United Community Financial (UCFC) 10-Q 2015 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, 2015

¨ 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. 47,772,682 common shares as of July 31, 2015.

TABLE OF CONTENTS

			PAGE
Part I. FINANCIAL INFORMATION
	Item 1.	Financial Statements	3
	Consolidated Statements of Financial Condition as of June 30, 2015 (Unaudited) and December 31, 2014		3
	Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2015 and 2014 (Unaudited)		4
	Consolidated Statement of Shareholders’ Equity for the Six Months ended June 30, 2015 and 2014 (Unaudited)		6
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 (Unaudited)		7
	Notes to Consolidated Financial Statements (Unaudited)		8-48
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	50-59
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	60
	Item 4.	Controls and Procedures	61
Part II.OTHER INFORMATION			62
	Item 1.	Legal Proceedings	62
	Item 1A.	Risk Factors	62
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62
	Item 3.	Defaults Upon Senior Securities (None)
	Item 4.	Mine Safety Disclosures (None)
	Item 5.	Other Information (None)
	Item 6.	Exhibits	63
Signatures			64
Exhibits			65

2

PART I—FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

	June 30,			December 31,
	2015			2014
	(Dollars in thousands)
Assets:
Cash and deposits with banks	$	25,575		$	21,152
Federal funds sold		23,408			11,828
Total cash and cash equivalents		48,983			32,980
Securities:
Available for sale, at fair value		472,972			499,790
Held to maturity, nontaxable (fair value of $4,679 and $0, respectively)		4,775			—
Loans held for sale, at lower of cost or market		25,263			20,730
Loans held for sale, at fair value		9,839			—
Loans, net of allowance for loan losses of $16,881 and $17,687		1,224,468			1,148,093
Federal Home Loan Bank stock, at cost		18,068			18,068
Premises and equipment, net		20,567			21,002
Accrued interest receivable		5,768			5,763
Real estate owned and other repossessed assets, net		3,361			3,467
Core deposit intangible		56			84
Cash surrender value of life insurance		54,073			46,401
Other assets		34,596			37,172
Total assets	$	1,922,789		$	1,833,550
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Interest bearing	$	1,233,019		$	1,159,871
Non-interest bearing		206,228			187,965
Total deposits		1,439,247			1,347,836
Borrowed funds:
Federal Home Loan Bank advances
Long-term Federal Home Loan Bank advances		46,585			46,194
Short-term Federal Home Loan Bank advances		145,500			140,000
Total Federal Home Loan Bank advances		192,085			186,194
Repurchase agreements and other		30,546			30,558
Total borrowed funds		222,631			216,752
Advance payments by borrowers for taxes and insurance		15,085			19,904
Accrued interest payable		227			185
Accrued expenses and other liabilities		9,137			8,738
Total liabilities		1,686,327			1,593,415
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 47,763,154 and 49,239,004 shares, respectively, outstanding		174,076			174,385
Retained earnings		134,820			128,512
Accumulated other comprehensive income (loss)		(22,045	)		(19,998	)
Treasury stock, at cost, 6,375,756 and 4,899,906 shares, respectively		(50,389	)		(42,764	)
Total shareholders’ equity		236,462			240,135
Total liabilities and shareholders’ equity	$	1,922,789		$	1,833,550

See Notes to Consolidated Financial Statements. 

3

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

	For the Three Months Ended June 30,							For the Six Months Ended June 30,
	2015			2014			��	2015			2014
	(Dollars in thousands, except per share data)
Interest income
Loans	$	12,890		$	12,361			$	25,581		$	24,483
Loans held for sale		341			74				635			123
Securities available for sale		2,679			3,125				5,540			6,366
Securities held to maturity (nontaxable)		12			—				12			—
Federal Home Loan Bank stock dividends		178			230				360			497
Other interest earning assets		11			21				17			47
Total interest income		16,111			15,811				32,145			31,516
Interest expense
Deposits		1,639			1,627				3,172			3,304
Federal Home Loan Bank advances		302			524				607			1,042
Repurchase agreements and other		319			919				635			1,827
Total interest expense		2,260			3,070				4,414			6,173
Net interest income		13,851			12,741				27,731			25,343
(Recovery) provision for loan losses		753			(1,614	)			569			(1,581	)
Net interest income after provision for loan losses		13,098			14,355				27,162			26,924
Non-interest income
Non-deposit investment income		248			407				540			748
Mortgage servicing fees		681			686				1,355			1,375
Deposit related fees		1,341			1,331				2,406			2,529
Mortgage servicing rights valuation		206			(5	)			45			(6	)
Mortgage servicing rights amortization		(462	)		(432	)			(905	)		(824	)
Other service fees		20			—				37			—
Net gains (losses):
Securities available for sale (includes $0, $31, $11 and $34,    respectively, accumulated other comprehensive income    reclassifications for unrealized net gains on available    for sale securities)		—			31				11			34
Mortgage banking income		2,187			312				3,179			924
Change in fair value of loans held for sale, carried at fair value		(146	)		—				415			—
Real estate owned and other repossessed assets, net		(102	)		(42	)			(192	)		(425	)
Card fees		925			852				1,741			1,624
Other income		377			298				761			683
Total non-interest income		5,275			3,438				9,393			6,662
Non-interest expense
Salaries and employee benefits		6,898			8,282				14,074			15,862
Occupancy		768			815				1,686			1,748
Equipment and data processing		1,719			1,963				3,391			3,761
Franchise tax		326			198				652			396
Advertising		221			247				363			436
Amortization of core deposit intangible		13			16				27			35
FDIC insurance premiums		307			327				633			580
Other insurance premiums		85			135				169			272
Legal and consulting fees		311			177				528			338
Other professional fees		386			617				762			1,009
Real estate owned and other repossessed asset expenses		18			137				159			350
Other expenses		1,156			1,312				2,445			2,982
Total non-interest expenses		12,208			14,226				24,889			27,769
Income before income taxes		6,165			3,567				11,666			5,817
Income tax expense (includes $0, $11,  $4 and $12 income tax    expense from reclassification items)		2,040			(38,837	)			3,855			(38,681	)
Net income	$	4,125		$	42,404			$	7,811		$	44,498

(Continued)

4

(Continued)

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
		2015			2014			2015			2014
	(Dollars in thousands, except per share data)
Net income	$	4,125		$	42,404		$	7,811		$	44,498
Other comprehensive income
Unrealized (loss) gain on securities, net of tax		(5,937	)		3,216			(2,040	)		15,786
Reclassification adjustment for (gains) losses, net of tax		—			(20	)		(7	)		(22	)
Total other comprehensive (loss) income	$	(5,937	)	$	3,196		$	(2,047	)	$	15,764
Comprehensive (loss) income	$	(1,812	)	$	45,600		$	5,764		$	60,262
Earnings per share
Basic	$	0.08		$	0.84		$	0.16		$	0.88
Diluted		0.08			0.84			0.16			0.88

See Notes to Consolidated Financial Statements.

5

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Unaudited)

	Common Shares Outstanding			Common Stock			Retained Earnings			Accumulated Other Comprehensive Income(Loss)			Treasury Stock			Total
	(Dollars in thousands, except per share data)
Balance January 1, 2015		49,239,004		$	174,385		$	128,512		$	(19,998	)	$	(42,764	)	$	240,135
Net income								7,811									7,811
Comprehensive loss											(2,047	)					(2,047	)
Stock option exercises		13,000						(87	)					113			26
Stock option expenses					13												13
Restricted stock grants		130,458			(694	)		(444	)					1,138			—
Restricted stock forfeitures		(8,091	)		6			12						(52	)		(34	)
Restricted stock amortization					366												366
Cash dividend payments ($0.02 per share)								(984	)								(984	)
Treasury stock purchases		(1,611,217	)											(8,824	)		(8,824	)
Balance June 30, 2015		47,763,154		$	174,076		$	134,820		$	(22,045	)	$	(50,389	)	$	236,462

	Common Shares Outstanding			Common Stock			Retained Earnings			Accumulated Other Comprehensive Income(Loss)			Treasury Stock			Total
	(Dollars in thousands, except per share data)
Balance January 1, 2014		50,339,089		$	174,719		$	81,515		$	(41,665	)	$	(39,495	)	$	175,074
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

See Notes to Consolidated Financial Statements.

6

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Six Months Ended June 30,
	2015			2014
	(Dollars in thousands)
Cash Flows from Operating Activities
Net income	$	7,811		$	44,498
Adjustments to reconcile net income to net cash provided by operating activities
(Recovery) provision for loan losses		569			(1,581	)
Mortgage banking income		(3,179	)		(924	)
Changes in fair value on loans held for sale		(415	)		—
Net losses on real estate owned and other repossessed assets sold		192			425
Net gain on available for sale securities sold		(11	)		(34	)
Net (gain) loss on other assets sold		(21	)		7
Amortization of premiums and accretion of discounts		629			483
Depreciation and amortization		1,041			988
Net change in interest receivable		(5	)		(68	)
Net change  in interest payable		42			23
Net change  in prepaid and other assets		713			2,614
Net change in other liabilities		399			732
Stock based compensation		345			149
Net principal disbursed on loans originated for sale		(113,776	)		(65,276	)
Proceeds from sale of loans held for sale		102,998			61,749
Net change in deferred tax assets		3,724			(38,681	)
Cash surrender value of life insurance		(672	)		(712	)
Net change in interest rate caps		155			332
Net cash from operating activities		539			4,724
Cash Flows from Investing Activities
Proceeds from the principal repayments and maturities of securities available for sale		16,956			12,195
Proceeds from the sale of securities available for sale		5,153			5,042
Proceeds from the sale of real estate owned and other repossessed assets		1,520			2,221
Proceeds from the sale of premises and equipment		154			30
Purchases of premises and equipment		(721	)		(476	)
Principal disbursed on loans, net of repayments		(73,074	)		(56,796	)
Loans purchased		(5,045	)		—
Purchase of municipal securities held to maturity		(4,777	)		—
Purchase of bank owned life insurance		(7,000	)		—
Redemption of FHLB stock		—			8,396
Net cash from investing activities		(66,834	)		(29,388	)
Cash Flows from Financing Activities
Net increase in checking, savings and money market accounts		70,000			24,072
Net increase (decrease) in certificates of deposit		21,411			(40,350	)
Net decrease in advance payments by borrowers for taxes and insurance		(4,819	)		(7,352	)
Proceeds from overnight FHLB advances		238,500			20,000
Repayments of overnight FHLB advances		(233,000	)		(5,000	)
Repayments of repurchase agreements and other borrowed funds		(12	)		(11	)
Proceeds from the exercise of stock options		26			162
Dividends paid		(984	)		—
Purchase of treasury stock		(8,824	)		(598	)
Net cash from financing activities		82,298			(9,077	)
Change in cash and cash equivalents		16,003			(33,741	)
Cash and cash equivalents, beginning of period		32,980			77,331
Cash and cash equivalents, end of period	$	48,983		$	43,590

See Notes to Consolidated Financial Statements

7

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, 32 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, 2015, are not necessarily indicative of the results to be expected for the year ending December 31, 2015. 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, 2014.

