications and taxes		3,196		(32,922	)		15,764		(35,885	)
Total other comprehensive ( loss)	$	3,196	$	(32,922	)	$	15,764	$	(35,885	)
Comprehensive (loss) income	$	45,600	$	(29,533	)	$	60,262	$	(29,814	)
Earnings (loss) per common share
Basic	$	0.84	$	(0.06	)	$	0.88	$	(0.02	)
Diluted		0.84		(0.06	)		0.88		(0.02	)

See Notes to Consolidated Financial Statements.

4

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 per share data)
Balance December 31, 2013		—			50,339,089		$	—		$	174,719		$	81,515		$	(41,665	)	$	(39,495	)	$	175,074
Comprehensive income:
Net income														44,498									44,498
Comprehensive income																	15,764						15,764
Stock option exercises					80,000									(662	)					824			162
Stock option expenses											13												13
Restricted stock grants					241,969						(932	)		(1,576	)					2,508			—
Restricted stock forfeitures					(52,475	)					140			118						(358	)		(100	)
Restricted stock amortization											236												236
Treasury stock purchases					(156,500	)														(598	)		(598	)
Balance June 30, 2014		—			50,452,083		$	—		$	174,176		$	123,893		$	(25,901	)	$	(37,119	)	$	235,049
Balance December 31, 2012		—			33,027,886		$	—		$	128,026		$	86,345		$	6,682		$	(50,293	)	$	170,760
Comprehensive income:
Net income														6,071									6,071
Other comprehensive loss																	(35,885	)					(35,885	)
Stock option exercises, net					68,600									(585	)					722			137
Stock option expenses, net											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 of 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.

5

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
	2014			2013
	(Dollars in thousands)
Cash Flows from Operating Activities
Net income	$	44,498		$	6,071
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		(1,581	)		3,177
Mortgage banking income		(924	)		(3,032	)
Net losses on real estate owned and other repossessed assets sold		425			1,571
Net gain on available for sale securities sold		(34	)		(2,578	)
Net loss (gain) on other assets sold		7			(10	)
Amortization of premiums and accretion of discounts		483			1,876
Depreciation and amortization		988			927
Net change in interest receivable		(68	)		400
Net change in interest payable		23			34
Net change in prepaid and other assets		2,614			1,691
Net change in other liabilities		732			4,104
Stock based compensation		149			188
Net principal disbursed on loans originated for sale		(65,276	)		(138,386	)
Proceeds from sale of loans held for sale		61,749			145,117
Net change in deferred tax assets		(38,681	)		—
Cash surrender value of life insurance		(712	)		—
Net change in interest rate caps		332			(441	)
Net cash from operating activities		4,724			20,709
Cash Flows from Investing Activities
Proceeds from principal repayments and maturities of:
Securities available for sale		12,195			31,676
Proceeds from sale of:
Securities available for sale		5,042			97,127
Real estate owned and other repossessed assets		2,221			6,563
Loans held for investment		—			10,173
Premises and equipment		30			20
Purchases of:
Securities available for sale		—			(144,992	)
Principal disbursed on loans, net of repayments		(56,796	)		42,777
Loans purchased		—			(50	)
Redemption of FHLB stock		8,396			—
Purchases of premises and equipment		(476	)		(554	)
Net cash from investing activities		(29,388	)		42,740
Cash Flows from Financing Activities
Net increase in checking, savings and money market accounts		24,072			4,909
Net decrease in certificates of deposit		(40,350	)		(33,168	)
Net decrease in advance payments by borrowers for taxes and insurance		(7,352	)		(10,162	)
Proceeds from Federal Home Loan Bank advances		20,000			142,000
Repayment of Federal Home Loan Bank advances		(5,000	)		(142,000	)
Net change in repurchase agreements and other borrowed funds		(11	)		(10	)
Proceeds from the exercise of stock options		162			137
Purchase of treasury stock		(598	)		—
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		(9,077	)		4,194
Change in cash and cash equivalents		(33,741	)		67,643
Cash and cash equivalents, beginning of period		77,331			42,613
Cash and cash equivalents, end of period	$	43,590		$	110,256

See Notes to Consolidated Financial Statements

6

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 (U.S. GAAP) 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, 2014, are not necessarily indicative of the results to be expected for the year ending December 31, 2014. The consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes contained in United Community’s Form 10-K for the year ended December 31, 2013.

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 predecessor regulator of United Community (the Holding Company Order). 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, as subsequently amended 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 United Community agreed not to pay dividends, repurchase shares, or take on debt without the FRB’s prior approval.

The Holding Company MOU was terminated on January 8, 2014.

3. RECENT ACCOUNTING DEVELOPMENTS

In July 2013, the Financial Accounting Standards Board amended existing guidance related to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. These amendments provide that an unrecognized tax benefit, or a portion thereof, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. These amendments are effective for interim and annual reporting periods beginning after December 15, 2013. Early adoption and retrospective application was permitted. The effect of adopting this standard did not have a material effect on the Company’s operating results or financial condition.

In January 2014, FASB issued Accounting Standards Update 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force). The ASU clarifies when an in-substance repossession or foreclosure occurs and a creditor is considered to have received physical possession of real estate property collateralizing a consumer mortgage loan. Specifically, the new ASU requires a creditor to reclassify a collateralized consumer mortgage loan to real estate property upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. Additional disclosures are required detailing the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgages collateralized by real estate property that are in the process of foreclosure. The new guidance is effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements, but will result in additional disclosures.

In May 2014, FASB issued Accounting Standards Update 2014-09,Revenue from Contracts with Customers (Topic 606). The ASU creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2016. Early adoption is not permitted. Management is currently evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements.

7

4. STOCK COMPENSATION

Stock Options:

On April 26, 2007, shareholders approved the United Community Financial Corp. 2007 Long-Term Incentive Plan (as amended, the 2007 Plan). The purpose of the 2007 Plan is to promote and advance the interests of United Community and its shareholders by enabling United Community to attract, retain and reward directors, directors emeritus, managerial and other key employees of United Community, including Home Savings, by facilitating their purchase of an ownership interest in United Community. The 2007 Plan provides for the issuance of up to 2,000,000 shares that are to be used for awards of restricted stock, stock options, performance awards, stock appreciation rights (SARs), or other forms of stock-based incentive awards. There were 3,623 stock options granted in 2014 and there were 17,787 stock options granted in 2013 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 $6,193 in stock option expenses for the three months ended June 30, 2014. The Company recognized $12,551 in stock option expenses for the six months ended June 30, 2014. 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 expects to recognize additional expense of $10,989 for the remainder of 2014, $15,786 in 2015 and $468 in 2016.

A summary of activity in the plans is as follows:

	For the six months ended June 30, 2014
	Shares			Weighted average exercise price		Aggregate intrinsic value (in thousands)
Outstanding at beginning of year		948,690		$	5.44
Granted		3,623			3.77
Exercised		(80,000	)		2.02
Forfeited and expired		(284,864	)		12.38
Outstanding at end of period		587,449		$	2.53	$	1,075
Options exercisable at end of period		566,528		$	2.49	$	1,064

Information related to the stock option plans for the six months ended June 30, 2014 follows:

	June 30, 2014
Intrinsic value of options exercised	$	135,800
Cash received from option exercises		162,000
Tax benefit realized from option exercises		10,267
Weighted average fair value of options granted, per share	$	1.70

As of June 30, 2014, there was approximately $27,000 of total unrecognized compensation cost related to nonvested stock options granted under the 2007 Plan. The cost is expected to be recognized over a weighted-average period of 2.0 years.

8

The fair value of options granted during the second quarter of 2014 was determined using the following weighted-average assumptions as of the grant date:

	April 3, 2014
Risk-free interest rate	1.76%
Expected term (years)	5
Expected stock volatility	64.98%
Dividend yield	— %

Outstanding stock options have a weighted average remaining life of 5.68 years and may be exercised in the range of $1.20 to $5.89.

Restricted Stock Awards:

The 2007 Plan permits the issuance of restricted stock awards to employees and nonemployee directors. Nonvested shares at June 30, 2014 aggregated 332,370, of which 117,435 will vest during 2014, 94,609 will vest in 2015, 60,163 will vest in 2016 and 60,163 will vest in 2017. 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 $58,000 in restricted stock award expenses for the three months ended June 30, 2014. The Company recognized approximately $236,000 in restricted stock award expenses for the six months ended June 30, 2014. 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 expects to recognize additional expenses of approximately $222,000 in 2014, $363,000 in 2015, $295,000 in 2016 and $79,000 in 2017.

A summary of changes in the Company’s nonvested restricted shares for the first six months of 2014 is as follows:

	Shares			Weighted average grant date fair value
Nonvested shares at January 1, 2014		192,937		$	3.49
Granted		241,969			3.85
Vested		(50,061	)		3.54
Forfeited		(52,475	)		3.55
Nonvested shares at March 31, 2014		332,370		$	3.74

9

5. SECURITIES

Components of the available for sale portfolio are as follows:

	June 30, 2014
	Amortized cost		Gross Unrealized Gains		Gross unrealized losses			Fair value
	(Dollars in thousands)
Available for Sale
U.S. Treasury and government sponsored entities’ securities	$	242,314	$	—	$	(10,717	)	$	231,597
Equity securities		100		352		—			452
Mortgage-backed GSE securities: residential		290,363		185		(5,960	)		284,588
Total	$	532,777	$	537	$	(16,677	)	$	516,637
	December 31, 2013
	Amortized cost		Gross Unrealized Gains		Gross unrealized losses			Fair value
	(Dollars in thousands)
Available for Sale
U.S. Treasury and government sponsored entities’ securities	$	247,863	$	—	$	(25,570	)	$	222,293
Equity securities		101		344		—			445
Mortgage-backed GSE securities: residential		303,435		31		(15,198	)		288,268
Total	$	551,399	$	375	$	(40,768	)	$	511,006

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

	June 30, 2014
	(Dollars in thousands)
	Amortized Cost		Fair Value
Due in one year or less	$	500	$	500
Due after one year through five years		—		—
Due after five years through ten years		183,967		176,757
Due after ten years through fifteen years		57,847		54,340
Mortgage-backed GSE securities: residential		290,363		284,588
Total	$	532,677	$	516,185

The Company expects to realize all interest and principal on these securities and has the ability and intent to hold these securities until maturity. Recognizing equity securities do not have a contractual maturity, they are excluded from the table above.

The Company had no securities pledged for the Company’s participation in the VISA payment processing program at June 30, 2014 and December 31, 2013. Securities pledged for participation in the Ohio Linked Deposit Program were approximately $400,000 at June 30, 2014 and $382,000 at December 31, 2013.

10

Securities available for sale that have been in an unrealized loss position for less than twelve months or twelve months or more are as follows:

	June 30, 2014
	(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	$	—	$	—	$	231,097	$	(10,717)	$	231,097	$	(10,717)
Mortgage-backed GSE securities:
residential		4,023		(7)		240,899		(5,953)		244,922		(5,960)
Total	$	4,023	$	(7)	$	471,996	$	(16,670)	$	476,019	$	(16,677)
	December 31, 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	$	193,746	$	(21,360)	$	28,046	$	(4,210)	$	221,792	$	(25,570)
Mortgage-backed GSE securities:
residential		240,201		(10,680)		47,319		(4,518)		287,520		(15,198)
Total	$	433,947	$	(32,040)	$	75,365	$	(8,728)	$	509,312	$	(40,768)

All of the U.S. Treasury and government sponsored entities (GSE) and mortgage-backed securities that were temporarily impaired at June 30, 2014 and December 31, 2013, were impaired due to the level of interest rates at that time. Unrealized losses on U.S. Treasury and government sponsored entities and mortgage-backed securities have not been recognized into income as of June 30, 2014 and December 31, 2013 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. From April 30, 2013 to December 31, 2013, the 10-year treasury yield rose from 1.70% to 3.04% which caused the securities portfolio to lose value. Since the year ended, the 10-year treasury yield has fallen to 2.53% resulting in an increase in the value of the portfolio. The duration of the securities portfolio was approximately 6.2 years at June 30, 2014. There is risk that longer term rates could rise further resulting in greater unrealized losses. Management continues to allow the portfolio to decline as no new investment purchases are being considered. In addition, the Company can look for opportunities to sell securities to reduce the portfolio or change the duration characteristics. All of the securities are GSE issued debt or mortgage-backed securities and carry the same rating as the U.S. Government. The Company expects to realize all interest and principal on these securities and has the ability and intent to hold these securities until maturity.

At June 30, 2014 and December 31, 2013, all of the mortgage-backed securities held by the Company were issued by U.S. government sponsored agencies, primarily Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2014 and December 31, 2013. The Company expects to realize all interest and principal on these securities and has the ability and intent to hold these securities until maturity.

Proceeds from sales of securities available for sale were $5.0 million and $69.2 million for the three months ended June 30, 2014 and 2013, respectively. Gross gains of $31,000 and $1.9 million were realized on these sales during the second quarter of 2014 and 2013, respectively.

Proceeds from sales of securities available for sale were $5.0 million and $97.1 million for the six months ended June 30, 2014 and 2013, respectively. Gross gains of $34,000 and $2.6 million were realized on these sales during the first six months of 2014 and 2013, respectively.