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

2. RECENT ACCOUNTING DEVELOPMENTS

In January 2014, FASB issued Accounting Standards Update (ASU) 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 did not have a material impact on the Company’s consolidated financial statements, but did result in additional disclosures.

In May 2014, FASB issued ASU 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, 2017. Early adoption is not permitted. Management is currently evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements.

In June 2014, the FASB issued Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in this ASU change the accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements. The amendments also require two new disclosures. The first disclosure requires an entity to disclose information on transfers accounted for as sales in transactions that are economically similar to repurchase agreements. The second disclosure provides increased transparency about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The accounting changes are effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. The disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, with all other disclosure requirements required to be

8

presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The adoption of this guidance as of January 1, 2015 did not have an impact on the Company’s consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The ASU amends the current consolidation guidance and affects both the variable interest entity and voting interest entity consolidation models. The new guidance is effective for annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. Management is currently evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements.

3. STOCK COMPENSATION

Stock Options:

On April 30, 2015, shareholders approved the United Community Financial Corp. 2015 Long Term Incentive Compensation Plan (the 2015 Plan). The purpose of the 2015 Plan is to provide a means through which United Community may attract and retain employees and non-employee directors, to provide incentives that align their interest with those of United Community’s shareholders and promote the success of United Community’s business.  All employees and non-employee directors are eligible to participate in the 2015 Plan.  The 2015 Plan provides for the issuance of up to 1,200,000 shares that are to be used for awards of stock options, stock awards, stock units, stock appreciation rights, annual bonus awards and long term incentive awards.

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 was 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 was terminated on April 30, 2015 upon the adoption of the 2015 Plan although the 2007 Plan survives so long as awards issued under the 2007 Plan remain outstanding and exercisable.  The 2007 Plan provided for the issuance of up to 2,000,000 shares that were to be used for awards of restricted stock, stock options, performance awards, stock appreciation rights (SARs), or other forms of stock-based incentive awards.

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.

There were 4,359 stock options granted in the six months ended June 30, 2015 and there were 3,623 stock options granted in the six months ended June 30, 2014 under the 2007 Plan. The options must be exercised within 10 years from the date of grant.  Expenses related to stock option grants are included with salaries and employee benefits. The Company recognized $6,200 and $13,000, in stock option expenses for the three and six months ended June 30, 2015, respectively.  The Company recognized $6,000 and $13,000 in stock option expenses for the three and six months ended June 30, 2014, respectively. The Company expects to recognize additional expense of $10,000 for the remainder of 2015 and $7,000 in 2016.

A summary of activity in the plans is as follows:

	For the six months ended
	June 30, 2015
				Weighted		Aggregate
				average		intrinsic value
	Shares			exercise price		(in thousands)
Outstanding at beginning of year		579,905		$	2.52
Granted		4,359			5.43
Exercised		(13,000	)		1.98
Forfeited and expired		—			—
Outstanding at end of period		571,264			2.55	$	1,638
Options exercisable at end of period		553,014			2.49	$	1,618

9

Information related to the stock option plans for the six months ended June 30, 2015 and 2014 follows:

	June 30, 2015		June 30, 2014
Intrinsic value of options exercised	$	43,641	$	135,800
Cash received from option exercises		25,700		162,000
Tax benefit realized from option exercises		—		10,267
Weighted average fair value of options granted, per share	$	1.72	$	1.70

As of June 30, 2015, the cost of nonvested stock options is expected to be recognized over a weighted-average period of 2.0 years.

The fair value of options granted during the three and six months ended June 30, 2015 and 2014 was determined using the following weighted-average assumptions as of the grant date:

	Three months ended						Six months ended
	June 30, 2015			June 30, 2014			June 30, 2015			June 30, 2014
Risk-free interest rate		1.35	%		1.79	%		1.42	%		1.76	%
Expected term (years)		5			5			5			5
Expected stock volatility		36.17	%		58.62	%		36.42	%		64.98	%
Dividend yield		0.72	%		—	%		0.74	%		—	%

Outstanding stock options at June 30, 2015 have a weighted average remaining life of 4.54 years and may be exercised in the range of $1.20 to $5.89.

Restricted Stock Awards:

The 2007 Plan permitted the issuance of restricted stock awards to employees and nonemployee directors. Nonvested shares at June 30, 2015 aggregated 264,228, of which 32,230 will vest during 2015, 96,254 will vest in 2016, 84,821 will vest in 2017 and 50,923 will vest in 2018. 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 $176,000 and $366,000 in restricted stock award expenses for the three and six months ended June 30, 2015, respectively, and approximately $58,000 and $236,000 in restricted stock award expenses for the three and six months ended June 30, 2014. The Company expects to recognize additional expenses of approximately $333,000 in 2015, $503,000 in 2016, $253,000 in 2017 and $93,000 in 2018.

A summary of changes in the Company’s nonvested restricted shares for the six months ended June 30, 2015 is as follows:

	For the six months ended
	June 30, 2015
				Weighted
				average
				grant date
	Shares			fair value
Nonvested at beginning of year		223,624		$	3.88
Granted		130,458			5.32
Vested		(81,763	)		4.20
Forfeited		(8,091	)		4.87
Nonvested shares at end of period		264,228		$	4.46

Executive Incentive Plan

The Executive Incentive Plan (“EIP”) provides incentive compensation awards to certain officers of the Company. Executive incentive awards are generally based upon the actual performance of the Company for the twelve months ending December 31, compared to the actual performance of a peer group during the same twelve month period. The target incentive awards for each year are measured as a percentage of the base salary of participating officers.  Once the awards under the EIP are calculated, they are paid 80% in cash and 20% in restricted stock. The restricted stock will be granted and vest equally over three years, beginning on the first anniversary of the date the restricted stock is issued.  The Company incurred $62,000 and $131,000 in expense for the restricted stock portion of the EIP and $319,000 and $487,000 for the cash portion of the EIP for the three and six months ended June 30, 2015, respectively.  The Company incurred $51,000 and $157,000 in expense for the restricted stock portion of the EIP and $160,000 and

10

$260,000 for the cash portion of the EIP for the three and six months ended June 30, 2014, respectively.  Restricted stock expenses for the EIP are included in the total restricted stock expenses discussed above.  

Long-term Incentive Plan

The Long-term Incentive Plan (“LTIP”) provides a long-term incentive compensation opportunity to certain executive officers, whose participation and target award opportunities will be approved by the Compensation Committee of the Board of Directors. Each participant in the LTIP will be granted a target number of Performance Share Units (“PSUs”).  Target PSUs will be determined as a percentage of base salary and translated into share units based on the Company’s average stock price at the appropriate measurement date.  The performance period for the annual grant for a given year will be from January 1, year 1 through December 31, year 3.   The Company incurred $23,000 and $71,000 in expense for the LTIP for the three and six months ended June 30, 2015, respectively.  The Company incurred $6,000 and $44,000 in expense for the LTIP for the three and six months ended June 30, 2014, respectively.

4. SECURITIES

Components of the available for sale portfolio are as follows:

	June 30, 2015
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(Dollars in thousands)
Available for Sale
U.S. Treasury and government sponsored entities' securities	$	226,539	$	125	$	(5,569	)	$	221,095
Mortgage-backed GSE securities: residential		256,221		93		(4,437	)		251,877
Total	$	482,760	$	218	$	(10,006	)	$	472,972

	December 31, 2014
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(Dollars in thousands)
Available for Sale
U.S. Treasury and government sponsored entities' securities	$	232,225	$	184	$	(4,452	)	$	227,957
Mortgage-backed GSE securities: residential		274,204		331		(2,702	)		271,833
Total	$	506,429	$	515	$	(7,154	)	$	499,790

Components of held to maturity securities portfolio are as follows:

	June 30, 2015
			Gross		Gross
	Amortized		unrecognized		unrecognized			Fair
	cost		gains		losses			value
	(Dollars in thousands)
Held to maturity
States of the U.S. and political subdivisions	$	4,775	$	—	$	(96	)	$	4,679
Total	$	4,775	$	—	$	(96	)	$	4,679

The Company had no held to maturity securities at December 31, 2014.

11

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

	June 30, 2015
	Amortized cost		Fair value
	(Dollars in thousands)
Due in one year or less	$	—	$	—
Due after one year through five years		—		—
Due after five years through ten years		199,219		194,901
Due after ten years		27,320		26,194
Mortgage-backed GSE securities: residential		256,221		251,877
Total	$	482,760	$	472,972

Debt securities held to maturity by contractual maturity, repricing or expected call date are shown below:

	June 30, 2015
	Amortized cost		Fair value
	(Dollars in thousands)
Due in one year or less	$	—	$	—
Due after one year through five years		—		—
Due after five years through ten years		570		561
Due after ten years		4,205		4,118
Mortgage-backed GSE securities: residential	$	—	$	—
Total	$	4,775	$	4,679

Securities pledged for participation in the Ohio Linked Deposit Program were $0 at June 30, 2015 and approximately $501,000 at December 31, 2014.  Securities pledged for public funds were approximately $109.5 million at June 30, 2015 and $36.2 million at December 31, 2014.  Securities pledged for borrowings, including repurchase agreements, were approximately $64.3 million at June 30, 2015 and $82.2 million at December 31, 2014.

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, 2015
	Less than 12 months					12 months or more					Total
	Fair		Unrealized loss			Fair		Unrealized loss			Fair		Unrealizedloss
	value		Loss			value		Loss			value		Loss
	(Dollars in thousands)
Description of securities:
U.S. Treasury and government sponsored entities	$	153,352	$	(3,434	)	$	54,383	$	(2,135	)	$	207,735	$	(5,569	)
Mortgage-backed GSE securities: residential		121,603		(1,280	)		103,555		(3,157	)		225,158		(4,437	)
Total temporarily impaired securities	$	274,955	$	(4,714	)	$	157,938	$	(5,292	)	$	432,893	$	(10,006	)

	December 31, 2014
	Less than 12 months					12 months or more					Total
	Fair		Unrealized loss			Fair		Unrealized loss			Fair		Unrealized loss
	value		Loss			value		Loss			value		Loss
	(Dollars in thousands)
Description of securities:
U.S. Treasury and government sponsored entities	$	—	$	—		$	214,495	$	(4,452	)	$	214,495	$	(4,452	)
Mortgage-backed GSE securities: residential		4,625		(40	)		193,434		(2,662	)		198,059		(2,702	)
Total temporarily impaired securities	$	4,625	$	(40	)	$	407,929	$	(7,114	)	$	412,554	$	(7,154	)

12

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

	June 30, 2015
	Less than 12 months					12 months or more				Total
	Fair		Unrealized loss			Fair		Unrealized loss		Fair		Unrealized loss
	value		Loss			value		Loss		value		Loss
	(Dollars in thousands)
Description of securities:
States of the U.S. and political subdivisions	$	4,679	$	(96	)	$	—	$	—	$	4,679	$	(96	)
Total temporarily impaired securities	$	4,679	$	(96	)	$	—	$	—	$	4,679	$	(96	)

All of the U.S. Treasury and government sponsored entities (GSE) and mortgage-backed securities that were temporarily impaired at June 30, 2015 and December 31, 2014, were impaired due to the level of interest rates at that time. Unrealized losses on these securities have not been recognized into income as of June 30, 2015 and December 31, 2014 because the issuer’s securities are of high credit quality (rated AA or higher), 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. There is risk that longer term rates could rise further resulting in greater unrealized losses.  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 no intent to sell and more than likely will not be required to sell these securities before their anticipated recovery.

At June 30, 2015 and December 31, 2014, 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 did not consider these securities to be other-than-temporarily impaired at June 30, 2015 or December 31, 2014. The Company expects to realize all interest and principal on these securities.

At June 30, 2015, all of the obligations of U.S. states and political subdivisions were impaired due to the level of interest rates at that time.  Unrealized losses on these securities have not been recognized into income as of June 30, 2015 because the issuer’s securities are of high credit quality (rated AA or higher), 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.

Proceeds from the sale of available for sale securities were $0 and $5.0 million for the three months ended June 30, 2015 and 2014, respectively.  Gross gains of $0 and $31,000 were realized on these sales during the three months ended June 30, 2015 and 2014, respectively.

Proceeds from the sales of available for sale securities were $5.2 million and $5.0 million for the six months ended June 30, 2015 and 2014, respectively.  Gross gains of $11,000 and $34,000 were realized on these sales during the six months ended June 30, 2015 and 2014, respectively.

13

5. LOANS

Portfolio loans consist of the following:

	June 30,			December 31,
	2015			2014
	(Dollars in thousands)
Commercial loans
Multifamily	$	69,485		$	60,546
Nonresidential		148,025			121,595
Land		10,231			9,484
Construction		16,265			16,064
Secured		68,813			45,088
Unsecured		456			134
Total commercial loans		313,275			252,911
Residential mortgage loans
One-to four-family		709,342			694,105
Construction		34,074			37,113
Total residential mortgage loans		743,416			731,218
Consumer loans
Home equity		157,909			154,776
Auto		8,169			5,902
Marine		3,054			3,917
Recreational vehicle		12,611			14,054
Other		1,953			2,105
Total consumer loans		183,696			180,754
Total loans		1,240,387			1,164,883
Less:
Allowance for loan losses		16,881			17,687
Deferred loan costs, net		(962	)		(897	)
Total		15,919			16,790
Loans, net	$	1,224,468		$	1,148,093

14

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, 2015 and December 31, 2014 and activity for the three and six months ended June 30, 2015 and 2014.

Allowance For Loan Losses

	Commercial Loans			Residential Loans			Consumer Loans			Total
	(Dollars in thousands)
For the three months ended June 30, 2015
Beginning balance	$	5,945		$	7,666		$	3,610		$	17,221
Provision (recovery)		1,015			(278	)		16			753
Charge-offs		(779	)		(328	)		(357	)		(1,464	)
Recoveries		208			22			141			371
Ending balance	$	6,389		$	7,082		$	3,410		$	16,881
For the six months ended June 30, 2015
Beginning balance	$	5,690		$	8,517		$	3,480		$	17,687
Provision (recovery)		1,173			(1,149	)		545			569
Charge-offs		(794	)		(494	)		(888	)		(2,176	)
Recoveries		320			208			273			801
Ending balance	$	6,389		$	7,082		$	3,410		$	16,881
June 30, 2015
Period-end amount allocated to:
Loans individually evaluated for impairment	$	673		$	1,651		$	761		$	3,085
Loans collectively evaluated for impairment		5,716			5,431			2,649			13,796
Ending balance	$	6,389		$	7,082		$	3,410		$	16,881
Period-end balances:
Loans individually evaluated for impairment	$	13,592		$	19,239		$	11,023		$	43,854
Loans collectively evaluated for impairment		299,683			724,177			172,673			1,196,533
Ending balance	$	313,275		$	743,416		$	183,696		$	1,240,387

15

Allowance For Loan Losses

	Commercial Loans			Residential Loans			Consumer Loans			Total
	(Dollars in thousands)
For the three months ended June 30, 2014
Beginning balance	$	7,275		$	9,337		$	3,942		$	20,554
Provision (recovery)		(1,565	)		(201	)		152			(1,614	)
Charge-offs		(509	)		(236	)		(447	)		(1,192	)
Recoveries		318			55			143			516
Ending balance	$	5,519		$	8,955		$	3,790		$	18,264
For the six months ended June 30, 2014
Beginning balance	$	6,984		$	9,830		$	4,302		$	21,116
Provision (recovery)		(1,075	)		(531	)		25			(1,581	)
Charge-offs		(951	)		(551	)		(854	)		(2,356	)
Recoveries		561			207			317			1,085
Ending balance	$	5,519		$	8,955		$	3,790		$	18,264
December 31, 2014
Period-end amount allocated to:
Loans individually evaluated for impairment	$	717		$	1,751		$	842		$	3,310
Loans collectively evaluated for impairment		4,973			6,766			2,638			14,377
Ending balance	$	5,690		$	8,517		$	3,480		$	17,687
Period-end balances:
Loans individually evaluated for impairment	$	14,845		$	19,209		$	11,843		$	45,897
Loans collectively evaluated for impairment		238,066			712,009			168,911			1,118,986
Ending balance	$	252,911		$	731,218		$	180,754		$	1,164,883

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.

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required based on an analysis using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations, estimated collateral values, general economic conditions in the market area and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

Other loans not reviewed specifically by management are evaluated as a homogenous group of loans (generally single-family residential mortgage loans and all consumer credits except marine loans) using a loss factor applied to the outstanding loan balance to determine the level of reserve required. This loss factor consists of two components, a quantitative and a qualitative component. The quantitative component is based on a historical analysis of all charged-off loans, net of recovery. In determining the qualitative factors, consideration is given to such attributes as lending policies, economic conditions, nature and volume of the portfolio, management, loan quality trend, loan review, collateral value, concentrations and other external factors.  At December 31, 2014, the Company evaluated two years of net charge-off history and applied the information to the current period. This component was combined with the qualitative component to arrive at the loss factor, which is applied to the outstanding principal balance by type of credit and internal risk grade applied to specific risk pools, plus specific loss allocations and adjustments for current events and conditions. As of June 30, 2015, the Company evaluated 11 quarters of net charge-off history and applied this information to the current period.  This component is combined with the qualitative component to arrive at the loss factor, which is applied to the average outstanding balance of homogenous loans and is no longer being applied by internal risk grade. This change in methodology, which was made in the first quarter of 2015, did not have a material effect on the calculation of the allowance for loan losses.  The change in methodology was made in order to facilitate technological improvements in the calculation of the allowance for loan loss.  

16

The following table presents loans individually evaluated for impairment by class of loans as of and for six months ended June 30, 2015:

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
Commercial loans
Multifamily	$	109	$	—	$	—	$	64	$	3	$	3
Nonresidential		4,175		2,431		—		3,567		3		80
Land		3,922		496		—		523		—		—
Construction		1,126		88		—		276		—		—
Secured		3,892		3,700		—		3,702		—		1
Unsecured		1,357		—		—		—		—		26
Total commercial loans		14,581		6,715		—		8,132		6		110
Residential mortgage loans
One-to four-family		5,925		4,411		—		4,939		27		62
Construction		—		—		—		—		—		—
Total residential mortgage loans		5,925		4,411		—		4,939		27		62
Consumer loans
Home equity		1,940		1,388		—		1,586		9		24
Auto		30		22		—		47		—		1
Marine		510		284		—		221		2		12
Recreational vehicle		95		66		—		117		1		2
Other		—		—		—		1		—		—
Total consumer loans		2,575		1,760		—		1,972		12		39
Total	$	23,081	$	12,886	$	—	$	15,043	$	45	$	211
With a specific allowance recorded
Commercial loans
Multifamily	$	153	$	85	$	17	$	31	$	—	$	—
Nonresidential		6,321		6,141		611		4,833		72		75
Land		—		—		—		—		—		—
Construction		2,815		327		42		967		—		—
Secured		324		324		3		324		—		—
Unsecured		—		—		—		—		—		—
Total commercial loans		9,613		6,877		673		6,155		72		75
Residential mortgage loans
One-to four-family		14,828		14,828		1,651		14,524		280		302
Construction		—		—		—		—		—		—
Total residential mortgage loans		14,828		14,828		1,651		14,524		280		302
Consumer loans
Home equity		8,554		8,554		646		9,260		211		224
Auto		4		4		—		6		—		—
Marine		—		—		—		—		—		—
Recreational vehicle		705		705		115		723		10		10
Other		—		—		—		—		—		—
Total consumer loans		9,263		9,263		761		9,989		221		234
Total		33,704		30,968		3,085		30,668		573		611
Total impaired loans	$	56,785	$	43,854	$	3,085	$	45,711	$	618	$	822