11

6. LOANS

Portfolio loans consist of the following:

	June 30,			December 31,
	2014			2013
	(Dollars in thousands)
Real Estate:
One-to four-family residential	$	645,211		$	585,025
Multi-family residential		52,938			54,485
Nonresidential		122,066			131,251
Land		9,635			9,683
Construction:
One-to four-family residential and land development		51,974			53,349
Multi-family and nonresidential		1,010			—
Total real estate		882,834			833,793
Consumer
Home equity		155,083			159,795
Auto		4,869			5,669
Marine		4,088			4,308
Recreational vehicles		15,983			17,347
Other		2,004			2,112
Total consumer		182,027			189,231
Commercial
Secured		39,001			25,714
Unsecured		126			427
Total commercial		39,127			26,141
Total loans		1,103,988			1,049,165
Less:
Allowance for loan losses		18,264			21,116
Deferred loan costs, net		(1,047	)		(1,143	)
Total		17,217			19,973
Loans, net	$	1,086,771		$	1,029,192

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.

12

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and are based on impairment method as of June 30, 2014 and December 31, 2013 and activity for the three and six months ended June 30, 2014 and 2013.

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, 2014
Beginning balance (03/31/14)	$	13,626		$	2,027		$	3,895		$	1,006		$	20,554
Provision		(1,013	)		(533	)		199			(267	)		(1,614	)
Chargeoffs		(415	)		(330	)		(447	)		—			(1,192	)
Recoveries		155			—			143			218			516
Ending balance (06/30/14)	$	12,353		$	1,164		$	3,790		$	957		$	18,264
For the six months ended June 30, 2014
Beginning balance (12/31/13)	$	13,794		$	2,281		$	4,302		$	739		$	21,116
Provision (recovery)		(761	)		(708	)		25			(137	)		(1,581	)
Chargeoffs		(1,027	)		(430	)		(854	)		(45	)		(2,356	)
Recoveries		347			21			317			400			1,085
Ending balance (06/30/14)	$	12,353		$	1,164		$	3,790		$	957		$	18,264
June 30, 2014
Period-end amount allocated to:
Loans individually evaluated for impairment	$	2,330		$	202		$	1,090		$	3		$	3,625
Loans collectively evaluated for impairment		10,023			962			2,700			954			14,639
Ending balance	$	12,353		$	1,164		$	3,790		$	957		$	18,264
Period-end balances:
Loans individually evaluated for impairment	$	27,007		$	2,550		$	13,491		$	4,032		$	47,080
Loans collectively evaluated for impairment		802,843			50,434			168,536			35,095			1,056,908
Ending balance	$	829,850		$	52,984		$	182,027		$	39,127		$	1,103,988

13

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
December 31, 2013
Period-end amount allocated to:
Loans individually evaluated for impairment	$	1,786		$	680		$	859		$	—		$	3,325
Loans collectively evaluated for impairment		12,008			1,601			3,443			739			17,791
Ending balance	$	13,794		$	2,281		$	4,302		$	739		$	21,116
Period-end balances:
Loans individually evaluated for impairment	$	27,224		$	3,092		$	13,821		$	4,044		$	48,181
Loans collectively evaluated for impairment		753,220			50,257			175,410			22,097			1,000,984
Ending balance	$	780,444		$	53,349		$	189,231		$	26,141		$	1,049,165

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.

14

The following table presents loans individually evaluated for impairment by class of loans as of and for the six months ended June 30, 2014:

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	$	7,571	$	6,020	$	—	$	8,558	$	29	$	148
Multifamily residential		185		86		—		347		—		—
Nonresidential		5,304		3,684		—		4,536		—		20
Land		3,958		532		—		498		—		—
Total		17,018		10,322		—		13,939		29		168
Construction loans
One-to four-family residential		1,741		739		—		824		—		—
Multifamily and nonresidential		—		—		—		—		—		—
Total		1,741		739		—		824		—		—
Consumer loans
Home Equity		2,509		1,998		—		4,517		3		46
Auto		94		79		—		57		—		5
Marine		156		156		—		159		—		5
Recreational vehicle		544		323		—		255		3		12
Other		6		6		—		2		—		—
Total		3,309		2,562		—		4,990		6		68
Commercial loans
Secured		3,945		3,708		—		3,948		—		2
Unsecured		3,783		—		—		—		—		57
Total		7,728		3,708		—		3,948		—		59
Total	$	29,796	$	17,331	$	—	$	23,701	$	35	$	295

15

(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	$	15,252	$	15,252	$	2,246	$	11,761	$	292	$	305
Multifamily residential		73		48		6		326		—		—
Nonresidential		1,865		1,385		78		1,015		2		7
Land		—		—		—		—		—		—
Total		17,190		16,685		2,330		13,102		294		312
Construction loans
One-to four-family residential		3,436		1,811		202		2,140		—		—
Multifamily and nonresidential		—		—		—		—		—		—
Total		3,436		1,811		202		2,140		—		—
Consumer loans
Home Equity		10,348		10,160		949		7,568		246		260
Auto		8		8		—		4		—		—
Marine		—		—		—		—		—		—
Recreational vehicle		761		761		141		743		11		11
Other		—		—		—		—		—		—
Total		11,117		10,929		1,090		8,315		257		271
Commercial loans
Secured		324		324		3		162		—		—
Unsecured		—		—		—		—		—		—
Total		324		324		3		162		—		—
Total	$	32,067	$	29,749	$	3,625	$	23,719	$	551	$	583
Total	$	61,863	$	47,080	$	3,625	$	47,420	$	586	$	878

16

The following tables present 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

17

(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

18

The following table present loans individually evaluated for impairment by class of loans as of December 31, 2013:

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	$	13,321	$	11,309	$	—
Multifamily residential		662		567		—
Nonresidential		6,451		5,311		—
Land		3,913		487		—
Total		24,347		17,674		—
Construction loans
One-to four-family residential		1,433		825		—
Multifamily and nonresidential		—		—		—
Total		1,433		825		—
Consumer loans
Home Equity		6,458		5,808		—
Auto		83		66		—
Marine		160		160		—
Recreational vehicle		429		386		—
Other		2		2		—
Total		7,132		6,422		—
Commercial loans
Secured		4,414		4,044		—
Unsecured		4,067		—		—
Total		8,481		4,044		—
Total	$	41,393	$	28,965	$	—

19

(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	$	8,897	$	8,897	$	1,675
Multifamily residential		185		85		25
Nonresidential		908		568		86
Land		—		—		—
Total		9,990		9,550		1,786
Construction loans
One-to four-family residential		3,895		2,267		680
Multifamily and nonresidential		—		—		—
Total		3,895		2,267		680
Consumer loans
Home Equity		6,743		6,743		719
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		656		656		140
Other		—		—		—
Total		7,399		7,399		859
Commercial loans
Secured		—		—		—
Unsecured		—		—		—
Total		—		—		—
Total	$	21,284	$	19,216	$	3,325
Total	$	62,677	$	48,181	$	3,325

20

The following tables present loans individually evaluated for impairment by class of loans as of and for the three months ended June 30, 2014:

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	$	5,226	$	13	$	84
Multifamily residential		88		—		1
Nonresidential		3,802		—		10
Land		510		—		—
Total		9,626		13		95
Construction loans
One-to four-family residential		690		—		—
Multifamily and nonresidential		—		—		—
Total		690		—		—
Consumer loans
Home Equity		1,875		2		21
Auto		65		—		2
Marine		157		—		2
Recreational vehicle		195		1		4
Other		4		—		—
Total		2,296		3		29
Commercial loans
Secured		3,710		—		1
Unsecured		—		9		23
Total		3,710		9		24
Total	$	16,322	$	25	$	148

21

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	$	15,742	$	145	$	148
Multifamily residential		567		—		—
Nonresidential		1,404		1		3
Land		—		—		—
Total		17,713		146		151
Construction loans
One-to four-family residential		2,026		—		—
Multifamily and nonresidential		—		—		—
Total		2,026		—		—
Consumer loans
Home Equity		10,399		124		131
Auto		9		—		—
Marine		—		—		—
Recreational vehicle		794		7		7
Other		—		—		—
Total		11,202		131		138
Commercial loans
Secured		324		—		—
Unsecured		—		—		—
Total		324		—		—
Total	$	31,265	$	277	$	289
Total	$	47,587	$	302	$	437

22

The following tables present 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

23

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

24

The following table presents the recorded investment in nonaccrual and loans past due over 90 days and still on accrual by class of loans as of June 30, 2014:

Nonaccrual Loans and Loans Past Due Over 90 Days and Still Accruing

As of June 30, 2014

(Dollars in thousands)

	Nonaccrual		Loans past due over 90 days and still accruing
Real Estate Loans
Permanent
One-to four-family residential	$	5,380	$	—
Multifamily residential		134		—
Nonresidential		4,902		—
Land		532		—
Total		10,948		—
Construction Loans
One-to four-family residential		2,550		—
Multifamily and nonresidential		—		—
Total		2,550		—
Consumer Loans
Home Equity		2,224		—
Auto		64		—
Marine		127		—
Recreational vehicle		242		—
Other		6		—
Total		2,663		—
Commercial Loans
Secured		4,023		—
Unsecured		128		—
Total		4,151		—
Total	$	20,312	$	—

25

The following table presents the recorded investment in nonaccrual and loans past due over 90 days and still on accrual by class of loans as of December 31, 2013:

Nonaccrual Loans and Loans Past Due Over 90 Days and Still Accruing

As of December 31, 2013

(Dollars in thousands)

	Nonaccrual		Loans past due over 90 days and still accruing
Real Estate Loans
Permanent
One-to four-family residential	$	6,356	$	—
Multifamily residential		641		—
Nonresidential		5,560		—
Land		496		—
Total		13,053		—
Construction Loans
One-to four-family residential		3,084		—
Multifamily and nonresidential		—		—
Total		3,084		—
Consumer Loans
Home Equity		2,726		45
Auto		110		—
Marine		136		—
Recreational vehicle		263		—
Other		13		—
Total		3,248		45
Commercial Loans
Secured		4,028		—
Unsecured		130		—
Total		4,158		—
Total	$	23,543	$	45

26

The following table presents an age analysis of past-due loans, segregated by class of loans as of June 30, 2014:

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	$	1,325	$	419	$	2,795	$	4,539	$	640,672		$	645,211
Multifamily residential		—		—		133		133		52,805			52,938
Nonresidential		—		—		4,852		4,852		117,214			122,066
Land		—		—		532		532		9,103			9,635
Total		1,325		419		8,312		10,056		819,794			829,850
Construction Loans
One-to four-family residential		—		—		2,553		2,553		49,421			51,974
Multifamily and nonresidential		—		—		—		—		1,010			1,010
Total		—		—		2,553		2,553		50,431			52,984
Consumer Loans
Home Equity		905		103		1,440		2,448		152,635			155,083
Auto		—		—		30		30		4,839			4,869
Marine		60		—		—		60		4,028			4,088
Recreational vehicle		282		477		150		909		15,074			15,983
Other		2		9		1		12		1,992			2,004
Total		1,249		589		1,621		3,459		178,568			182,027
Commercial Loans
Secured		—		—		4,023		4,023		34,978			39,001
Unsecured		—		—		128		128		(2	)		126
Total		—		—		4,151		4,151		34,976			39,127
Total	$	2,574	$	1,008	$	16,637	$	20,219	$	1,083,769		$	1,103,988

27

The following table presents an age analysis of past-due loans, segregated by class of loans as of December 31, 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	$	1,482	$	379	$	4,687	$	6,548	$	578,477	$	585,025
Multifamily residential		359		—		190		549		53,936		54,485
Nonresidential		13		—		5,456		5,469		125,782		131,251
Land		—		36		496		532		9,151		9,683
Total		1,854		415		10,829		13,098		767,346		780,444
Construction Loans
One-to four-family residential		—		—		3,084		3,084		50,265		53,349
Multifamily and nonresidential		—		—		—		—		—		—
Total		—		—		3,084		3,084		50,265		53,349
Consumer Loans
Home Equity		541		452		2,111		3,104		156,691		159,795
Auto		5		—		49		54		5,615		5,669
Marine		—		—		—		—		4,308		4,308
Recreational vehicle		117		199		3		319		17,028		17,347
Other		1		7		10		18		2,094		2,112
Total		664		658		2,173		3,495		185,736		189,231
Commercial Loans
Secured		—		11		4,017		4,028		21,686		25,714
Unsecured		—		—		130		130		297		427
Total		—		11		4,147		4,158		21,983		26,141
Total	$	2,518	$	1,084	$	20,233	$	23,835	$	1,025,330	$	1,049,165

28

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended June 30, 2014:

	Number of loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Recorded Investment
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family		11	$	922	$	969
Multifamily residential		—		—		—
Nonresidential		—		—		—
Land		—		—		—
Total		11		922		969
Construction Loans
One-to four-family residential		—		—		—
Multifamily and nonresidential		—		—		—
Total		—		—		—
Consumer Loans
Home Equity		9		465		450
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—
Total		9		465		450
Commercial Loans
Secured		—		—		—
Unsecured		—		—		—
Total		—		—		—
Total Restructured Loans		20	$	1,387	$	1,419

The troubled debt restructurings described above increased the allowance for loan losses by $59,000 and resulted in charge-offs of $3,000 during the three months ended June 30, 2014.

29

The following table presents loans by class modified as troubled debt restructurings that occurred during the six months ended June 30, 2014:

	Number of loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Recorded Investment
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family		20	$	1,491	$	1,545
Multifamily residential		—		—		—
Nonresidential		1		120		120
Land		—		—		—
Total		21		1,611		1,665
Construction Loans
One-to four-family residential		—		—		—
Multifamily and nonresidential		—		—		—
Total		—		—		—
Consumer Loans
Home Equity		19		1,017		1,009
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—
Total		19		1,017		1,009
Commercial Loans
Secured		—		—		—
Unsecured		—		—		—
Total		—		—		—
Total Restructured Loans		40	$	2,628	$	2,674

The troubled debt restructurings described above increased the allowance for loan losses by $116,000 and resulted in charge-offs of $3,000 during the six months ended June 30, 2014.

30

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 resulted in charge-offs of $1.8 million during the three months ended June 30, 2013.

31

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 resulted in charge-offs of $1.8 million during the six months ended June 30, 2013.

32

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within a twelve month cycle following the modification as June 30, 2014:

	Number of loans		Recorded Investment
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family		2	$	74
Multifamily residential		—		—
Nonresidential		—		—
Land		—		—
Total		2		74
Construction Loans
One-to four-family residential		—		—
Multifamily and nonresidential		—		—
Total		—		—
Consumer Loans
Home Equity		4		172
Auto		—		—
Marine		—		—
Recreational vehicle		—		—
Other		—		—
Total		4		172
Commercial Loans
Secured		—		—
Unsecured		—		—
Total		—		—
Total Restructured Loans		6	$	246

The troubled debt restructurings that subsequently defaulted described above resulted in no charge-offs during the three months ended June 30, 2014, and had no effect on the provision for loan losses.

33

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within a twelve month cycle following the modification as of December 31, 2013:

	Number of loans		Recorded Investment
			(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family		4	$	576
Multifamily residential		1		463
Nonresidential		—		—
Land		2		487
Total		7		1,526
Construction Loans
One-to four-family residential		1		623
Multifamily and nonresidential		—		—
Total		1		623
Consumer Loans
Home Equity		6		207
Auto		—		—
Marine		—		—
Recreational vehicle		2		184
Other		—		—
Total		8		391
Commercial Loans
Secured		—		—
Unsecured		—		—
Total		—		—
Total Restructured Loans		16	$	2,540

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 described above that subsequently defaulted resulted in no charge-offs during the twelve months ended December 31, 2013, and had no effect on the provision for loan losses.

The terms of certain other loans were modified during the periods ended June 30, 2014 and December 31, 2013, but they did not meet the definition of a troubled debt restructuring. These loans have a total recorded investment as of June 30, 2014 of $8.6 million and at December 31, 2013 of $66.4 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 insignificant.

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.

34

Asset quality ratings are divided into two groups: Pass (unclassified) and Classified. Within the unclassified group, certain 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.

35

As of June 30, 2014 and December 31, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Loans

June 30, 2014

(Dollars in thousands)

	Unclassified				Classified
	Unclassified		Special Mention		Substandard		Doubtful		Loss		Total Classified		Total Loans
Real Estate Loans
Permanent
One-to four-family residential	$	636,679	$	1,556	$	6,976	$	—	$	—	$	6,976	$	645,211
Multifamily residential		47,655		2,599		2,684		—		—		2,684		52,938
Nonresidential		92,480		8,605		20,981		—		—		20,981		122,066
Land		9,148		—		487		—		—		487		9,635
Total		785,962		12,760		31,128		—		—		31,128		829,850
Construction Loans
One-to four-family residential		49,423		—		2,551		—		—		2,551		51,974
Multifamily and nonresidential		1,010		—		—		—		—		—		1,010
Total		50,433		—		2,551		—		—		2,551		52,984
Consumer Loans
Home Equity		152,467		27		2,589		—		—		2,589		155,083
Auto		4,790		4		75		—		—		75		4,869
Marine		3,932		—		156		—		—		156		4,088
Recreational vehicle		15,715		—		268		—		—		268		15,983
Other		1,990		—		14		—		—		14		2,004
Total		178,894		31		3,102		—		—		3,102		182,027
Commercial Loans
Secured		32,173		2,030		4,798		—		—		4,798		39,001
Unsecured		10		—		116		—		—		116		126
Total		32,183		2,030		4,914		—		—		4,914		39,127
Total	$	1,047,472	$	14,821	$	41,695	$	—	$	—	$	41,695	$	1,103,988

36

Loans

December 31, 2013

(Dollars in thousands)

	Unclassified				Classified
	Unclassified		Special Mention		Substandard		Doubtful		Loss		Total Classified		Total Loans
Real Estate Loans
Permanent
One-to four-family residential	$	575,903	$	404	$	8,718	$	—	$	—	$	8,718	$	585,025
Multifamily Residential		48,918		2,962		2,605		—		—		2,605		54,485
Nonresidential		90,115		12,222		28,914		—		—		28,914		131,251
Land		9,069		127		487		—		—		487		9,683
Total		724,005		15,715		40,724		—		—		40,724		780,444
Construction Loans
One-to four-family Residential		50,257		—		3,092		—		—		3,092		53,349
Multifamily and Nonresidential		—		—		—		—		—		—		—
Total		50,257		—		3,092		—		—		3,092		53,349
Consumer Loans
Home Equity		156,841		46		2,954		—		—		2,954		159,841
Auto		5,507		5		116		—		—		116		5,628
Marine		4,143		—		160		—		—		160		4,303
Recreational vehicle		17,066		—		281		—		—		281		17,347
Other		2,099		—		13		—		—		13		2,112
Total		185,656		51		3,524		—		—		3,524		189,231
Commercial Loans
Secured		19,714		190		5,810		—		—		5,810		25,714
Unsecured		68		—		359		—		—		359		427
Total		19,782		190		6,169		—		—		6,169		26,141
Total	$	979,700	$	15,956	$	53,509	$	—	$	—	$	53,509	$	1,049,165

37

7. MORTGAGE BANKING ACTIVITIES

Mortgage loans serviced for others, which are not reported in United Community’s assets, totaled $1.1 billion as of June 30, 2014 and December 31, 2013. 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, 2014		December 31, 2013
	(Dollars in thousands)
Mortgage loan portfolios serviced for:
FHLMC	$	816,370	$	827,146
FNMA		272,639		283,340

Escrow balances are maintained at the Federal Home Loan Bank (FHLB) in connection with serviced loans totaling $866,000 and $1.3 million at June 30, 2014 and December 31, 2013, respectively.

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

	Six Months Ended June 30, 2014			Six Months Ended June 30, 2013
	(Dollars in thousands)
Balance, beginning of year	$	5,941		$	5,506
Originations		541			1,791
Amortized to expense		(824	)		(1,230	)
Balance, end of period		5,658			6,067
Less valuation allowance		(6	)		(34	)
Net balance	$	5,652		$	6,033

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

	Six Months Ended June 30, 2014			Six Months Ended June 30, 2013
	(Dollars in thousands)
Balance, beginning of year	$	—		$	(680	)
Impairment charges		(6	)		—
Recoveries		—			646
Balance, end of period	$	(6	)	$	(34	)

The fair value of mortgage servicing rights as of June 30, 2014, was approximately $9.7 million and at December 31, 2013, the fair value was approximately $10.2 million.

Key economic assumptions in measuring the value of mortgage servicing rights at June 30, 2014, and December 31, 2013, were as follows:

	June 30, 2014			December 31, 2013
Weighted average prepayment rate		195 PSA			182 PSA
Weighted average life (in years)		3.74			3.94
Weighted average discount rate		8.00	%		8.00	%

38

8. OTHER REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS

Real estate owned and other repossessed assets at June 30, 2014 and June 30, 2013 were as follows:

	June 30, 2014			June 30, 2013
	(Dollars in thousands)
Real estate owned and other repossessed assets	$	8,111		$	17,864
Valuation allowance		(3,563	)		(6,505	)
End of period	$	4,548		$	11,359

Activity in the valuation allowance was as follows:

	June 30, 2014			June 30, 2013
	(Dollars in thousands)
Beginning of year	$	4,059		$	6,796
Additions charged to expense		438			1,337
Reductions due to sales		(934	)		(1,628	)
End of period	$	3,563		$	6,505

Expenses related to foreclosed and repossessed assets include:

	Three Months Ended June 30, 2014			Three Months Ended June 30, 2013
	(Dollars in thousands)
Net (gain) loss on sales	$	(104	)	$	126
Provision for unrealized losses, net		146			1,014
Operating expenses, net of rental income		137			293
Total expenses	$	179		$	1,433

	Six Months Ended June 30, 2014			Six Months Ended June 30, 2013
	(Dollars in thousands)
Net (gain) loss on sales	$	(13	)	$	234
Provision for unrealized losses, net		438			1,337
Operating expenses, net of rental income		350			786
Total expenses	$	775		$	2,357

39

9. OTHER POSTRETIREMENT BENEFIT PLANS

Home Savings sponsors a defined benefit health care plan that was curtailed in 2000, but continues to provide post-retirement 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, post-retirement 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,
	2014			2013			2014			2013
	(Dollars in thousands)
Service cost	$	—		$	—		$	—		$	—
Interest cost		14			13			28			26
Expected return on plan assets		—			—			—			—
Net amortization of prior service cost		(19	)		(19	)		(39	)		(38	)
Recognized net actuarial gain		(36	)		(28	)		(71	)		(56	)
Net periodic benefit cost/(gain)	$	(41	)	$	(34	)	$	(82	)	$	(68	)
Assumptions used in the valuations were as follows:
Weighted average discount rate		3.95	%		3.00	%		3.95	%		3.00	%

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.

40

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. Real estate owned properties are individually evaluated at least annually for additional impairment and adjusted accordingly.

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 Home Savings. 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, Home Savings 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. At the time a property is acquired and classified as real estate owned, the fair value is determined utilizing the most appropriate method. A fair value in excess of $250,000 will be supported by an appraisal. After determination of fair value, each property will be recorded at the lower of cost (i.e., recorded investment in the loan) or the estimated net realizable value on the date of transfer to real estate owned. In determining net realizable value, reductions to fair market value may be taken for estimated costs of sale, conditions that must be remedied immediately upon acquisition, and other factors that negatively impact the marketability and prompt sale of the property.

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:Home Savings 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). Assumptions used in the valuation of interest rate caps are back-tested for reasonableness on a quarterly basis using an independent source along with a third party service.

Purchased and written certificate of deposit option:Home Savings periodically enters into written and purchased option derivative instruments to facilitate the Power CD. The written and purchased options are mirror derivative instruments which are carried at fair value on the consolidated balance sheets. Home Savings uses an independent third party that performs a market valuation analysis for purchased and written certificate of deposit options. (Level 2).

41

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, 2014 Using:
	June 30,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2014		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Available for sale securities
U.S. Treasury and government sponsored entities’ securities	$	231,597	$	—	$	231,597	$	—
Equity securities		452		452		—		—
Mortgage-backed GSE securities: residential		284,588		—		284,588		—
Mortgage servicing assets		157		—		157		—
Interest rate caps		214		—		—		214
Purchased certificate of deposit option		489		—		489		—
Liabilities
Written certificate of deposit option		489		—		489		—

			Fair Value Measurements at December 31, 2013 Using:
	December 31,		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
U.S. Treasury and government sponsored entities’ securities	$	222,293	$	—	$	222,293	$	—
Equity securities		445		445		—		—
Mortgage-backed GSE securities: residential		288,268		—		288,268		—
Interest rate caps		546		—		—		546
Purchased certificate of deposit option		155		—		155		—
Liabilities
Written certificate of deposit option		155		—		155		—

There were no transfers between Level 1 and Level 2 during 2014 or 2013.

42

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 three months ended June 30, 2014 and 2013:

	Interest Rate Caps
	Six Months Ended June 30, 2014			Six Months Ended June 30, 2013
	(Dollars in thousands)
Balance of recurring Level 3 assets at beginning of period	$	546		$	436
Total gains (losses) for the period
Included in other income		(73	)		700
Included in other comprehensive income		—			—
Purchases		—			—
Amortization		(259	)		(259	)
Sales		—			—
Balance of recurring Level 3 assets at end of period	$	214		$	877

There were no transfers between Level 2 and Level 3 during 2014 or 2013.

The following table presents quantitative information about recurring Level 3 fair value measurements at June 30, 2014:

	Fair Value		Valuation Technique(s)		Unobservable Input(s)		Range
	(Dollars in thousands)
Interest rate caps	$	214		Discounted cash flow		Discount rate		0.40	%-1.18%

The following table presents quantitative information about recurring Level 3 fair value measurements at December 31, 2013:

	Fair Value		Valuation Technique(s)		Unobservable Input(s)		Range
	(Dollars in thousands)
Interest rate caps	$	546		Discounted cash flow		Discount rate		0.35	%-1.18%

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.

43

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, 2014 Using:
	June 30,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2014		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Impaired loans:
Permanent real estate loans	$	1,062	$	—	$	—	$	1,062
Construction loans		1,997		—		—		1,997
Consumer loans		163		—		—		163
Other real estate owned, net:
Permanent real estate		1,366		—		—		1,366
Construction		1,848		—		—		1,848

			Fair Value Measurements at December 31, 2013 Using:
	December 31,		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	$	2,219	$	—	$	—	$	2,219
Construction loans		1,587		—		—		1,587
Consumer loans		339		—		—		339
Other real estate owned, net:
Permanent real estate loans		1,939		—		—		1,939
Construction loans		2,310		—		—		2,310

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 $3.2 million at June 30, 2014, that includes a specific valuation allowance of $277,000. This resulted in a decrease of the provision for loan losses of $30,000 during the three months ended June 30, 2014 and an increase in the provision for loan losses of $439,000 during the six months ended June 30, 2014. 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 net carrying amount of $4.1 million at December 31, 2013, that includes a specific valuation allowance of $792,000. This resulted in an increase of the provision for loan losses of $1.5 million during the twelve months ended December 31, 2013.