17

The following tables present loans individually evaluated for impairment by class of loans as of and for 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
Commercial loans
Multifamily	$	185	$	86	$	—	$	347	$	—	$	—
Nonresidential		5,304		3,684		—		4,536		—		20
Land		3,958		532		—		498		—		—
Construction		1,741		739		—		824		—		—
Secured		3,945		3,708		—		3,948		—		2
Unsecured		3,783		—		—		—		—		57
Total commercial loans		18,916		8,749		—		10,153		-		79
Residential mortgage loans
One-to four-family		7,571		6,020		—		8,558		29		148
Construction		—		—		—		—		—		—
Total residential mortgage loans		7,571		6,020		—		8,558		29		148
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 consumer loans		3,309		2,562		—		4,990		6		68
Total	$	29,796	$	17,331	$	—	$	23,701	$	35	$	295
With a specific allowance recorded
Commercial loans
Multifamily	$	73	$	48	$	6	$	326	$	—	$	—
Nonresidential		1,865		1,385		78		1,015		2		7
Land		—		—		—		—		—		—
Construction		3,436		1,811		202		2,140		—		—
Secured		324		324		3		162		—		—
Unsecured		—		—		—		—		—		—
Total commercial loans		5,698		3,568		289		3,643		2		7
Residential mortgage loans
One-to four-family		15,252		15,252		2,246		11,761		292		305
Construction		—		—		—		—		—		—
Total residential mortgage loans		15,252		15,252		2,246		11,761		292		305
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 consumer loans		11,117		10,929		1,090		8,315		257		271
Total		32,067		29,749		3,625		23,719		551		583
Total impaired loans	$	61,863	$	47,080	$	3,625	$	47,420	$	586	$	878

18

The following table present loans individually evaluated for impairment by class of loans as of December 31, 2014:

Impaired Loans

(Dollars in thousands)

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no specific allowance recorded
Commercial loans
Multifamily	$	185	$	85	$	—
Nonresidential		7,201		5,582		—
Land		3,958		532		—
Construction		1,126		188		—
Secured		3,903		3,702		—
Unsecured		3,258		—		—
Total commercial loans		19,631		10,089		—
Residential mortgage loans
One-to four-family		6,015		4,518		—
Construction		—		—		—
Total residential mortgage loans		6,015		4,518		—
Consumer loans
Home equity		1,901		1,262		—
Auto		47		37		—
Marine		151		151		—
Recreational vehicle		124		81		—
Other		—		—		—
Total consumer loans		2,223		1,531		—
Total	$	27,869	$	16,138	$	—
With a specific allowance recorded
Commercial loans
Multifamily	$	33	$	8	$	6
Nonresidential		3,944		3,561		615
Land		—		—		—
Construction		2,815		863		93
Secured		324		324		3
Unsecured		—		—		—
Total commercial loans		7,116		4,756		717
Residential mortgage loans
One-to four-family		14,691		14,691		1,751
Construction		—		—		—
Total residential mortgage loans		14,691		14,691		1,751
Consumer loans
Home equity		9,577		9,577		722
Auto		7		6		1
Marine		—		—		—
Recreational vehicle		729		729		119
Other		—		—		—
Total consumer loans		10,313		10,312		842
Total		32,120		29,759		3,310
Total impaired loans	$	59,989	$	45,897	$	3,310

19

The following table present loans individual evaluated for impairment by class of loans as of and for the three months ended June 30, 2015

Impaired Loans
(Dollars in thousands)
	Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With no specific allowance recorded
Commercial loans
Multifamily	$	43	$	1	$	2
Nonresidential		2,441		2		41
Land		514		—		—
Construction		138		—		—
Secured		3,700		—		—
Unsecured		—		—		7
Total commercial loans		6,836		3		50
Residential mortgage loans
One-to four-family		4,530		17		30
Construction		—		—		—
Total residential mortgage loans		4,530		17		30
Consumer loans
Home equity		1,534		4		18
Auto		27		—		—
Marine		289		—		7
Recreational vehicle		68		1		1
Other		—		—		—
Total consumer loans		1,918		5		26
Total	$	13,284	$	25	$	106
With a specific allowance recorded
Commercial loans
Multifamily	$	43	$	—	$	—
Nonresidential		6,254		34		36
Land		—		—		—
Construction		595		—		—
Secured		324		—		—
Unsecured		—		—		—
Total commercial loans		7,216		34		36
Residential mortgage loans
One-to four-family		14,712		142		146
Construction		—		—		—
Total residential mortgage loans		14,712		142		146
Consumer loans
Home equity		8,905		108		114
Auto		5		—		—
Marine		—		—		—
Recreational vehicle		711		4		4
Other		—		—		—
Total consumer loans		9,621		112		118
Total		31,549		288		300
Total impaired loans	$	44,833	$	313	$	406

20

The following table present loans individual 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
Commercial loans
Multifamily	$	88	$	—	$	1
Nonresidential		3,802		—		10
Land		510		—		—
Construction		690		—		—
Secured		3,710		—		1
Unsecured		—		9		23
Total commercial loans		8,800		9		35
Residential mortgage loans
One-to four-family		5,226		13		84
Construction		—		—		—
Total residential mortgage loans		5,226		13		84
Consumer loans
Home equity		1,875		2		21
Auto		65		—		2
Marine		157		—		2
Recreational vehicle		195		1		4
Other		4		—		—
Total consumer loans		2,296		3		29
Total	$	16,322	$	25	$	148
With a specific allowance recorded
Commercial loans
Multifamily	$	567	$	—	$	—
Nonresidential		1,404		1		3
Land		—		—		—
Construction		2,026		—		—
Secured		324		—		—
Unsecured		—		—		—
Total commercial loans		4,321		1		3
Residential mortgage loans
One-to four-family		15,742		145		148
Construction		—		—		—
Total residential mortgage loans		15,742		145		148
Consumer loans
Home equity		10,399		124		131
Auto		9		—		—
Marine		—		—		—
Recreational vehicle		794		7		7
Other		—		—		—
Total consumer loans		11,202		131		138
Total		31,265		277		289
Total impaired loans	$	47,587	$	302	$	437

21

Home Savings reclassifies a collateralized mortgage loan and consumer loans secured by real estate to real estate owned and other repossessed assets once it has either obtained legal title to the real estate collateral or the borrower voluntarily conveys all interest in the real property to the Bank to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement.  The table below presents loans that are in the process of foreclosure at June 30, 2015 and December 31, 2014 but legal title, deed in lieu of foreclosure or similar legal agreement to the property has not yet been obtained:

	June 30, 2015				December 31, 2014
	Unpaid Principal Balance		Recorded Investment		Unpaid Principal Balance		Recorded Investment
	(Dollars in thousands)				(Dollars in thousands)
Mortgage loans in process of foreclosure	$	2,176	$	2,105	$	1,714	$	1,661
Consumer loans in process of foreclosure		1,035		846		707		489

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, 2015:

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

As of June 30, 2015

	Nonaccrual		Loans past due over 90 days and still accruing
	(Dollars in thousands)
Commercial loans
Multifamily	$	85	$	—
Nonresidential		5,637		—
Land		496		—
Construction		415		—
Secured		4,016		—
Unsecured		—		—
Total commercial loans		10,649		—
Residential mortgage loans
One-to four-family		6,475		—
Construction		—		—
Total residential mortgage loans		6,475		—
Consumer Loans
Home equity		1,490		—
Auto		39		—
Marine		242		—
Recreational vehicle		114		—
Other		2		—
Total consumer loans		1,887		—
Total nonaccrual loans and loans past due over 90 days and still accruing	$	19,011	$	—

22

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, 2014:

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

As of December 31, 2014

	Nonaccrual		Loans past due over 90 days and still accruing
	(Dollars in thousands)
Commercial loans
Multifamily	$	93	$	—
Nonresidential		5,781		—
Land		531		—
Construction		1,051		—
Secured		4,016		—
Unsecured		—		—
Total commercial loans		11,472		—
Residential mortgage loans
One-to four-family		6,816		—
Construction		—		—
Total residential mortgage loans		6,816		—
Consumer Loans
Home equity		1,792		—
Auto		66		—
Marine		119		—
Recreational vehicle		184		—
Other		2		—
Total consumer loans		2,163		—
Total nonaccrual loans and loans past due over 90 days and still accruing	$	20,451	$	—

23

The following table presents an age analysis of past-due loans, segregated by class of loans as of June 30, 2015:

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
Commercial loans
Multifamily	$	—	$	—	$	85	$	85	$	69,400	$	69,485
Nonresidential		13		—		3,783		3,796		144,229		148,025
Land		—		—		496		496		9,735		10,231
Construction		—		—		415		415		15,850		16,265
Secured		—		—		4,016		4,016		64,797		68,813
Unsecured		—		—		—		—		456		456
Total commercial loans		13		—		8,795		8,808		304,467		313,275
Residential mortgage loans
One-to four-family		1,414		636		4,207		6,257		703,085		709,342
Construction		—		—		—		—		34,074		34,074
Total residential mortgage loans		1,414		636		4,207		6,257		737,159		743,416
Consumer Loans:
Home equity		472		136		1,122		1,730		156,179		157,909
Automobile		9		—		11		20		8,149		8,169
Marine		287		—		95		382		2,672		3,054
Recreational vehicle		33		557		16		606		12,005		12,611
Other		—		3		—		3		1,950		1,953
Total consumer loans		801		696		1,244		2,741		180,955		183,696
Total loans	$	2,228	$	1,332	$	14,246	$	17,806	$	1,222,581	$	1,240,387