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 values versus appraised value. During the reported periods, discounts applied to appraisals for estimated selling costs were 10%.

44

At June 30, 2014, mortgage servicing rights carried at fair value were $157,000, resulting in a net valuation allowance of $6,000 for the six months ended June 30, 2014. 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 December 31, 2013, mortgage servicing rights carried at fair value of $0, resulting in a net recovery of $680,000 for the year ended December 31, 2013. 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, 2014, other real estate owned, carried at fair value, which is measured for impairment using the fair value of the property less estimated selling costs and had a net carrying amount of $3.2 million, with a valuation allowance of $3.6 million. This resulted in additional expenses of $146,000 during the three months ended June 30, 2014 and additional expenses of $438,000 during the six months ended June 30, 2014. At June 30, 2013, other real estate owned 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 December 31, 2013, other real estate owned had a net carrying amount of $4.2 million, with a valuation allowance of $4.1 million. This resulted in additional expenses of $2.0 million during the twelve months ended December 31, 2013.

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, 2014:

	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Average)
			(Dollars in thousands)
Impaired loans:
Permanent real estate loans	$	1,062	Sales comparison approach Income approach	Adjustment for differences between comparable sales Adjustment for differences in net operating income Capitalization rate	0.00%-56.90% (11.78%) 3.95%-14.62% (9.41%)
Construction loans		1,997	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-25.00% (11.90%)
Consumer loans		163	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-25.00% (11.90%)
Other real estate owned, net:
Permanent real estate loans		1,366	Sales comparison approach	Adjustment for differences between comparable sales	6.00%-46.53% (17.76%)
Construction loans		1,848	Sales comparison approach	Adjustment for differences between comparable sales	6.54%-26.63% (9.24%)

45

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, 2013:

	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Average)
			(Dollars in thousands)
Impaired loans:
Permanent real estate loans	$	2,219	Sales comparison approach Income approach	Adjustment for differences between comparable sales Adjustment for differences in net operating income Capitalization rate	0.00%-56.90% (11.78%) 3.95%-14.62% (9.41%)
Construction loans		1,587	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-25.00% (11.90%)
Consumer loans		339	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-10.00% (5.00%)
Other real estate owned, net:
Permanent real estate loans		1,939	Sales comparison approach	Adjustment for differences between comparable sales	6.00%-46.53% (17.76%)
Construction loans		2,310	Sales comparison approach	Adjustment for differences between comparable sales	6.54%-26.63% (9.24%)

In accordance with U.S. GAAP, the carrying value and estimated fair values of financial instruments at June 30, 2014 and December 31, 2013, were as follows:

				Fair Value Measurements at June 30, 2014 Using:
	June 30, 2014
	Carrying Value			(Level 1)			(Level 2)			(Level 3)
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	43,590		$	43,590		$	—		$	—
Available for sale securities		516,637			452			516,185			—
Loans held for sale		9,290			—			9,507			—
Loans, net		1,086,771			—			—			1,096,670
FHLB stock		18,068			n/a			n/a			n/a
Accrued interest receivable		5,762			—			2,513			3,249
Interest rate caps		214			—			—			214
Purchased certificate of deposit option		489			—			489			—
Liabilities:
Deposits:
Checking, savings and money market accounts		(923,552	)		(923,552	)		—			—
Certificates of deposit		(451,922	)		—			(457,181	)		—
FHLB advances		(65,000	)		—			(69,647	)		—
Repurchase agreements and other		(90,567	)		—			(96,904	)		—
Advance payments by borrowers for taxes and insurance		(12,708	)		—			(12,708	)		—
Accrued interest payable		(573	)		—			(573	)		—
Written certificate of deposit option		(489	)		—			(489	)		—

46

	December 31,
	2013			Fair Value Measurements at December 31, 2013 Using:
	Carrying Value			(Level 1)			(Level 2)			(Level 3)
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	77,331		$	77,331		$	—		$	—
Available for sale securities		511,006			445			510,561			—
Loans held for sale		4,838			—			4,866			—
Loans, net		1,029,192			—			—			1,031,491
FHLB stock		26,464			n/a			n/a			n/a
Accrued interest receivable		5,694			—			2,584			3,110
Interest rate caps		546			—			—			546
Purchased certificate of deposit option		155			—			155			—
Liabilities:
Deposits:
Checking, savings and money market accounts		(899,481	)		(899,481	)		—			—
Certificates of deposit		(492,271	)		—			(500,651	)		—
FHLB advances		(50,000	)		—			(55,327	)		—
Repurchase agreements and other		(90,578	)		—			(98,462	)		—
Advance payments by borrowers for taxes and insurance		(20,060	)		—			(20,060	)		—
Accrued interest payable		(550	)		—			(550	)		—
Written certificate of deposit option		(155	)		—			(155	)		—

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; and 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, 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 June 30, 2014		Six Months Ended June 30, 2013
	(Dollars in thousands)
Supplemental disclosures of cash flow information
Cash paid (received) during the period for:
Interest on deposits and borrowings	$	6,150	$	6,836
Income taxes		—		150
Supplemental schedule of noncash activities:
Transfers from loans to real estate owned and other repossessed assets		853		1,053
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 87,315 shares were anti-dilutive for the three months ended June 30, 2014 and stock options for 380,946 shares were anti-dilutive for the three months ended June 30, 2013. Stock options for 87,315 shares were anti-dilutive for the six months ended June 30, 2014 and stock options for 380,946 shares were anti-dilutive for the six months ended June 30, 2013.

	Three months ended June 30, 2014			Three months ended June 30, 2013
	(Dollars in thousands, except per share data)
Net income per consolidated statements of income	$	42,404		$	3,389
Net income allocated to participating securities		(235	)		(9	)
Amortization of discount on preferred stock		—			(5,930	)
Net income allocated to common stock	$	42,169		$	(2,550	)
Basic earnings per common share computation:
Distributed earnings allocated to common stock	$	—		$	—
Undistributed earnings allocated to common stock		42,169			(2,550	)
Net income allocated to common stock	$	42,169		$	(2,550	)
Weighted average common shares outstanding, including shares considered participating securities		50,554			43,276
Less: Average participating securities		(280	)		(116	)
Weighted average shares		50,274			13,160
Basic earnings per common share	$	0.84		$	(0.06	)
Diluted earnings per common share computation:
Net income allocated to common stock	$	42,169		$	(2,550	)
Weighted average common shares outstanding for basic earnings per common share		50,274			43,160
Add: Dilutive effects of assumed exercises of stock options		222			—
Weighted average shares and dilutive potential common shares		50,496			43,160
Diluted earnings per common share	$	0.84		$	(0.06	)

49

	Six months ended June 30, 2014			Six months ended June 30, 2013
	(Dollars in thousands, except per share data)
Net income per consolidated statements of income	$	44,498		$	6,071
Net income allocated to participating securities		(232	)		(19	)
Amortization of discount on preferred stock		—			(6,751	)
Net income allocated to common stock	$	44,266		$	(699	)
Basic earnings per common share computation:
Distributed earnings allocated to common stock	$	—		$	—
Undistributed earnings allocated to common stock		44,266			(699	)
Net income allocated to common stock	$	44,266		$	(699	)
Weighted average common shares outstanding, including shares considered participating securities		50,481			38,509
Less: Average participating securities		(263	)		(121	)
Weighted average shares		50,218			38,388
Basic earnings per common share	$	0.88		$	(0.02	)
Diluted earnings per common share computation:
Net income allocated to common stock	$	44,266		$	(699	)
Weighted average common shares outstanding for basic earnings per common share		50,218			38,388
Add: Dilutive effects of assumed exercises of stock options		221			—
Weighted average shares and dilutive potential common shares		50,439			38,388
Diluted earnings per common share	$	0.88		$	(0.02	)

As previously announced and described under Note 16 below, United Community sold 7,942 preferred shares to various investors. In accordance with U.S. GAAP, United Community recorded a beneficial conversion feature (“BCF”) related to the issuance of these preferred shares because they contain 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 were convertible was deemed to be $2.75, which was used to compute the intrinsic value. The intrinsic value was 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. GAAP, and is amortized over the period the preferred shares were 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 took into account the BCF discount when computing earnings per common share in 2013.

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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 $31,000 reclassification of gains on sales of securities and no impairment charges for the three months ended June 30, 2014, and gains on sales of securities of $1.9 million and no impairment charges for the three months ended June 30, 2013. The change includes $34,000 reclassification of gains on sales of securities and no impairment charges for the six months ended June 30, 2014, and gains on sales of securities of $2.6 million and no impairment charges for the six months ended June 30, 2013.

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

	Three months ended June 30,
	2014			2013
	(Dollars in thousands)
Unrealized holding gain (loss) on securities available for sale	$	11,716		$	(31,065	)
Unrealized holding gain (loss) on postretirement benefits		—			—
Reclassification adjustment for (gains) losses realized in income		(31	)		(1,857	)
Net unrealized gains		11,685			(32,922	)
Tax effect, including tax effect attributable to reversal of prior quarter’s deferred tax valuation allowance		(8,489	)		—
Net of tax amount	$	3,196		$	(32,922	)
	Six months ended June 30,
	2014			2013
	(Dollars in thousands)
Unrealized holding gain (loss) on securities available for sale	$	24,287		$	(33,307	)
Unrealized holding gain (loss) on postretirement benefits		—			—
Reclassification adjustment for (gains) losses realized in income		(34	)		(2,578	)
Net unrealized gains		24,253			(35,885	)
Tax effect		(8,489	)		—
Net of tax amount	$	15,764		$	(35,885	)

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

	Balance at December 31, 2013			Current Period Change		Balance at June 30, 2014
Unrealized gains (losses) on securities available for sale	$	(43,364	)	$	15,764	$	(27,600	)
Unrealized gains (losses) on post-retirement benefits		1,699			—		1,699
Total	$	(41,665	)	$	15,764	$	(25,901	)

	Balance at December 31, 2012		Current Period Change			Balance at June 30, 2013
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	)

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As of June 30, 2014, management concluded it was more likely than not that the Company’s net deferred tax asset (DTA) would be realized and accordingly determined a full deferred tax valuation allowance was no longer required. Upon reversal of the former full deferred tax valuation allowance as of June 30, 2014, certain disproportionate tax effects are retained in accumulated other comprehensive income (loss) totaling approximately a ($16.6) million loss. Almost the entire disproportionate tax effect is attributable to valuation allowance expense recorded through other comprehensive income (loss) on the tax benefit of losses sustained on the available for sale securities portfolio while the Company was in a full deferred tax valuation allowance. This valuation allowance was appropriately reversed through continuing operations at June 30, 2014, leaving the original expense in accumulated other comprehensive income (loss), where it will remain in accordance with the Company’s election of the “portfolio approach”, until such time as the Company would cease to have an available for sale security portfolio.

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, 2014, net of tax:

	Unrealized gains/losses on Available for Sale Securities			Postretirement Benefits		Total
	(Dollars in thousands)
Beginning balance (03/31/2014)	$	(30,796	)	$	1,699	$	(29,097	)
Other comprehensive income before reclassification, net of tax		3,216			—		3,216
Amounts reclassified from accumulated other compressive income, net of tax		(20	)		—		(20	)
Net current period other comprehensive income, net of tax		3,196			—		3,196
Ending balance (06/30/2014)	$	(27,600	)	$	1,699	$	(25,901	)

	Unrealized gains/losses on Available for Sale Securities			Postretirement Benefits		Total
	(Dollars in thousands)
Beginning balance (12/31/2013)	$	(43,364	)	$	1,699	$	(41,665	)
Other comprehensive income before reclassification, net of tax		15,786			—		15,786
Amounts reclassified from accumulated other compressive income, net of tax		(22	)		—		(22	)
Net current period other comprehensive income, net of tax		15,764			—		15,764
Ending balance (06/30/2014)	$	(27,600	)	$	1,699	$	(25,901	)

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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 income before reclassification		(31,065	)		—		(31,065	)
Amounts reclassified from accumulated other compressive income		(1,857	)		—		(1,857	)
Net current period other comprehensive income		(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 (12/31/2013)	$	5,082		$	1,600	$	6,682
Other comprehensive income before reclassification		(33,307	)		—		(33,307	)
Amounts reclassified from accumulated other compressive income		(2,578	)		—		(2,578	)
Net current period other comprehensive income		(35,885	)		—		(35,885	)
Ending balance (06/30/2013)	$	(30,803	)	$	1,600	$	(29,203	)

The following are significant amounts reclassified out of each component of accumulated comprehensive income (loss) for the three months ended June 30, 2014:

Details About Accumulated Other Comprehensive Income Components	Amount Reclassified From Accumulated Other Comprehensive Income			Affected Line Item on the Statement Where Net Income is Presented
	(Dollars in thousands)
Realized net gains on the sale of available for sale securities	$	(31	)	Net gains on securities available for sale
		11		Tax expense (benefit)
		(20	)	Net of tax
Total reclassification during the period	$	(20	)

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The following is significant amounts reclassified out of each component of accumulated comprehensive income (loss) for the three months ended June 30, 2013:

Details About Accumulated Other Comprehensive Income Components	Amount Reclassified From Accumulated Other Comprehensive Income			Affected Line Item on the Statement Where Net Income is Presented
(Dollars in thousands)
Realized net gains on the sale of available for sale securities	$	(1,857	)	Net gains on securities available for sale
		—		Tax expense (benefit)
		(1,857	)	Net of tax
Total reclassification during the period	$	(1,857	)

The following is significant amounts reclassified out of each component of accumulated comprehensive income (loss) for the six months ended June 30, 2014:

Details About Accumulated Other Comprehensive Income Components	Amount Reclassified From Accumulated Other Comprehensive Income			Affected Line Item on the Statement Where Net Income is Presented
(Dollars in thousands)
Realized net gains on the sale of available for sale securities	$	(34	)	Net gains on securities available for sale
		12		Tax expense (benefit)
		(22	)	Net of tax
Total reclassification during the period	$	(22	)

The following is significant amounts reclassified out of each component of accumulated comprehensive income (loss) for the six months ended June 30, 2013:

Details About Accumulated Other Comprehensive Income Components	Amount Reclassified From Accumulated Other Comprehensive Income			Affected Line Item on the Statement Where Net Income is Presented
(Dollars in thousands)
Realized net gains on the sale of available for sale securities	$	(2,578	)	Net gains on securities available for sale
		—		Tax expense (benefit)
		(2,578	)	Net of tax
Total reclassification during the period	$	(2,578	)

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 possible 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.

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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, 2014
	Actual					Minimum Capital Requirements Per Regulation					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(In thousands)
Total risk-based capital to risk-weighted assets	$	223,734		21.26	%	$	84,201		8.00	%	$	105,251		10.00	%
Tier 1 capital to risk-weighted assets		210,515		20.00	%		*		*			63,151		6.00	%
Tier 1 capital to average total assets**		210,515		12.05	%		69,872		4.00	%		87,340		5.00	%

	As of December 31, 2013
	Actual					Minimum Capital Requirements Per Regulation					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(In thousands)
Total risk-based capital to risk-weighted assets	$	200,835		19.76	%	$	81,293		8.00	%	$	101,616		10.00	%
Tier 1 capital to risk-weighted assets		188,029		18.50	%		*		*			60,969		6.00	%
Tier 1 capital to average total assets**		188,029		10.50	%		71,611		4.00	%		89,514		5.00	%

* Ratio is not required under regulations

** Tier 1 Leverage Capital Ratio

As of June 30, 2014 and December 31, 2013, Home Savings was considered well capitalized.

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15. INCOME TAXES

Significant components of the deferred tax assets and liabilities are as follows:

	June 30, 2014			December 31, 2013
	(Dollars in thousands)
Deferred tax assets:
Loan loss reserves	$	6,393		$	7,391
Postretirement benefits		1,113			1,162
Other real estate owned valuation		1,247			1,421
Tax credits carryforward		529			339
Securities impairment charges		150			153
Unrealized loss on securities available for sale		5,649			14,138
Interest on nonaccrual loans		910			758
Net operating loss carryforward		23,558			26,708
Purchase accounting adjustment		76			70
Accrued bonuses		149			456
Other		686			295
Less: Valuation allowance		(2,481	)		(42,802	)
Deferred tax assets		37,979			10,089
Deferred tax liabilities:
Deferred loan fees		378			405
Federal Home Loan Bank stock dividends		4,585			6,715
Mortgage servicing rights		1,978			2,079
Postretirement benefits accrual		640			640
Prepaid expenses		206			250
Deferred tax liabilities		7,787			10,089
Net deferred tax asset	$	30,192		$	—

As of June 30, 2014, the net deferred tax asset (DTA) was $30.2 million, and as of December 31, 2013, the net DTA (prior to any valuation allowance) was $42.8 million. Management recorded a valuation allowance against the net deferred tax assets at December 31, 2013 based on consideration of, but not limited to, its cumulative pre-tax losses during the past three years, the composition of recurring and non-recurring income from operations over the past several years and the magnitude of recent taxable income as compared to net operating loss carryforwards.

As of June 30, 2014, the Company had reversed $40.3 million of the valuation allowance on its net DTA. $1.6 million of the reversal is due to current year-to-date operating income; the remaining $38.7 million reversal is due to management’s change in judgment regarding the ability to realize deferred tax assets in future years. The remaining $2.5 million of valuation allowance is expected to reverse due to operating income projected for the remainder of 2014. The realization of a DTA is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the DTA will not be realized. “More likely than not” is defined as the DTA being more than 50% likely of being realized. All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance against the net DTA is required. In assessing the need for a valuation allowance, the Company considered all available evidence about the realization of the DTA both positive and negative, that could be objectively verified.

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Positive evidence considered included (1) the Company’s recent history of quarterly pre-tax earnings (ten out of the last eleven quarters with the most recent quarterly loss being recorded for the quarter ended September 30, 2012), (2) expectations for sustained and continued profitability with sufficient taxable income to fully utilize the remaining net deferred tax benefits (3) significant reductions in the level of non-performing assets since their peak, which was the primary source of the losses generated in prior periods (4) resolution to executive searches placed on key management positions (5) evaluation of core earnings (6) adequacy of capital to fund balance sheet and future growth and (7) cost-saving initiatives triggered during the second quarter of 2014.

Negative evidence considered was (1) the uncertainty about the potential impact on future earnings from nonperforming assets along with (2) former pre-tax losses reported by the Company. As the number of consecutive periods of profitability increased and the level of profits are indicative of on-going results, the weight of cumulative losses as negative evidence decreased. A reduction in the weight given to such losses is further validated given that the source of the losses was due to an elevated level of problem assets and related credit costs, which have since been significantly reduced due to the bulk asset sale in 2012 and as evidenced by the improvements in the Company’s asset quality metrics.

After weighing both the positive and negative evidence, management determined that a valuation allowance on the net DTA was no longer warranted as of June 30, 2014. For a more detailed discussion of the Company’s tax calculation, see Note 14 to the consolidated financial statements, included in Item 8 of the Company’s Form 10-K.

Net operating loss carryforwards will begin to expire in the year ending December 31, 2030.

The Company’s ultimate realization of the DTA is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the nature and amount of historical and projected future taxable income, the scheduled reversal of deferred tax assets and liabilities, and available tax planning strategies in making this assessment. The amount of deferred taxes recognized could be impacted by changes to any of these variables.

16. 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 at a special meeting of shareholders held on May 28, 2013. 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 were approximately $4.6 million in the aggregate. The increase in equity from the capital raise was reduced by these expenses.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNITED COMMUNITY FINANCIAL CORP.

	At or For the Three Months Ended June 30,						At or For the Six Months Ended June 30,
	2014			2013			2014			2013
Selected financial ratios and other data: (1)
Performance ratios:
Return on average assets (2)		9.67	%		0.75	%		5.09	%		0.67	%
Return on average equity (3)		84.84	%		6.47	%		46.18	%		6.31	%
Interest rate spread (4)		2.92	%		2.76	%		2.92	%		2.81	%
Net interest margin (5)		3.09	%		2.93	%		3.08	%		2.97	%
Noninterest expense to average assets		3.24	%		3.15	%		3.17	%		3.10	%
Efficiency ratio (6)		87.77	%		78.38	%		85.61	%		76.96	%
Average interest-earning assets to average interest-bearing liabilities		123.00	%		121.64	%		122.00	%		120.03	%
Capital ratios:
Average equity to average assets		11.40	%		11.52	%		11.02	%		10.56	%
Equity to assets, end of period		13.13	%		10.28	%		13.13	%		10.28	%
Tier 1 leverage ratio		12.05	%		10.03	%		12.05	%		10.03	%
Tier 1 risk-based capital ratio		20.00	%		18.17	%		19.60	%		18.17	%
Total risk-based capital ratio		21.26	%		19.42	%		20.86	%		19.42	%
Asset quality ratio:
Nonperforming loans to net loans at end of period (7)		1.87	%		2.88	%		1.87	%		2.88	%
Nonperforming assets to average assets (8)		1.42	%		2.22	%		1.42	%		2.22	%
Nonperforming assets to total assets at end of period		1.39	%		2.26	%		1.39	%		2.26	%
Allowance for loan losses as a percent of loans		1.65	%		1.85	%		1.65	%		1.85	%
Allowance for loan losses as a percent of nonperforming loans (7)		89.91	%		65.41	%		89.91	%		65.41	%
Texas ratio (9)		9.82	%		19.97	%		9.82	%		19.97	%
Total classified assets as a percent of Tier 1 Capital		21.97	%		30.72	%		21.97	%		30.72	%
Total classified loans as a percent of Tier 1 Capital and ALLL		18.23	%		22.22	%		18.23	%		22.22	%
Total classified assets as a percent of Tier 1 Capital and ALLL		20.21	%		27.83	%		20.21	%		27.83	%
Net chargeoffs as a percent of average loans		0.25	%		1.54	%		0.24	%		1.02	%
Total 90+ days past due as a percent of net loans		1.53	%		2.58	%		1.53	%		2.58	%
Office data:
Number of full service banking offices		33			33			33			33
Number of loan production offices		9			9			9			9
Per share data:
Basic earnings (loss) per common share (10)	$	0.84		$	(0.06	)	$	0.88		$	(0.02	)
Diluted earnings (loss) per common share (10)		0.84			(0.06	)		0.88			(0.02	)
Book value per common share (11)		4.66			3.66			4.66			3.66
Tangible book value per common share (12)		4.66			3.66			4.66			3.66

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

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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, 2014 and December 31, 2013

Total assets increased $52.1 million to $1.8 billion at June 30, 2014, compared to December 31, 2013. Contributing to the change were increases in available for sale securities of $5.6 million, net loans of $57.6 million, loans held for sale of $4.5 million and other assets of $28.1 million offset by decreases in cash and cash equivalents of $33.7 million, Federal Home Loan Bank stock of $8.4 million and real estate owned and other repossessed assets of $1.8 million.

Funds not currently utilized for general corporate purposes are invested in overnight funds. Cash and cash equivalents decreased during the first six months of 2014 as excess funds held on deposit at the Federal Reserve were used to fund loan growth during the period.

The increase in available for sale securities was the result of a positive market value adjustment of $24.3 million during the first six months of 2014, offset by maturities, paydowns and amortization of securities totaling $12.2 million and sales of $5.0 million. The balance of the unrealized loss position at June 30, 2014 was $16.1 million, pretax. The unrealized loss position is entirely driven by the level of interest rates. To that end, the Company expects to receive all principal and interest payments contractually due and has the ability and intent to hold the securities until maturity. All of the securities are GSE issued debt or mortgage-backed securities and carry the same rating as the U.S. Government.

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The duration of the securities portfolio was approximately 6.2 years at June 30, 2014. There is risk that longer term rates could continue to rise, resulting in greater unrealized losses. But it is also possible that longer term rates could fall, resulting in the recovery of all of the unrealized losses. Management continues to allow the portfolio to decline as no new investment purchases are being considered at this time. In addition, the Company may look for opportunities to sell securities to reduce the portfolio or change the duration characteristics of the portfolio.

Net loans increased $57.6 million during the first six months of 2014. Contributing to the increase was a combination of an increase in permanent construction and secured commercial loans during the period. See Note 6 to the consolidated financial statements for additional information regarding the composition of net loans.

The following table summarizes the trend in the allowance for loan losses as of June 30, 2014:

	Allowance For Loan Losses
	(Dollars in thousands)
Real Estate Loans	December 31, 2013		Provision			Recovery		Chargeoff			June 30, 2014
Permanent
One-to four-family residential	$	8,319	$	119		$	207	$	(551	)	$	8,094
Multifamily residential		610		148			—		(140	)		618
Nonresidential		4,791		(1,026	)		140		(336	)		3,569
Land		74		(2	)		—		—			72
Total		13,794		(761	)		347		(1,027	)		12,353
Construction Loans
One-to four-family residential		2,281		(739	)		21		(430	)		1,133
Multifamily and nonresidential		—		31			—		—			31
Total		2,281		(708	)		21		(430	)		1,164
Consumer Loans
Home Equity		3,552		(62	)		82		(439	)		3,133
Auto		35		(4	)		5		(9	)		27
Marine		40		(6	)		14		—			48
Recreational vehicle		661		86			72		(251	)		568
Other		14		11			144		(155	)		14
Total		4,302		25			317		(854	)		3,790
Commercial Loans
Secured		686		204			50		—			940
Unsecured		53		(341	)		350		(45	)		17
Total		739		(137	)		400		(45	)		957
Total	$	21,116	$	(1,581	)	$	1,085	$	(2,356	)	$	18,264

The allowance for loan losses is a valuation allowance for probable incurred credit losses established through a provision for loan losses charged to expense. The allowance for loan losses was $18.3 million at June 30, 2014, down from $21.1 million at December 31, 2013. The allowance for loan losses as a percentage of loans was 1.65% at June 30, 2014, compared to 2.01% at December 31, 2013. The allowance for loan losses as a percentage of nonperforming loans was 89.91% at June 30, 2014, compared to 89.52% at December 31, 2013. 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 charge-offs or recoveries, among other factors.

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During the first six months of 2014, the Company recorded a negative loan loss provision of ($1.6) million. The negative provision of $1.0 million associated with nonresidential real estate loans has been impacted by the payoff of a nonresidential real estate loan aggregating $7.7 million, which resulted in a release of approximately $748,000 in reserves. In addition, the negative provision of $739,000 associated with residential construction one-to four-family loans is being impacted by a change in loan loss factors. When construction is complete the loan will convert to a permanent one-to four-family residential loan. Accordingly, the loan loss factors applied to these construction one-to four-family residential loans are being aligned with one-to four-family residential real estate loans. This alignment resulted in the release of approximately $794,000 in reserves.