24

The following table presents an age analysis of past-due loans, segregated by class of loans as of December 31, 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
Commercial loans
Multifamily	$	—	$	—	$	93	$	93	$	60,453	$	60,546
Nonresidential		—		—		3,891		3,891		117,704		121,595
Land		—		—		531		531		8,953		9,484
Construction		—		—		1,051		1,051		15,013		16,064
Secured		—		—		4,016		4,016		41,072		45,088
Unsecured		—		—		—		—		134		134
Total commercial loans		—		—		9,582		9,582		243,329		252,911
Residential mortgage loans
One-to four-family		2,279		605		4,856		7,740		686,365		694,105
Construction		—		—		—		—		37,113		37,113
Total residential mortgage loans		2,279		605		4,856		7,740		723,478		731,218
Consumer Loans:
Home equity		588		183		1,531		2,302		152,474		154,776
Automobile		21		—		30		51		5,851		5,902
Marine		—		686		—		686		3,231		3,917
Recreational vehicle		452		109		18		579		13,475		14,054
Other		3		4		1		8		2,097		2,105
Total consumer loans		1,064		982		1,580		3,626		177,128		180,754
Total loans	$	3,343	$	1,587	$	16,018	$	20,948	$	1,143,935	$	1,164,883

25

As of June 30, 2015 and December 31, 2014, the Company has a recorded investment in troubled debt restructurings of $29.5 million and $28.1 million, respectively.  The Company has allocated $2.4 million and $2.6 million of specific allowance for those loans at June 30, 2015 and December 31, 2014, respectively.  The Company has committed to lend additional amounts totaling up to$41,000 and $50,000 at June 30, 2015 and December 31, 2014, respectively.  

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended June 30, 2015:

	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Recorded Investment
			(In thousands)
Commercial loans
Multifamily		—	$	—	$	—
Nonresidential		—		—		—
Land		—		—		—
Construction		—		—		—
Secured		—		—		—
Unsecured		—		—		—
Total commercial loans		—		—		—
Residential mortgage loans
One-to four-family		5		469		476
Construction		—		—		—
Total residential mortgage loans		5		469		476
Consumer loans
Home equity		4		128		129
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—
Total consumer loans		4		128		129
Total restructured loans		9	$	597	$	605

The troubled debt restructurings described above increased the allowance for loan losses by $24,000 and resulted in no charge-offs during the three months ended June 30, 2015.

26

The following table presents loans by class modified as troubled debt restructurings that occurred during the six months ended June 30, 2015:

	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Recorded Investment
			(In thousands)
Commercial loans
Multifamily		—	$	—	$	—
Nonresidential		—		—		—
Land		—		—		—
Construction		—		—		—
Secured		—		—		—
Unsecured		—		—		—
Total commercial loans		—		—		—
Residential mortgage loans
One-to four-family		10		910		930
Construction		—		—		—
Total residential mortgage loans		10		910		930
Consumer loans
Home equity		6		482		483
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—
Total consumer loans		6		482		483
Total restructured loans		16	$	1,392	$	1,413

The troubled debt restructurings described above increased the allowance for loan losses by $82,000 and resulted in no charge-offs during the six months ended June 30, 2015.

27

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)
Commercial loans
Multifamily		—	$	—	$	—
Nonresidential		—		—		—
Land		—		—		—
Construction		—		—		—
Secured		—		—		—
Unsecured		—		—		—
Total commercial loans		—		—		—
Residential mortgage loans
One-to four-family		11		922		969
Construction		—		—		—
Total residential mortgage loans		11		922		969
Consumer loans
Home equity		9		465		450
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—
Total consumer loans		9		465		450
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 chargeoffs of $3,000 during the three months ended June 30, 2014.

28

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)
Commercial loans
Multifamily		—	$	—	$	—
Nonresidential		1		120		120
Land		—		—		—
Construction		—		—		—
Secured		—		—		—
Unsecured		—		—		—
Total commercial loans		1		120		120
Residential mortgage loans
One-to four-family		20		1,491		1,545
Construction		—		—		—
Total residential mortgage loans		20		1,491		1,545
Consumer loans
Home equity		19		1,017		1,009
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—
Total consumer loans		19		1,017		1,009
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 chargeoffs of $3,000 during the six months ended June 30, 2014.

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 during the six months ended June 30, 2015:

	Number of loans		Recorded Investment
			(Dollars in thousands)
Commercial loans
Multifamily		—	$	—
Nonresidential		—		—
Land		—		—
Construction		—		—
Secured		—		—
Unsecured		—		—
Total commercial loans		—		—
Residential mortgage loans
One-to four-family		1		76
Construction		—		—
Total residential mortgage loans		1		76
Consumer loans
Home equity		2		56
Auto		—		—
Marine		—		—
Recreational vehicle		—		—
Other		—		—
Total consumer loans		2		56
Total restructured loans		3	$	132

29

The troubled debt restructurings that subsequently defaulted described above resulted in no charge-offs during the three and six months ended June 30, 2015, and had no effect on the provision for loan losses.

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 during the six months ended June 30, 2014:

	Number of loans		Recorded Investment
			(Dollars in thousands)
Commercial loans
Multifamily		—	$	—
Nonresidential		—		—
Land		—		—
Construction		—		—
Secured		—		—
Unsecured		—		—
Total commercial loans		—		—
Residential mortgage loans
One-to four-family		2		74
Construction		—		—
Total residential mortgage loans		2		74
Consumer loans
Home equity		4		172
Auto		—		—
Marine		—		—
Recreational vehicle		—		—
Other		—		—
Total consumer loans		4		172
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.

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

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.

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.

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.

30

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.

As of June 30, 2015 and December 31, 2014, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Loans

June 30, 2015

(Dollars in thousands)

	Unclassified				Classified
	Unclassified		Special Mention		Substandard		Doubtful		Loss		Total Classified		Total Loans
Commercial Loans
Multifamily	$	64,906	$	2,055	$	2,524	$	—	$	—	$	2,524	$	69,485
Nonresidential		123,491		11,592		12,942		—		—		12,942		148,025
Land		9,735		—		496		—		—		496		10,231
Construction		15,850		—		415		—		—		415		16,265
Secured		63,319		—		5,494		—		—		5,494		68,813
Unsecured		349		—		107		—		—		107		456
Total commercial loans		277,650		13,647		21,978		—		—		21,978		313,275
Residential mortgage loans
One-to four-family		701,570		125		7,647		—		—		7,647		709,342
Construction		34,074		—		—		—		—		—		34,074
Total residential mortgage loans		735,644		125		7,647		—		—		7,647		743,416
Consumer Loans
Home equity		156,152		—		1,757		—		—		1,757		157,909
Auto		8,121		3		45		—		—		45		8,169
Marine		2,770		—		284		—		—		284		3,054
Recreational vehicle		12,481		—		130		—		—		130		12,611
Other		1,948		—		5		—		—		5		1,953
Total consumer loans		181,472		3		2,221		—		—		2,221		183,696
Total loans	$	1,194,766	$	13,775	$	31,846	$	—	$	—	$	31,846	$	1,240,387

31

Loans

December 31, 2014

(Dollars in thousands)

	Unclassified				Classified
	Unclassified		Special Mention		Substandard		Doubtful		Loss		Total Classified		Total Loans
Commercial Loans
Multifamily	$	53,485	$	4,134	$	2,927	$	—	$	—	$	2,927	$	60,546
Nonresidential		92,074		12,290		17,231		—		—		17,231		121,595
Land		8,952		—		532		—		—		532		9,484
Construction		15,013		—		1,051		—		—		1,051		16,064
Secured		39,480		900		4,708		—		—		4,708		45,088
Unsecured		22		—		112		—		—		112		134
Total commercial loans		209,026		17,324		26,561		—		—		26,561		252,911
Residential mortgage loans
One-to four-family		684,779		939		8,387		—		—		8,387		694,105
Construction		37,113		—		—		—		—		—		37,113
Total residential mortgage loans		721,892		939		8,387		—		—		8,387		731,218
Consumer Loans
Home equity		152,599		—		2,177		—		—		2,177		154,776
Auto		5,829		10		63		—		—		63		5,902
Marine		3,766		—		151		—		—		151		3,917
Recreational vehicle		13,846		—		208		—		—		208		14,054
Other		2,099		—		6		—		—		6		2,105
Total consumer loans		178,139		10		2,605		—		—		2,605		180,754
Total loans	$	1,109,057	$	18,273	$	37,553	$	—	$	—	$	37,553	$	1,164,883

6. 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, 2015 and December 31, 2014. 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, 2015		December 31, 2014
	(Dollars in thousands)
Mortgage loan portfolios serviced for:
FHLMC	$	849,109	$	821,609
FNMA		248,012		259,463

Escrow balances are maintained at the Federal Home Loan Bank (FHLB) in connection with serviced loans totaling $1.3 and $1.0 million at June 30, 2015 and December 31, 2014, respectively.

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

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2015			2014			2015			2014
	(Dollars in thousands)
Balance, beginning of period	$	5,543		$	5,803		$	5,535		$	5,941
Originations		530			287			981			541
Amortized to expense		(462	)		(432	)		(905	)		(824	)
Balance, end of period		5,611			5,658			5,611			5,658
Less valuation allowance		(12	)		(6	)		(12	)		(6	)
Net balance	$	5,599		$	5,652		$	5,599		$	5,652

32

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

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2015			2014			2015			2014
	(Dollars in thousands)
Balance, beginning of period	$	(219	)	$	(1	)	$	(58	)	$	—
Impairment charges		—			(5	)		(161	)		(6	)
Recoveries		207			—			207			—
Balance, end of period	$	(12	)	$	(6	)	$	(12	)	$	(6	)

The fair value of mortgage servicing rights as of June 30, 2015, was approximately $9.8 million and at December 31, 2014, the fair value was approximately $9.0 million.