At the time of completion construction phase these loans will convert to permanent one-to four-family residential loans. Loan loss factors applied to these construction loans are being aligned with mortgage loans to more closely reflect the loss experience of a mortgage loan. In the past Home Savings has applied a loan loss factor similar to the one used for construction loans to contractors. As a result, the reserves set aside for these specific loans has declined approximately $794,000.

Home Savings individually analyzed a large portion of impaired mortgage and home equity loans in 2014. Many of these loans were deemed to have adequate collateral to cover any potential future losses allowing for the release of reserves. Finally, as a result of continued improvement in asset quality and a decline in loan loss history Home Savings has adjusted historical and environmental factors resulting in a decrease in reserves.

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 $47.1 million at June 30, 2014 as compared to $48.2 million at December 31, 2013. The schedule below summarizes impaired loans for June 30, 2014 and December 31, 2013.

Impaired Loans

(Dollars in thousands)

Real Estate Loans	June 30, 2014		December 31, 2013			Change
Permanent
One-to four-family residential	$	21,272	$	20,206		$	1,066
Multifamily residential		134		652			(518	)
Nonresidential		5,069		5,879			(810	)
Land		532		487			45
Total		27,007		27,224			(217	)
Construction Loans
One-to four-family residential		2,550		3,092			(542	)
Multifamily and nonresidential		—		—			—
Total		2,550		3,092			(542	)
Consumer Loans
Home Equity		12,158		12,550			(392	)
Auto		87		66			21
Boat		156		160			(4	)
Recreational vehicle		1,084		1,043			41
Other		6		2			4
Total		13,491		13,821			(330	)
Commercial Loans
Secured		4,032		4,044			(12	)
Unsecured		—		—			—
Total		4,032		4,044	��		(12	)
Total Impaired Loans	$	47,080	$	48,181		$	(1,101	)

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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.

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.

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The change in TDRs for the six months ended June 30, 2014 is as follows:

Troubled Debt Restructurings

	June 30, 2014		December 31, 2013		Change
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family	$	16,908	$	16,700	$	208
Multifamily residential		—		463		(463	)
Nonresidential		890		858		32
Land		487		487		—
Total		18,285		18,508		(223	)
Construction Loans
One-to four-family residential		388		698		(310	)
Multifamily and nonresidential		—		—		—
Total		388		698		(310	)
Consumer Loans
Home Equity		10,412		11,133		(721	)
Auto		8		10		(2	)
Marine		—		—		—
Recreational vehicle		816		836		(20	)
Other		—		—		—
Total		11,236		11,979		(743	)
Commercial Loans
Secured		324		333		(9	)
Unsecured		—		—		—
Total		324		333		(9	)
Total Restructured Loans	$	30,233	$	31,518	$	(1,285	)

The decrease in the level of TDR loans during the six months ended June 30, 2014 was attributable primarily to paydowns in accordance with terms of the loans.

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 $4.3 million and $4.9 million at June 30, 2014 and December 31, 2013, respectively. Such loans are considered nonperforming loans. TDR loans that were accruing according to their terms aggregated $25.9 million at June 30, 2014 and $26.6 million at December 31, 2013.

Nonperforming loans consist of nonaccrual loans and loans past due 90 days and still accruing. Nonperforming loans were $20.3 million, or 1.87% of net loans, at June 30, 2014, compared to $23.6 million, or 2.29% of net loans, at December 31, 2013.

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The schedule below summarizes the change in nonperforming loans for the first six months of 2014.

Nonperforming Loans

(Dollars in thousands)

	June 30, 2014			December 31, 2013		Change
Real Estate Loans
Permanent
One-to four-family residential	$	5,380		$	6,356	$	(976	)
Multifamily residential		133			641		(508	)
Nonresidential		4,902			5,560		(658	)
Land		532			496		36
Total		10,947			13,053		(2,106	)
Construction Loans
One-to four-family residential		2,553			3,084		(531	)
Multifamily and nonresidential		—			—		—
Total		2,553			3,084		(531	)
Consumer Loans
Home Equity		2,224			2,771		(547	)
Auto		64			110		(46	)
Marine		127			136		(9	)
Recreational vehicle		242			263		(21	)
Other		6			13		(7	)
Total		2,663			3,293		(630	)
Commercial Loans
Secured		4,023			4,028		(5	)
Unsecured		128			130		(2	)
Total		4,151			4,158		(7	)
			��
Total Nonperforming Loans	$	20,314		$	23,588	$	(3,274	)

Loans held for sale increased $4.5 million, or 92.0%, to $9.3 million at June 30, 2014, compared to $4.8 million at December 31, 2013. The change was primarily attributable to the timing of originations and sales during the period. 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 decreased to $18.1 million at June 30, 2014 compared to $26.5 million at December 31, 2013. During the first quarter of 2014, the FHLB redeemed 83,962 shares, having a historical cost of $8.4 million (or $100 per share). Home Savings received cash for the redemption. There was no gain or loss recognized on the redemption. Also during the first six months of 2014, the FHLB paid a cash dividend of $497,000 in lieu of stock dividends to its member banks.

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Real estate owned and other repossessed assets decreased $1.8 million, or 28.3%, during the six months ended June 30, 2014. 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	$	6,318		$	23		$	6,341
Acquisitions		851			2			853
Sales, net		(2,185	)		(23	)		(2,208	)
Change in valuation allowance		(438	)		—			(438	)
Balance at End of period	$	4,546		$	2		$	4,548

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, 2014:

	Balance		Valuation Allowance			Net Balance
	(Dollars in thousands)
Real estate owned
One-to four-family	$	2,830	$	(445	)	$	2,385
Multifamily residential		43		—			43
Nonresidential		139		(60	)		79
One-to four-family residential construction		4,827		(2,979	)		1,848
Land		270		(79	)		191
Total real estate owned		8,109		(3,563	)		4,546
Repossessed assets
Auto		2		—			2
Marine		—		—			—
Recreational vehicle		—		—			—
Total repossessed assets		—		—			—
Total real estate owned and other repossessed assets	$	8,111	$	(3,563	)	$	4,548

Real estate owned and other repossessed assets are 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 nonresidential real estate properties that exceed $1.0 million in value and residential real estate properties that exceed $250,000 in value. Based on current appraisals, a valuation allowance may be established to properly reflect 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.

Bank Owned Life Insurance (BOLI) is maintained on select officers and employees of Home Savings whereby Home Savings is the beneficiary. BOLI is recorded at its cash surrender value, or the amount currently realizable. Increases in the Home Savings’ policy cash surrender value are tax exempt and death benefit proceeds received by Home Savings are tax-free. Income from these policies and changes in the cash surrender value are recorded in other income. There is no post-termination coverage, split dollar or other encumbrance provided to participants covered by the BOLI. Home Savings recognized $712,000 and $459,000, as other non-interest income based on the change in cash value of the policies in the six months ended June 30, 2014 and 2013, respectively.

Other assets increased $28.1 million, largely due to the reversal of the valuation allowance previously established on the Company’s net deferred tax assets. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. When determining the amount of net deferred tax assets that are more likely than not to be realized, United Community conducts a regular assessment of all available evidence, both positive and negative. This evidence includes, but is not limited to, taxable income in prior periods, projected future income, projected future reversals of deferred tax items and the future effects of enacted tax law changes. Based on these criteria, including projected usage of its net operating loss (NOL) carryforward, United Community determined that it was necessary to maintain a full valuation allowance against the deferred tax asset at December 31, 2013.

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As of June 30, 2014, the net deferred tax asset (DTA) was $30.2 million, and as of December 31, 2013, the net DTA (prior to any valuation allowance) was $42.8 million. Management maintained a valuation allowance against the net deferred tax assets at December 31, 2013 based on consideration of, but not limited to, its cumulative pre-tax losses during the past three years, the composition of recurring and non-recurring income from operations over the past several years and the magnitude of recent taxable income as compared to net operating loss carryforwards.

As of June 30, 2014, the Company had reversed $40.3 million of the valuation allowance on its net DTA. $1.6 million of the reversal is due to current year-to-date operating income; the remaining $38.7 million is due to management’s change in judgment regarding the ability to realize deferred tax assets in future years. The realization of a DTA is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the DTA will not be realized. “More likely than not” is defined as the DTA being more than 50% likely of being realized. All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance against the net DTA is required. In assessing the need for a valuation allowance, the Company considered all available evidence about the realization of the DTA both positive and negative, that could be objectively verified.

Positive evidence considered included (1) the Company’s recent history of quarterly pre-tax earnings (ten out of the last eleven quarters with the most recent quarterly loss being recorded for the quarter ended September 30, 2012 due to a bulk sale of troubled assets ), (2) expectations for sustained and continued profitability with sufficient taxable income to fully utilize the remaining net deferred tax benefits (3) significant reductions in the level of non-performing assets since their peak, which was the primary source of the losses generated in prior periods (4) resolution to executive searches placed on key management positions (5) evaluation of core earnings (6) adequacy of capital to fund balance sheet and future growth and (7) cost-saving initiatives triggered during the quarter.

Negative evidence considered was (1) the uncertainty about the potential impact on future earnings from nonperforming assets along with (2) a pre-tax loss reported by the Company during one quarterly period over the previous eleven quarters. As the number of consecutive periods of profitability increased and the level of profits are indicative of on-going results, the weight of cumulative losses as negative evidence decreased. A reduction in the weight given to such losses is further validated given that the source of the losses was due to an elevated level of problem assets and related credit costs, which have since been significantly reduced due to the bulk asset sale in 2012 and as evidenced by the improvements in the Company’s asset quality metrics.

After weighing both the positive and negative evidence, management determined that a valuation allowance on the net DTA was no longer warranted as of June 30, 2014. For a more detailed discussion of the Company’s tax calculation, see Note 14 to the consolidated financial statements, included in Item 8 of the Company’s Form 10-K.

The Company’s ultimate realization of the DTA is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the nature and amount of historical and projected future taxable income, the scheduled reversal of deferred tax assets and liabilities, and available tax planning strategies in making this assessment. The amount of deferred taxes recognized could be impacted by changes to any of these variables.

Total deposits decreased $16.3 million to $1.4 billion at June 30, 2014, compared to December 31, 2013. Certificates of deposit declined and were only partially offset by an increase in savings and checking deposits. As of June 30, 2014, Home Savings had no brokered deposits.

Advance payments by borrowers for taxes and insurance decreased $7.4 million during the first six months of 2014. Remittance of real estate taxes and property insurance made on behalf of customers of Home Savings accounted for $2.2 million of the decrease. In addition, funds held for payments received on loans sold where servicing was retained by Home Savings decreased $5.2 million.

Federal Home Loan Bank advances increased from $50.0 million at December 31, 2013 to $65.0 million at June 30, 2014. The increase partially funded the growth of the Company.

Home Savings receives requests for reimbursements from both Freddie Mac and Fannie Mae to make them whole on loans sold to them in the secondary market. These loans were originated by Home Savings in the normal course, but such loans have certain defined weaknesses such that a settlement to the investor is required. For the six months ended June 30, 2014, Home Savings incurred expenses of $25,000 associated with such repurchases. Home Savings has included in other liabilities a reserve for future make-whole settlements aggregating $973,000 at June 30, 2014.

Other liabilities increased $732,000 to $10.6 million at June 30, 2014, from $9.8 million at December 31, 2013. The change was the result of the accrual of expenses associated with severance payments, incentive payments, legal and other consulting services, offset by the remittance of funds owed to the Small Business Administration after the sale of collateral secured on a foreclosed loan.

Shareholders’ equity increased $60.0 million to $235.0 million at June 30, 2014, from $175.1 million at December 31, 2013. The change occurred as a result of net income for the period, including the tax benefit recognized on the reversal of the valuation allowance on net deferred tax assets, along with positive adjustments to other comprehensive income for the recovery of value of available for sale securities during the period.

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Accumulated other comprehensive income improved $15.8 million from December 31, 2013 to June 30, 2014. 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, 2014 and December 31, 2013 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 the rise in longer-term interest rates in 2013 and 2014. The fair value is expected to recover as the investments approach maturity and the Company has the intent an ability to hold these investments until recovery.

In July 2013, United Community’s primary federal regulator, the FRB, and Home Savings’ primary federal regulator, the FDIC, along with 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 Home Savings 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.

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.

Book value per common share as of June 30, 2014 was $4.66 as compared to $3.48 per common share as of December 31, 2013. 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 as mentioned above.

Comparison of Operating Results for the Three Months Ended

June 30, 2014 and June 30, 2013

Net Income.United Community recognized net income for the three months ended June 30, 2014, of $42.4 million, or $0.84 per diluted common share compared to net income of $3.4 million, before amortization of the discount on preferred stock for the three months ended June 30, 2013. As part of the capital raise in 2013, United Community issued preferred stock that was later converted to common stock. No dividend was declared or paid on the preferred stock. However, because the preferred stock was issued at a price below the then market price of our common stock, the difference is deemed a non-cash dividend under U.S. GAAP and is deducted in the calculation of net income available to common shareholders. Therefore, a net loss available to common shareholders as of June 30, 2013 was ($2.5) million, or $(0.06) per diluted share.

The significant increase in earnings for the second quarter of 2014 was primarily a result of the reversal of the valuation allowance on net deferred tax assets, which provided an income tax benefit of $38.8 million. In addition, the Company recorded a negative loan loss provision of ($1.6) million, compared to provision for loan losses of $1.1 million for the second quarter of 2013.