Key economic assumptions in measuring the value of mortgage servicing rights at June 30, 2015, and December 31, 2014, were as follows:

	June 30, 2015	December 31, 2014
Weighted average prepayment rate	195 PSA	219 PSA
Weighted average life (in years)	3.54	3.61
Weighted average discount rate	8.00%	8.00%

7. OTHER REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS

Real estate owned and other repossessed assets at June 30, 2015 and December 31, 2014 were as follows:

	June 30, 2015			December 31, 2014
	(Dollars in thousands)
Real estate owned and other repossessed assets	$	4,556		$	4,890
Valuation allowance		(1,195	)		(1,423	)
End of period	$	3,361		$	3,467

Activity in the valuation allowance was as follows:

	Three Months Ended						Six Months Ended
	June 30, 2015			June 30, 2014			June 30, 2015			June 30, 2014
	(Dollars in thousands)
Beginning of period	$	1,244		$	3,588		$	1,423		$	4,059
Additions charged to expense		42			146			123			438
Reductions due to sales		(91	)		(171	)		(351	)		(934	)
End of period	$	1,195		$	3,563		$	1,195		$	3,563

Expenses related to foreclosed and repossessed assets include:

	Three Months Ended
	June 30, 2015		June 30, 2014
	(Dollars in thousands)
Net (gain) loss on sales	$	60	$	(104	)
Provision for unrealized losses, net		42		146
Operating expenses, net of rental income		18		137
Total expenses	$	120	$	179

33

	Six Months Ended
	June 30, 2015		June 30, 2014
	(Dollars in thousands)
Net (gain) loss on sales	$	69	$	(13	)
Provision for unrealized losses, net		123		438
Operating expenses, net of rental income		159		350
Total expenses	$	351	$	775

8. 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.

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. In addition to the Special Assets Department review, a third party independent review is also performed.  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

34

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, 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).

Loans held for sale, at fair value:  The Company elected the fair value option for all permanent construction loans held for sale originated on or after January 1, 2015. As noted above, the fair value of the Company’s construction perm loans held for sale was determined based on quoted prices for similar loans in active markets.  The fair value of permanent construction loans held for sale is determined, based on the committed loan amount, using quoted prices for similar assets, adjusted for specific attributes of that loan and other unobservable market data, such as time it takes to complete the project (Level 3).

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)

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, 2015 Using:
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	June 30,		Assets		Inputs		Inputs
	2015		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Available for sale securities
U.S. Treasury and government sponsored entities’ securities	$	221,095	$	—	$	221,095	$	—
Mortgage-backed GSE securities: residential		251,877		—		251,877		—
Loans held for sale, at fair value		9,839		—		—		9,839
Interest rate caps		24		—		—		24
Purchased certificate of deposit option		847		—		847		—
Liabilities
Written certificate of deposit option		847		—		847		—

35

			Fair Value Measurements at December 31, 2014 Using:
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
	2014		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Available for sale securities
U.S. Treasury and government sponsored entities’    securities	$	227,957	$	—	$	227,957	$	—
Mortgage-backed GSE securities: residential		271,833		—		271,833		—
Interest rate caps		180		—		—		180
Purchased certificate of deposit option		930		—		930		—
Liabilities
Written certificate of deposit option		930		—		930		—

There were no transfers between Level 1 and Level 2 during 2015 or 2014.

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 and six months ended June 30, 2015. There were no loans held for sale, carried at fair value during 2014.

	Loans Held for Sale, At Fair Value
	For the Three Months Ended June 30,			For the Six Months Ended June 30,
	2015			2015
	(Dollars in thousands)
Balance of recurring Level 3 assets at beginning of period	$	1,608		$	—
Total gains (losses) for the period
Included in change in fair value of loans held for sale		(146	)		415
Included in other comprehensive income		—			—
Originations		8,377			9,424
Amortization		—			—
Sales		—			—
Balance of recurring Level 3 assets at end of period	$	9,839		$	9,839

	Interest Rate Caps						Interest Rate Caps
	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2015			2014			2015			2014
	(Dollars in thousands)
Balance of recurring Level 3 assets at beginning of period	$	126		$	419		$	180		$	546
Total gains (losses) for the period
Included in other income		28			(75	)		103			(73	)
Included in other comprehensive income		—			—			—			—
Purchases		—			—			—			—
Amortization		(130	)		(130	)		(259	)		(259	)
Sales		—			—			—			—
Balance of recurring Level 3 assets at end of period	$	24		$	214		$	24		$	214

There were no transfers between Level 2 and Level 3 during 2015 or 2014.

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The following table presents quantitative information about recurring Level 3 fair value measurements at June 30, 2015:

			Valuation	Unobservable
	Fair Value		Technique(s)	Input(s)	Range
Loans held for sale, at fair value	$	9,839	Comparable sales	Time discount	0.00-1.80%
Interest rate caps		24	Discounted cash flow	Discount rate	0.49-1.18%

The following table presents quantitative information about recurring Level 3 fair value measurements at December 31, 2014:

			Valuation	Unobservable
	Fair Value		Technique(s)	Input(s)	Range
Interest rate caps	$	180	Discounted cash flow	Discount rate	0.49-1.18%

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.

The fair value of loans held for sale, at fair value was determined using pricing from a quoted market, discounted for the length of time to the completion of the construction project.

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, 2015 Using:
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	June 30,		Assets		Inputs		Inputs
	2015		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Impaired loans:
Commercial loans	$	3,305	$	—	$	—	$	3,305
Residential loans		601		—		—		601
Consumer loans		306		—		—		306
Mortgage servicing rights		215		—		215		—
Other real estate owned, net
Residential loans		588		—		—		588
Construction loans		804		—		—		804
Nonresidential loans		175		—		—		175

37

			Fair Value Measurements at December 31, 2014 Using:
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
	2014		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Impaired loans:
Commercial loans	$	3,803	$	—	$	—	$	3,803
Residential loans		765		—		—		765
Consumer loans		260		—		—		260
Mortgage servicing rights		1,138		—		1,138		—
Other real estate owned, net
Residential loans		640		—		—		640
Construction loans		1,286		—		—		1,286

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 $4.2 million at June 30, 2015, that includes a specific valuation allowance of $644,000. This resulted in a decrease of the provision for loan losses of $34,000 and $36,000 during the three and six months ended June 30, 2015, respectively. 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, which includes a specific valuation allowance of $277,000. This resulted in a decrease in the provision for loan losses of $30,000 for the three months ended June 30, 2014 and an increase in the provison 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 $4.8 million at December 31, 2014, that includes a specific valuation allowance of $713,000.

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%.

At June 30, 2015, mortgage servicing rights carried at fair value were $215,000, resulting in a net valuation allowance of $12,000 for the six months ended June 30, 2015.  At June 30, 2014, mortgage servicing rights, carried at fair value totaled $157,000, resulting in a net valuation allowance of $6,000.  At December 31, 2014, mortgage servicing rights carried at fair value were $1.1 million, resulting in a valuation allowance of $58,000 at December 31, 2014.  Mortgage servicing rights are valued by an independent third party that is active in purchasing and selling these instruments.  Net impairment (recovery) reflected in other income totaled $(207,000) and $(46,000) for the three and six months ended June 30, 2015.  Net impairment (recovery) reflected in other income totaled $5,000 and $6,000 for the three and six months ended June 30, 2014.  The value reflects the characteristics of the underlying loans.  

At June 30, 2015, other real estate owned, carried at fair value, which is measured for impairment using the fair value of the property less estimated selling costs, had a net carrying amount of $1.8 million, with a valuation allowance of $1.2 million. This resulted in additional expenses of $42,000 and $123,000 during the three and six months ended June 30, 2015, respectively. 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, had a gross carrying amount of $6.8 million with a valuation allowance of $3.6 million. This resulted in additional expenses of $146,000 and $438,000 during the three and six months ended June 30, 2014. At December 31, 2014, other real estate owned had a gross carrying amount of $3.3 million, with a valuation allowance of $1.4 million.

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The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at June 30, 2015:

	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range     (Weighted Average)
Impaired loans:
Commercial loans	$	3,305	Salescomparison approach	Adjustment for differences between comparable sales	0.00%-20.00%  (10.00%)
Residential loans		601	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-10.77%  (10.00%)
Consumer loans		306	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-17.85%  (17.85%)
Other real estate owned:
Residential loans		588	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-40.50%  (14.55%)
Construction loans		804	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-25.00%  (12.13%)
Nonresidential loans		175	Income approach	Adjustment for differences in net operating income capitalization rate	0.00-12.50%     (12.50%)

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, 2014:

	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range     (Weighted Average)
Impaired loans:
Commercial loans	$	3,803	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-20.00%  (10.00%)
Residential loans		765	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-11.80%  (3.70%)
Consumer loans		260	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-10.00%  (5.00%)
Other real estate owned:
Residential loans		640	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-51.10%  (26.83%)
Construction loans		1,286	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-58.10%  (22.20%)

The Company has elected the fair value option for newly originated permanent construction loans held for sale.  These loans are intended for sale and the Company believes that fair value is the best indicator of the resolution of these loans.  Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on loans held for investment.  None of these loans are 90 or more days past due nor on nonaccrual status as of June 30, 2015.  

	June 30, 2015
	(Dollars in thousands)
Aggregate fair value	$	9,839
Contractual balance		9,424
Gain (loss)		415

The total amount of gains and losses from changes in fair value included in earnings for the three and six months ended June 30, 2015 for loans held for sale, at fair value were:

	For the Three Months Ended			For the Six Months Ended
	June 30, 2015			June 30, 2015
	(Dollars in thousands)
Interest  income	$	—		$	—
Interest expense		—			—
Change in fair value		(146	)		415
Total change in fair value	$	(146	)	$	415

39

In accordance with U.S. GAAP, the carrying value and estimated fair values of financial instruments at June 30, 2015 and December 31, 2014, were as follows:

				Fair Value Measurements at June 30, 2015 Using:
	June 30,
	2015
	Carrying Value			(Level 1)			(Level 2)			(Level 3)
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	48,983		$	48,983		$	—		$	—
Available for sale securities		472,972			—			472,972			—
Held to maturity securities		4,775			—			4,679			—
Loans held for sale		25,263			—			26,317			—
Loans held for sale, at fair value		9,839			—			—			9,839
Loans, net		1,224,468			—			—			1,236,370
FHLB stock		18,068		n/a			n/a			n/a
Accrued interest receivable		5,768			—			2,284			3,484
Interest rate caps		24			—			—			24
Purchased certificate of deposit option		847			—			847			—
Liabilities:
Deposits:
Checking, savings and money market accounts		(982,536	)		(982,636	)		—			—
Certificates of deposit		(456,711	)		—			(462,628	)		—
FHLB advances		(192,085	)		—			(192,188	)		—
Repurchase agreements and other		(30,546	)		—			(32,312	)		—
Advance payments by borrowers for taxes and insurance		(15,085	)		(15,085	)		—			—
Accrued interest payable		(227	)		—			(227	)		—
Written certificate of deposit option		(847	)		—			(847	)		—

				Fair Value Measurements at December 31, 2014 Using:
	December 31,
	2014
	Carrying Value			(Level 1)			(Level 2)			(Level 3)
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	32,980		$	32,980		$	—		$	—
Available for sale securities		499,790			—			499,790			—
Loans held for sale		20,730			—			21,528			—
Loans, net		1,148,093			—			—			1,167,372
FHLB stock		18,068		n/a			n/a			n/a
Accrued interest receivable		5,763			—			2,374			3,389
Interest rate caps		180			—			—			180
Purchased certificate of deposit option		930			—			930			—
Liabilities:
Deposits:
Checking, savings and money market accounts		(912,536	)		(912,536	)		—			—
Certificates of deposit		(435,300	)		—			(442,268	)		—
FHLB advances		(186,194	)		—			(186,290	)		—
Repurchase agreements and other		(30,558	)		—			(32,817	)		—
Advance payments by borrowers for taxes and insurance		(19,904	)		(19,904	)		—			—
Accrued interest payable		(185	)		—			(185	)		—
Written certificate of deposit option		(930	)		—			(930	)		—

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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.

(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.

(e) Other Borrowings

Short-term borrowings, generally maturing within 90 days, approximate their fair values resulting in a Level 2 classification. 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.

(f) 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.

(g) 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.

9. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURE

Supplemental disclosures of cash flow information are summarized below.

	For the Six Months Ended June 30,
	2015		2014
	(Dollars in thousands)
Supplemental disclosures of cash flow information
Cash paid (received) during the period for:
Interest on deposits and borrowings	$	4,372	$	6,150
Income taxes		100		—
Supplemental schedule of noncash activities:
Transfers from loans to real estate owned and other repossessed assets		1,606		853

41

10. 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 74,058 shares were anti-dilutive for the three months ended June 30, 2015 and stock options for 87,315 shares were anti-dilutive for the three months ended June 30, 2014.  Stock options for 74,058 shares were anti-dilutive for the six months ended June 30, 2015 and stock options for 87,315 shares were anti-dilutive for the six months ended June 30, 2014.  

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2015			2014			2015			2014
	(Dollars in thousands, except per share data)
Net income per consolidated statements of income	$	4,125		$	42,404		$	7,811		$	44,498
Net income allocated to participating securities		(25	)		(235	)		(39	)		(232	)
Net income allocated to common stock	$	4,100		$	42,169		$	7,772		$	44,266
Basic earnings per common share computation:
Distributed earnings allocated to common stock	$	490		$	—		$	979		$	—
Undistributed earnings allocated to common stock		3,610			42,169			6,793			44,266
Net income allocated to common stock	$	4,100		$	42,169		$	7,772		$	44,266
Weighted average common shares outstanding, including shares    considered participating securities		48,649			50,554			48,968			50,481
Less: Average participating securities		(290	)		(280	)		(244	)		(263	)
Weighted average shares		48,359			50,274			48,724			50,218
Basic earnings per common share	$	0.08		$	0.84		$	0.16		$	0.88
Diluted earnings per common share computation:
Net income allocated to common stock	$	4,100		$	42,169		$	7,772		$	44,266
Weighted average common shares outstanding for basic    earnings per common share		48,359			50,274			48,724			50,218
Add: Dilutive effects of assumed exercises of stock options		275			222			273			221
Weighted average shares and dilutive potential common shares		48,634			50,496			48,997			50,439
Diluted earnings per common share	$	0.08		$	0.84		$	0.16		$	0.88

11. 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, disproportional tax effects and changes in unrealized gains and losses on the postretirement liability. The change includes reclassification of net gains or (losses) and impairment charges on sales of securities of $0 and $31,000 for the three months ended June 30, 2015 and 2014, respectively and $11,000 and $34,000 for the six months ended June 30, 2015 and 2014, respectively.    

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

	Unrealized Gains (Losses) on Securities Available for Sale			Disproportionate Tax Effect from Securities Available for Sale			Unrealized Gains (Losses) from Postretirement Plan		Disproportionate Tax Effect from Postretirement Plan		Total
June 30, 2015	(Dollars in thousands)
Balances at beginning of period	$	(425	)	$	(17,110	)	$	916	$	511	$	(16,108	)
Income tax		—			—			—		—		—
Balances at beginning of period, net of    tax		(425	)		(17,110	)		916		511		(16,108	)
Other comprehensive income before    reclassifications		(5,937	)		—			—		—		(5,937	)
Reclassification adjustment for    gains realized in income		—			—			—		—		—
Net current period other comprehensive    income		(5,937	)		—			—		—		(5,937	)
Balances at end of period, net of tax	$	(6,362	)	$	(17,110	)	$	916	$	511	$	(22,045	)

	Unrealized Gains (Losses) on Securities Available for Sale			Disproportionate Tax Effect from Securities Available for Sale			Unrealized Gains (Losses) from Postretirement Plan			Disproportionate Tax Effect from Postretirement Plan			Total
June 30, 2014	(Dollars in thousands)
Balances at beginning of period	$	(27,825	)	$	(2,972	)	$	1,829		$	(129	)	$	(29,097	)
Income tax		14,138			(14,138	)		(640	)		640			—
Balances at beginning of period, net of    tax		(13,687	)		(17,110	)		1,189			511			(29,097	)
Other comprehensive income before    reclassifications		3,216			—			—			—			3,216
Reclassification adjustment for    gains realized in income		(20	)		—			—			—			(20	)
Net current period other comprehensive    income		3,196			—			—			—			3,196
Balances at end of period, net of tax	$	(10,491	)	$	(17,110	)	$	1,189		$	511		$	(25,901	)

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

	Unrealized Gains (Losses) on Securities Available for Sale			Disproportionate Tax Effect from Securities Available for Sale			Unrealized Gains (Losses) From Postretirement Plan		Disproportionate Tax Effect from Postretirement Plan		Total
June 30, 2015	(Dollars in thousands)
Balances at beginning of period	$	(4,315	)	$	(17,110	)	$	916	$	511	$	(19,998	)
Income tax		—			—			—		—		—
Balances at beginning of period, net of    tax		(4,315	)		(17,110	)		916		511		(19,998	)
Other comprehensive income before    reclassifications		(2,040	)		—			—		—		(2,040	)
Reclassification adjustment for    gains realized in income		(7	)		—			—		—		(7	)
Net current period other comprehensive    income		(2,047	)		—			—		—		(2,047	)
Balances at end of period, net of tax	$	(6,362	)	$	(17,110	)	$	916	$	511	$	(22,045	)

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	Unrealized Gains (Losses) on Securities Available for Sale			Disproportionate Tax Effect from Securities Available for Sale			Unrealized Gains (Losses) From Postretirement Plan			Disproportionate Tax Effect from Postretirement Plan			Total
June 30, 2014	(Dollars in thousands)
Balances at beginning of period	$	(40,393	)	$	(2,972	)	$	1,829		$	(129	)	$	(41,665	)
Income tax		14,138			(14,138	)		(640	)		640			—
Balances at beginning of period, net of    tax		(26,255	)		(17,110	)		1,189			511			(41,665	)
Other comprehensive income before    reclassifications		15,786			—			—			—			15,786
Reclassification adjustment for    gains realized in income		(22	)		—			—			—			(22	)
Net current period other comprehensive    income		15,764			—			—			—			15,764
Balances at end of period, net of tax	$	(10,491	)	$	(17,110	)	$	1,189		$	511		$	(25,901	)

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 are significant amounts reclassified out of each component of accumulated comprehensive income (loss) for the three months ended June 30, 2015:

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

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

	Amount Reclassified			Affected Line Item on
	From Accumulated			the Statement Where
Details About Accumulated Other Comprehensive	Other Comprehensive			Net Income is
Income Components	Income			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
Total reclassification during the period	$	(20	)	Net of tax

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The following are significant amounts reclassified out of each component of accumulated comprehensive income (loss) for the six months ended June 30, 2015:

	Amount Reclassified			Affected Line Item on
	From Accumulated			the Statement Where
Details About Accumulated Other Comprehensive	Other Comprehensive			Net Income is
Income Components	Income			Presented
	(Dollars in thousands)
Realized net gains on the sale of available for sale securities	$	(11	)	Net gains on securities available for sale
		4		Tax expense
Total reclassification during the period	$	(7	)	Net of tax

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

	Amount Reclassified			Affected Line Item on
	From Accumulated			the Statement Where
Details About Accumulated Other Comprehensive	Other Comprehensive			Net Income is
Income Components	Income			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
Total reclassification during the period	$	(22	)	Net of tax

12. REGULATORY CAPITAL REQUIREMENTS

Home Savings and United Community are subject to various regulatory capital requirements administered by the federal banking agencies. During the first quarter of 2015, Home Savings and United Community adopted the new Basel III regulatory capital framework as approved by the federal banking agencies. The adoption of this new framework modified the calculation of the various capital ratios, added a new ratio, common equity tier 1, and revised the adequately and well capitalized thresholds. 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.

The Basel III Capital Rules establish 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 rules 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. In connection with the adoption of the Basel III Capital Rules, United Community and Home Savings elected to opt-out of the requirement to include most components of accumulated other comprehensive income in Common Equity Tier 1.  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 rules became 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 implemented consolidated capital requirements, that became effective January 1, 2015.

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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).  United Community and Home Savings’ Common Equity Tier 1 capital consists of common stock and related paid-in capital, net of treasury stock, and retained earnings. In connection with the adoption of the Basel III Capital Rules, United Community and Home Savings elected to opt-out of the requirement to include most components of accumulated other comprehensive income in Common Equity Tier 1. Common Equity Tier 1 for both United Community and Home Savings is reduced by intangible assets, net of associated deferred tax liabilities and subject to transition provisions. Actual and regulatory required capital ratios for Home Savings, along with the dollar amount of capital implied by such ratios, are presented below.