Net interest income for the period increased $105,000. The provision for loan losses decreased $2.7 million during the same period. Additionally, non-interest income decreased $2.9 million and noninterest expense decreased $142,000.

Net Interest Income. Net interest income for the three months ended June 30, 2014 and 2013 was $12.7 million and $12.6 million, respectively. Net interest margin for the three months ended June 30, 2014 and 2013 was 3.09% and 2.93%, respectively.

Total interest income decreased $176,000 in the second quarter of 2014 compared to the second quarter of 2013, primarily as a result of a decrease of $70.7 million in the average balance of available for sale securities as well as a decrease in the average balance of FHLB stock. These declines were offset by an increase in the average balance of net loans of $52.9 million in the second quarter of 2014 as compared to the same quarter last year, despite a decrease in the yield on those assets of 18 basis points.

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Total interest expense decreased $281,000 for the quarter ended June 30, 2014, as compared to the same quarter last year. The change was due primarily to reductions of $282,000 in interest paid on deposits. The overall decrease in interest expense was partially attributable to an 11.0% growth in noninterest bearing deposits. Also contributing to the decrease between the two quarterly periods was a reduction of two basis points in the cost of certificates of deposit. The average outstanding balance of certificates of deposit in the second quarter of 2014 declined by $73.6 million as compared to the second quarter of 2013.

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, 2014, increased to 2.92% compared to 2.76% for the quarter ended June 30, 2013. The net interest margin increased 16 basis points to 3.09% for the three months ended June 30, 2014 compared to 2.93% for the same quarter in 2013.

	For the Three Months Ended June 30,
	2014 vs. 2013
	Increase (decrease) due to						Total increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	(396	)	$	550		$	154
Loans held for sale		(33	)		29			(4	)
Investment securities:
Available for sale		181			(440	)		(259	)
FHLB stock		100			(147	)		(47	)
Other interest-earning assets		5			(25	)		(20	)
Total interest-earning assets	$	(143	)	$	(33	)	$	(176	)
Interest-bearing liabilities:
Savings accounts		(17	)		1			(16	)
NOW and money market accounts		(16	)		(4	)		(20	)
Certificates of deposit		(26	)		(219	)		(245	)
Federal Home Loan Bank advances		—			—			—
Repurchase agreements and other		—			—			—
Total interest-bearing liabilities	$	(59	)	$	(222	)		(281	)
Change in net interest income							$	105

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 Company recognized a negative loan loss provision of ($1.6) million in the second quarter of 2014, compared to a $1.1 million provision in the second quarter of 2013. During the second quarter of 2014, a commercial real estate loan aggregating $7.7 million paid off, causing a reduction in the loan loss provision $748,000. Furthermore, the provision was reduced by $491,000 due to the realignment of loan loss factors assigned to construction one- to four- family residential loans. The loan loss factors applied to these construction one- to four-family residential loans are being aligned with permanent one-to four-family residential real estate loans.

During 2014, chargeoffs exceeded provision primarily as a result of a large nonresidential real estate loan payoff releasing $748,000 in reserves. In addition, Home Savings individually analyzed a large portion of impaired mortgage and home equity loans in the first quarter of 2014. Many of these loans were deemed to have adequate collateral to cover any potential future losses. This analysis allowed Home Savings to release a portion of the reserves that had been set aside for potential losses on these loans. Loans that did not have adequate collateral were written down to fair value. Home Savings also made a change in loan loss factors associated with residential construction one- to four-family loans. When construction is complete the loan will convert to a permanent one-to four- family residential loan. Accordingly, the loan loss factors applied to these construction one- to four-family residential loans are being aligned with one- to four-family residential real estate loans. This alignment resulted in the release of approximately $794,000 in reserves.

Noninterest Income.Noninterest income in the second quarter of 2014 was $3.4 million, as compared to noninterest income for the second quarter of 2013 of $6.4 million. The decrease in noninterest income was driven by decreased mortgage banking income, gains on the sale of available for sale securities and other income. As a result of a decrease of $32.4 million in mortgage originations sold, comparing the second quarter of 2014 to the second quarter of 2013, mortgage banking income declined $1.1 million. The change in gains recognized on the sale of available for sale securities was the result of sales in the second quarter of 2013 that did not reoccur in the second quarter of 2014. The change in real estate owned and other repossessed assets charges is a result of additional valuation reserves being required on select other real estate owned in the second quarter of 2013. The change in other income was the result of lower net rental income received on real estate owned and lower debit card fees earned in the current quarter, compared to the same quarter last year. Also, Home Savings recognized a recovery of $561,000 on interest rate caps in the second quarter of 2013.

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Noninterest Expense. Noninterest expense was $14.2 million in the second quarter of 2014, compared to $14.4 million in the second quarter of 2013; a difference of $142,000. During the second quarter of 2014, Home Savings incurred a $923,000 charge related to cost reduction initiatives. The Company anticipates a savings of approximately $5.0 million annualized on a go-forward basis or approximately 9.0% of annualized noninterest expenses as a result of this initiative.

In the second quarter of 2014, most other expenses decreased primarily because of lower expenses incurred on loans sold in the secondary market. Reduced FDIC insurance premiums of $276,000 and franchise/financial institutions tax expenses of $202,000 also contributed to the change. Reduced FDIC premiums are the result of the termination of all regulatory orders that the Bank had been operating under. The lower franchise/financial institutions tax is the result of a change in Ohio tax law. These reductions were offset by an increase of $1.2 million in salaries and employee benefits, primarily due to the above mentioned cost reduction initiative.

As of June 30, 2014, United Community accrued $300,000 for a legal matter that is believed to be appropriate based upon information available at that time. It is possible that the assumptions used regarding the ultimate outcome of this litigation may change, which could result in increasing or decreasing the accrual for this matter. As of June 30, 2014, management does not believe that there is a reasonable possibility that any material loss exceeding the amount already recognized for United Community’s litigation claims has been incurred. However, the ultimate resolutions of these proceedings and matters are inherently unpredictable. As such, the Company’s financial condition and results of operations could be adversely affected in any particular period by the unfavorable resolution of such litigation. In July, 2014, United Community and the plaintiff reached a settlement in principal, subject to final negotiation of a definitive agreement. The difference between the accrual and settlement is immaterial.

Income Taxes. During the three months ended June 30, 2014, the Company recognized a tax benefit of $38.8 million on pre-tax income of $3.6 million, compared to tax expense of $150,000 on pre-tax income of $3.5 million for the three months ended June 30, 2013. The primary reason for the variance was the reversal of substantially all of the Company’s deferred tax asset valuation allowance in the quarter ended June 30, 2014. As of June 30, 2014, the net deferred tax asset (DTA) was $30.2 million, and as of December 31, 2013, the net DTA (prior to any valuation allowance) was $42.8 million. Management maintained a valuation allowance against the net deferred tax assets at December 31, 2013 based on consideration of, but not limited to, its cumulative pre-tax losses during the past three years, the composition of recurring and non-recurring income from operations over the past several years and the magnitude of recent taxable income as compared to net operating loss carryforwards.

As of June 30, 2014, the Company had reversed $40.3 million of the valuation allowance on its net DTA. $1.6 million of the reversal is due to current year-to-date operating income; the remaining $38.7 million is due to management’s change in judgment regarding the ability to realize deferred tax assets in future years. The realization of a DTA is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the DTA will not be realized. “More likely than not” is defined as the DTA being more than 50% likely of being realized. All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance against the net DTA is required. In assessing the need for a valuation allowance, the Company considered all available evidence about the realization of the DTA both positive and negative, that could be objectively verified.

Positive evidence considered included (1) the Company’s recent history of quarterly pre-tax earnings (ten out of the last eleven quarters with the most recent quarterly loss being recorded for the quarter ended September 30, 2012 due to a bulk sale of troubled assets), (2) expectations for sustained and continued profitability with sufficient taxable income to fully utilize the remaining net deferred tax benefits (3) significant reductions in the level of non-performing assets since their peak, which was the primary source of the losses generated in prior periods (4) resolution to executive searches placed on key management positions (5) evaluation of core earnings (6) adequacy of capital to fund balance sheet and future growth and (7) cost-saving initiatives triggered during the quarter.

Negative evidence considered was (1) the uncertainty about the potential impact on future earnings from nonperforming assets along with (2) a pre-tax loss reported by the Company during one quarterly periods over the previous eleven quarters. As the number of consecutive periods of profitability increased and the level of profits are indicative of on-going results, the weight of cumulative losses as negative evidence decreased. A reduction in the weight given to such losses is further validated given that the source of the losses was due to an elevated level of problem assets and related credit costs, which have since been significantly reduced due to the bulk asset sale in 2012 and as evidenced by the improvements in the Company’s asset quality metrics.

After weighing both the positive and negative evidence, management determined that a valuation allowance on the net DTA was no longer warranted as of June 30, 2014. For a more detailed discussion of the Company’s tax calculation, see Note 14 to the consolidated financial statements, included in Item 8 of the Company’s Form 10-K.

The Company’s ultimate realization of the DTA is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the nature and amount of historical and projected future taxable income, the scheduled reversal of deferred tax assets and liabilities, and available tax planning strategies in making this assessment. The amount of deferred taxes recognized could be impacted by changes to any of these variables.

The Company expects tax expense for the remainder of the year to be offset by the reversal of the remaining valuation allowance, for an effective tax rate of zero, excluding the discrete benefit recorded in the second quarter. The effective tax rate for 2015 is expected to more closely reflect marginal tax rates.

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Comparison of Operating Results for the Six Months Ended

June 30, 2014 and June 30, 2013

Net Income.United Community recognized net income for the six months ended June 30, 2014, of $44.5 million, or $0.88 per diluted common share compared to net income of $6.1 million, before amortization of the discount on preferred stock for the six months ended June 30, 2013. As part of the capital raise in 2013, United Community issued preferred stock that was later converted to common stock. No dividend was declared or paid on the preferred stock. However, because the preferred stock was issued at a price below the then market price of our common stock, the difference is deemed a non-cash dividend under U.S.GAAP and is deducted in the calculation of net income available to common shareholders. Therefore, a net loss available to common shareholders as of June 30, 2013 was $680,000, or $(0.02) per diluted share.

The significant increase in earnings for the first half of 2014 was primarily a result of the reversal of the valuation allowance on net deferred tax assets, which provided an income tax benefit of $38.7 million. In addition, the Company recorded a negative loan loss provision of ($1.6) million, compared to provision for loan losses of $3.2 million for the first half of 2013.

Net interest income for the period decreased $210,000. The provision for loan losses decreased $4.8 million during the same period. Additionally, non-interest income decreased $5.4 million and noninterest expense decreased $463,000. United Community’s annualized return on average assets and return on average equity were 5.09% and 46.18%, respectively, for the six months ended June 30, 2014. The annualized return on average assets and return on average equity for the comparable period in 2013 were 0.67% and 6.31%, respectively.

Net Interest Income. Net interest income for the six months ended June 30, 2014 and 2013 was $25.3 million and $25.6 million, respectively. Net interest margin for the six months ended June 30, 2014 and 2013 was 3.08% and 2.97%, respectively.

Total interest income decreased $907,000 in the first six months of 2014 compared to the first six months of 2013, primarily as a result of a decrease of $78.4 million in the average balance of available for sale securities as well as a decrease in the yield on net loans of 18 basis points. These declines were offset by an increase in the average balance of net loans of $23.9 million in the first six months of 2014 as compared to the same period last year.

Total interest expense decreased $697,000 for the six months ended June 30, 2014, as compared to the same period last year. The change was due primarily to reductions of $692,000 in interest paid on deposits. The overall decrease in interest expense was partially attributable to a 15.8% growth in noninterest bearing deposits. Also contributing to the decrease between the two periods was a reduction of 5 basis points in the cost of certificates of deposit. The average outstanding balance of certificates of deposit in the first half of 2014 declined by $71.3 million as compared to the first half of 2013. Furthermore, the average balance of non-time deposits decreased $6.0 million and the cost of non-time deposits decreased 4 basis points.

70

The following table shows the impact of interest rate and outstanding balance (volume) changes compared to the first six months of last year. The interest rate spread for the six months ended June 30, 2014, increased to 2.92% compared to 2.81% for the six months ended June 30, 2013. The net interest margin increased 11 basis points to 3.08% for the six months ended June 30, 2014 compared to 2.97% for the same period in 2013.

	For the Six Months Ended June 30,
	2014 vs. 2013
	Increase						Total
	(decrease) due to						increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	(963	)	$	612		$	(351	)
Loans held for sale		928			(972	)		(44	)
Investment securities:
Available for sale		613			(1,059	)		(446	)
FHLB stock		107			(170	)		(63	)
Other interest-earning assets		12			(15	)		(3	)
Total interest-earning assets	$	697		$	(1,604	)	$	(907	)
Interest-bearing liabilities:
Savings accounts		(61	)		2			(59	)
NOW and money market accounts		(71	)		(11	)		(82	)
Certificates of deposit		(126	)		(425	)		(551	)
Federal Home Loan Bank advances		(51	)		46			(5	)
Repurchase agreements and other		—			—			—
Total interest-bearing liabilities	$	(309	)	$	(388	)		(697	)
Change in net interest income							$	(210	)

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 Company recognized negative loan loss provision of ($1.6) million in the first six months of 2014, compared to a $3.2 million expense in the first six months of 2013. During the second quarter of 2014, a commercial real estate loan aggregating $7.7 million paid off, causing a reduction in the loan loss provision $748,000. Furthermore, the provision was reduced by $794,000 due to the realignment of loan loss factors assigned to construction one- to four- family residential loans. The loan loss factors applied to these construction one- to four-family residential loans are being aligned with permanent one to four family residential real estate loans. Also contributing to the change in the provision for loan losses were charge offs of $560,000 previously reserved associated with one commercial lending relationship that was settled in the first quarter of 2013. In addition, a $382,000 specific reserve was established in 2013 on another commercial relationship to adjust the net book value to an anticipated resolution balance.

Noninterest Income.Noninterest income in the first six months of 2014 was $6.7 million, as compared to noninterest income for the second quarter of 2013 of $12.1 million. The decrease in noninterest income was driven by decreases mortgage banking income, gains on the sale of available for sale securities and other income. The decrease in mortgage banking income was caused by an $81.2 million reduction in mortgage originations sold which resulted in a $2.1 million decline in mortgage banking income. The change in gains recognized on the sale of available for sale securities was the result of sales made in the first half of 2013 that did not reoccur in the first half of 2014. The change in other income was the result of lower net rental income received on real estate owned and lower debit card fees earned in the current quarter, compared to the same quarter last year. Also, Home Savings recognized a recovery of $700,000 on interest rate caps in the first six months of 2013.

Noninterest Expense. Noninterest expense was $27.8 million in the first six months of 2014, compared to $28.2 million in the first six months of 2013; a difference of $463,000. In the first half of 2014, other expenses decreased primarily because of lower expenses incurred on loans sold in the secondary market. Reduced FDIC premiums of $577,000 and franchise/financial institutions tax expenses of $435,000 also contributed to the change. Reduced FDIC premiums are the result of the termination of all regulatory orders that the Bank had been operating under. The lower franchise/financial institutions tax is the result of a change in Ohio tax law. These reductions were offset by an increase of $1.9 million in salaries and employee benefits, primarily due to the above mentioned cost reduction initiative.

71

Income Taxes. During the six months ended June 30, 2014 the Company recognized a tax benefit of $38.7 million on pre-tax income of $5.8 million, compared to tax expense of $150,000 on pre-tax income of $6.2 million for the six months ended June 30, 2013. The primary reason for the variance was the reversal of substantially all of the Company’s deferred tax asset valuation allowance in the quarter ended June 30, 2014. As of June 30, 2014, the net deferred tax asset (DTA) was $30.2 million, and as of December 31, 2013, the net DTA (prior to any valuation allowance) was $42.8 million. Management maintained a valuation allowance against the net deferred tax assets at December 31, 2013 based on consideration of, but not limited to, its cumulative pre-tax losses during the past three years, the composition of recurring and non-recurring income from operations over the past several years and the magnitude of recent taxable income as compared to net operating loss carryforwards.

As of June 30, 2014, the Company had reversed $40.3 million of the valuation allowance on its net DTA. $1.6 million of the reversal is due to current year-to-date operating income; the remaining $38.7 million is due to management’s change in judgment regarding the ability to realize deferred tax assets in future years. The realization of a DTA is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the DTA will not be realized. “More likely than not” is defined as the DTA being more than 50% likely of being realized. All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance against the net DTA is required. In assessing the need for a valuation allowance, the Company considered all available evidence about the realization of the DTA both positive and negative, that could be objectively verified.

Positive evidence considered included (1) the Company’s recent history of quarterly pre-tax earnings (ten out of the last eleven quarters with the most recent quarterly loss being recorded for the quarter ended September 30, 2012due to a bulk sale of troubled assets), (2) expectations for sustained and continued profitability with sufficient taxable income to fully utilize the remaining net deferred tax benefits (3) significant reductions in the level of non-performing assets since their peak, which was the primary source of the losses generated in prior periods (4) resolution to executive searches placed on key management positions (5) evaluation of core earnings (6) adequacy of capital to fund balance sheet and future growth and (7) cost-saving initiatives triggered during the quarter.

Negative evidence considered was (1) the uncertainty about the potential impact on future earnings from nonperforming assets along with (2) a pre-tax loss reported by the Company during one quarterly periods over the previous eleven quarters. As the number of consecutive periods of profitability increased and the level of profits are indicative of on-going results, the weight of cumulative losses as negative evidence decreased. A reduction in the weight given to such losses is further validated given that the source of the losses was due to an elevated level of problem assets and related credit costs, which have since been significantly reduced due to the bulk asset sale in 2012 and as evidenced by the improvements in the Company’s asset quality metrics.

After weighing both the positive and negative evidence, management determined that a valuation allowance on the net DTA was no longer warranted as of June 30, 2014. For a more detailed discussion of the Company’s tax calculation, see Note 14 to the consolidated financial statements, included in Item 8 of the Company’s Form 10-K.

The Company’s ultimate realization of the DTA is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the nature and amount of historical and projected future taxable income, the scheduled reversal of deferred tax assets and liabilities, and available tax planning strategies in making this assessment. The amount of deferred taxes recognized could be impacted by changes to any of these variables.

The Company expects tax expense for the remainder of the year to be offset by the reversal of the remaining valuation allowance, for an effective tax rate of zero, excluding the discrete benefit recorded in the second quarter. The effective tax rate for 2015 is expected to more closely reflect marginal tax rates.

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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, 2014 and 2013. Average balance calculations were based on daily balances.

	Three Months Ended June 30,
	2014							2013
	Average Outstanding Balance		Interest Earned/ Paid		Yield/ Cost			Average Outstanding Balance		Interest Earned/ Paid		Yield/ Cost
	(Dollars in thousands)
Interest-earning assets:
Net loans (1)	$	1,069,690	$	12,361		4.62	%	$	1,016,810	$	12,207		4.80	%
Net loans held for sale		5,514		74		5.37	%		7,683		78		4.06	%
Investment securities:
Available for sale		518,553		3,125		2.41	%		589,284		3,384		2.30	%
Federal Home Loan Bank stock		18,068		230		5.09	%		26,464		277		4.19	%
Other interest-earning assets		38,469		21		0.22	%		83,535		41		0.20	%
Total interest-earning assets		1,650,294		15,811		3.84	%		1,723,776		15,987		3.71	%
Noninterest-earning assets		103,976							99,246
Total assets	$	1,754,270						$	1,823,022
Interest-bearing liabilities:
NOW and money market accounts	$	463,786	$	226		0.19	%	$	470,704	$	246		0.21	%
Savings accounts		279,004		43		0.06	%		274,238		59		0.09	%
Certificates of deposit		457,945		1,358		1.19	%		531,553		1,604		1.21	%
Federal Home Loan Bank advances		50,385		524		4.16	%		50,000		524		4.19	%
Repurchase agreements and other		90,570		919		4.06	%		90,591		918		4.05	%
Total interest-bearing liabilities		1,341,690		3,070		0.92	%		1,417,086		3,351		0.95	%
Noninterest-bearing liabilities		212,664							195,991
Total liabilities		1,554,354							1,613,077
Equity		199,916							209,945
Total liabilities and equity	$	1,754,270						$	1,823,022
Net interest income and interest rate spread			$	12,741		2.92	%			$	12,636		2.76	%
Net interest margin						3.09	%						2.93	%
Average interest-earning assets to average interest-bearing liabilities						123.00	%						121.64	%

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

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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, 2014 and 2013. Average balance calculations were based on daily balances.

	Six Months Ended June 30,
	2014							2013
	Average Outstanding Balance		Interest Earned/ Paid		Yield/ Cost			Average Outstanding Balance		Interest Earned/ Paid		Yield/ Cost
	(Dollars in thousands)
Interest-earning assets:
Net loans (1)	$	1,056,054	$	24,483		4.64	%	$	1,032,150	$	24,834		4.81	%
Net loans held for sale		4,986		123		4.93	%		10,015		167		3.33	%
Investment securities:
Available for sale		517,297		6,366		2.46	%		595,696		6,812		2.29	%
Federal Home Loan Bank stock		20,619		497		4.82	%		26,464		560		4.23	%
Other interest-earning assets		45,898		47		0.20	%		55,827		50		0.18	%
Total interest-earning assets		1,644,854		31,516		3.84	%		1,720,152		32,423		3.77	%
Noninterest-earning assets		104,682							101,736
Total assets	$	1,749,536						$	1,821,888
Interest-bearing liabilities:
NOW and money market accounts	$	464,295	$	456		0.20	%	$	473,855	$	538		0.23	%
Savings accounts		275,468		87		0.06	%		271,874		146		0.11	%
Certificates of deposit		467,680		2,761		1.18	%		538,995		3,312		1.23	%
Federal Home Loan Bank advances		50,193		1,042		4.15	%		57,740		1,047		3.63	%
Repurchase agreements and other		90,572		1,827		4.03	%		90,594		1,827		4.03	%
Total interest-bearing liabilities		1,348,208		6,173		0.92	%		1,433,058		6,870		0.96	%
Noninterest-bearing liabilities		208,592							196,373
Total liabilities		1,556,800							1,629,431
Equity		192,736							192,457
Total liabilities and equity	$	1,749,536						$	1,821,888
Net interest income and interest rate spread			$	25,343		2.92	%			$	25,553		2.81	%
Net interest margin						3.08	%						2.97	%
Average interest-earning assets to average interest-bearing liabilities						122.00	%						120.03	%

(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 to annually set exposure limits for Home Savings as a guide to management in setting and implementing day to day operating strategies.

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

Home Savings uses an NPV and earnings simulation model prepared internally as its primary method to identify and manage its interest rate risk profile. The model is based on actual cash flows and repricing characteristics for all financial instruments and incorporates market-based assumptions regarding the impact of changing interest rates on future volumes and the prepayment rate of applicable financial instruments. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates also are incorporated into the model. These assumptions 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 the year ended December 31, 2013 and the quarter ended June 30, 2014, the percentage changes fall within the policy limits set by the Board of Directors of Home Savings as the minimum NPV ratio and the maximum change in interest income the Home Savings Board deems advisable in the event of various changes in interest rates. See the table below for Board adopted policy limits.

Three Months Ended June 30, 2014
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		11.89	%		6.00	%		-1.74	%		30.00	%	$	2,119			-20.00	%		4.16	%
300		12.42	%		6.00	%		-1.22	%		25.00	%		1,270			-15.00	%		2.49	%
200		13.06	%		7.00	%		-0.58	%		20.00	%		412			-10.00	%		0.81	%
100		14.07	%		7.00	%		0.43	%		15.00	%		(273	)		-5.00	%		-0.54	%
Static		13.63	%		9.00	%		—	%		—	%		—			—	%		—	%

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Year Ended December 31, 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		9.27	%		6.00	%		-2.20	%		30.00	%	$	3,761		-20.00	%		7.70	%
300		9.85	%		6.00	%		-1.62	%		25.00	%		2,796		-15.00	%		5.72	%
200		10.52	%		7.00	%		-0.95	%		20.00	%		1,638		-10.00	%		3.35	%
100		11.11	%		7.00	%		-0.36	%		15.00	%		409		-5.00	%		0.84	%
Static		11.47	%		9.00	%		—	%		—	%		—		—	%		—	%

Due to a low interest rate environment, it was not meaningful 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 Principal Accounting 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, 2014. Based on their evaluation, the Chief Executive Officer and Principal Accounting Officer have concluded that United Community’s disclosure controls and procedures as of June 30, 2014, 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 Principal Accounting Officer, to allow timely decisions regarding required disclosure. During the quarter ended June 30, 2014, 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.

Excluding deferred tax assets and liabilities, 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, 2013. 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.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision (credit) for income taxes. A valuation allowance, if needed, reduces deferred tax assets to the expected amount to be realized.

Income tax positions that meet a more-likely-than-not recognition threshold are measured as the largest amount of income tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority.

The Company reversed its DTA valuation allowance as of June 30, 2014 resulting in a net deferred tax asset of $30.2 million at that date. This compares to no deferred tax asset as of December 31, 2013 as it was fully reserved against. There are a number of tax issues that impact the deferred tax asset balancing including changes in temporary differences between the financial statement and tax recognition of revenue and expenses and estimates as to the deductibility of prior losses.

For the quarter ended June 30, 2014, management determined it was more likely than not that a significant portion of the DTA would be realized. Management’s decision was based upon evidence including its earnings performance trend, expected continued profitability, and improvement in the Company’s financial condition. The Company’s ultimate realization of the DTA is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the nature and amount of historical and projected future taxable income, the scheduled reversal of deferred lax assets and liabilities and available tax planning strategies in making this assessment. The amount of deferred taxes recognized could be impacted by changes to any of these variables.

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

(a) Not applicable

(b) Not applicable

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(c) The following table provides information concerning purchases of United Community’s common shares made by United Community during the three months ended June 30, 2014:

Period	Total number of common shares purchased		Average price paid per common share		Total number of common shares purchased as part of publicly announced plans		Maximum number of shares remaining that may yet be purchased under the plan
April 1 through April 30, 2014		—	$	—		—		1,477,804
May 1 through May 31, 2014		37,200	$	3.76		37,200		1,440,604
June 1 through June 30, 2014		119,300	$	3.84		119,300		1,321,304
Total		156,500	$	3.82		156,500		1,321,304

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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, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations and Comprehensive Income (Loss), (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 7, 2014	/S/ Gary M. Small
	Gary M. Small
	President and Chief Executive Officer
	(Principal Executive Officer)

Date: August 7, 2014	/S/ Timothy W. Esson
	Timothy W. Esson
	Principal Accounting 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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