	June 30, 2015
											To Be Well Capitalized
						Minimum Capital					Under Prompt
						Requirements For Capital					Corrective Action
	Actual					Adequacy Purposes					Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total capital (to risk-weighted assets)	$	237,890		19.69	%	$	96,655		8.00	%	$	120,819		10.00	%
Tier 1 capital (to risk-weighted assets)		222,593		18.42	%		72,492		6.00	%		96,655		8.00	%
Common equity Tier 1 capital (to risk-weighted    assets)		222,593		18.42	%		54,369		4.50	%		78,532		6.50	%
Tier 1 capital (to average assets)**		222,593		11.94	%		74,542		4.00	%		93,177		5.00	%

	December 31, 2014
											To Be Well Capitalized
						Minimum Capital					Under Prompt
						Requirements					Corrective Action
	Actual					Per Regulation					Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total risk-based capital to risk-weighted assets	$	233,974		21.13	%	$	88,602		8.00	%	$	110,752		10.00	%
Tier 1 capital to risk-weighted assets		220,080		19.87	%	*		*				66,451		6.00	%
Tier 1 capital to average total assets**		220,080		12.11	%		72,674		4.00	%		90,843		5.00	%

* Ratio was not required under regulations existing at that time

** Tier 1 Leverage Capital Ratio

Management believes that as of June 30, 2015 and December 31, 2014, Home Savings meets all capital adequacy requirements to which they were subject.  As of June 30, 2015 and December 31, 2014, Home Savings was considered well capitalized.

The components of Home Savings’ regulatory capital are as follows:

	June 30, 2015			December 31, 2014
Total shareholders' equity	$	223,855		$	217,372
Add (deduct)
Accumulated other comprehensive income		22,061			20,015
Intangible assets		(23	)		(84	)
Disallowed deferred tax assets		(23,300	)		(17,223	)
Disallowed capitalized mortgage loan servicing rights		—			—
Tier 1 Capital		222,593			220,080
Allowance for loan losses and allowance for unfunded lending commitments    limited to 1.25% of total risk-weighted assets		15,297			13,894
Total risk-based capital	$	237,890		$	233,974

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Actual and regulatory required consolidated capital ratios for United Community, along with the dollar amount of capital implied by such ratios, are presented below.

	June 30, 2015
											To Be Well Capitalized
						Minimum Capital					Under Prompt
						Requirements For Capital					Corrective Action
	Actual					Adequacy Purposes					Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total capital (to risk-weighted assets)	$	248,306		20.57	%	$	96,565		8.00	%	$	120,707		10.00	%
Tier 1 capital (to risk-weighted assets)		232,991		19.30	%		72,424		6.00	%		96,565		8.00	%
Common equity Tier 1 capital (to risk-weighted    assets)		232,991		19.30	%		54,318		4.50	%		78,459		6.50	%
Tier 1 capital (to average assets)**		232,991		12.50	%		74,541		4.00	%		93,176		5.00	%

The components of United Community’s consolidated regulatory capital are as follows:

	June 30, 2015
Total shareholders' equity	$	236,462
Add (deduct)
Accumulated other comprehensive income		22,045
Intangible assets		(23	)
Disallowed deferred tax assets		(25,493	)
Disallowed capitalized mortgage loan servicing rights		—
Tier 1 Capital		232,991
Allowance for loan losses and allowance for unfunded lending commitments    limited to 1.25% of total risk-weighted assets		15,315
Total risk-based capital	$	248,306

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13. INCOME TAXES

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

	June 30,		December 31,
	2015		2014
	(Dollars in thousands)
Deferred tax assets:
Loan loss reserves	$	5,909	$	6,190
Postretirement benefits		1,042		1,066
Depreciation		735		625
Other real estate owned valuation		418		498
Tax credits carryforward		736		513
Unrealized loss on securities available for sale		3,426		2,324
Interest on nonaccrual loans		933		943
Net operating loss carryforward		20,315		24,027
Purchase accounting adjustment		86		82
Accrued bonuses		405		459
Other		338		279
Deferred tax assets		34,343		37,006
Deferred tax liabilities:
Deferred loan fees		369		321
Federal Home Loan Bank stock dividends		4,585		4,585
Mortgage servicing rights		1,960		1,917
FHLB prepayment penalty		1,195		1,332
Postretirement benefits accrual		493		493
Prepaid expenses		248		201
Deferred tax liabilities		8,850		8,849
Net deferred tax asset	$	25,493	$	28,157

As of June 30, 2015, the net deferred tax asset (DTA) was $25.5 million, and as of December 31, 2014, the net DTA was $28.2 million.

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 (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 an executive search placed on a key management position (5) evaluation of core earnings (6) adequacy of capital to fund balance sheet and future growth and (7) cost-saving initiatives triggered during 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 and June 30, 2015. 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

48

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.

United Community’s net operating loss of $58.0 million at June 30, 2015 will be carried forward to use against future taxable income. The net operating loss carryforwards begin to expire in the year ending December 31, 2030. In addition, United Community is carrying forward $736,000 of alternative minimum tax credits. The alternative minimum tax credits are carried forward indefinitely.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNITED COMMUNITY FINANCIAL CORP.

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
Selected financial ratios and other data: (1)	2015			2014			2015			2014
Performance ratios:
Return on average assets (2)		0.88	%		9.67	%		0.84	%		5.09	%
Return on average equity (3)		6.73	%		84.84	%		6.36	%		46.18	%
Interest rate spread (4)		3.03	%		2.92	%		3.07	%		2.92	%
Net interest margin (5)		3.16	%		3.09	%		3.20	%		3.08	%
Noninterest expense to average assets		2.59	%		3.24	%		2.67	%		3.17	%
Efficiency ratio (6)		63.40	%		87.77	%		66.64	%		85.61	%
Average interest-earning assets to average interest-bearing liabilities		125.30	%		123.00	%		124.91	%		122.00	%
Capital ratios:
Average equity to average assets		13.02	%		11.40	%		13.17	%		11.02	%
Equity to assets, end of period		12.30	%		13.13	%		12.30	%		13.13	%
Tier 1 leverage ratio (Bank only)		11.94	%		12.05	%		11.94	%		12.05	%
Common equity Tier 1 capital (Bank only)		18.42	%	n/a				18.42	%	n/a
Tier 1 risk-based capital ratio (Bank only)		18.42	%		20.00	%		18.42	%		20.00	%
Total risk-based capital ratio (Bank only)		19.69	%		21.26	%		19.69	%		21.26	%
Asset quality ratios:
Nonperforming loans to net loans at end of period (7)		1.55	%		1.87	%		1.55	%		1.87	%
Nonperforming assets to average assets (8)		1.19	%		1.42	%		1.20	%		1.42	%
Nonperforming assets to total assets at end of period		1.16	%		1.39	%		1.16	%		1.39	%
Allowance for loan losses as a percent of loans		1.36	%		1.65	%		1.36	%		1.65	%
Allowance for loan losses as a percent of nonperforming loans (7)		88.80	%		89.91	%		88.80	%		89.91	%
Texas ratio (9)		8.83	%		9.82	%		8.83	%		9.82	%
Total classified assets as a percent of Tier 1 Capital    (Bank only)		15.82	%		21.97	%		15.82	%		21.97	%
Total classified loans as a percent of Tier 1 Capital and ALLL    (Bank only)		13.30	%		18.23	%		13.30	%		18.23	%
Total classified assets as a percent of Tier 1 Capital and ALLL    (Bank only)		14.70	%		20.21	%		14.70	%		20.21	%
Net chargeoffs as a percent of average loans		0.37	%		0.25	%		0.23	%		0.24	%
Total 90+ days past due as a percent of net loans		1.16	%		1.53	%		1.16	%		1.53	%
Per share data:
Basic earnings per common share (10)	$	0.08		$	0.84		$	0.16		$	0.88
Diluted earnings per common share (10)		0.08			0.84			0.16			0.88
Book value per common share (11)		4.95			4.66			4.95			4.66
Tangible book value per common share (12)		4.95			4.66			4.95			4.66
Cash dividend per common share		0.01			—			0.02			—
Dividend payout ratio (13)		12.50	%	n/a				12.58	%	n/a

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 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 ALLL

10. Net income divided by the number of basic or diluted shares outstanding

11. Shareholders’ equity divided by number of shares outstanding

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12. Shareholders’ equity minus core deposit intangible divided by number of shares outstanding

13. Historical per share dividends declared and paid for the period divided by the diluted earnings per share for that year

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, 2015 and December 31, 2014

Total assets increased $89.2 million to $1.9 billion at June 30, 2015, compared to December 31, 2014. Contributing to the change were increases in net loans of $76.4 million, loans held for sale of $14.4 million, the cash surrender value of life insurance of $7.6 million and the addition of $4.8 million in held to maturity securities.  These changes were offset by a decrease in available for sale securities of $26.8 million.

Funds not currently utilized for general corporate purposes are invested in overnight funds. Cash and cash equivalents increased $16.0 million during the first six months of 2015.

The decrease in available for sale securities was the result of maturities, paydowns and amortization of securities totaling $18.5 million and sales of $5.2 million, along with an increase of $3.1 million of unrealized losses during the first six months of 2015.

Net loans increased $76.4 million during the first six months of 2015. The increase was a combination of growth in nonresidential and secured commercial loans during the period. See Note 5 to the consolidated financial statements for additional information regarding the composition of net loans.

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 $16.9 million at June 30, 2015, down from $17.7 million at December 31, 2014. The allowance for loan losses as a percentage of loans was 1.36% at June 30, 2015, compared to 1.52% at December 31, 2014. The allowance for loan losses as a percentage of nonperforming loans was 88.80% at June 30, 2015, compared to 86.48% at December 31, 2014. 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”. At December 31, 2014, the Company evaluated two years of net charge-off history and applied the information to the current period. This component was combined with the qualitative component to arrive at the loss factor, which is applied to the outstanding principal balance by type of credit and internal risk grade applied to specific risk pools, plus specific loss allocations and adjustments for current events and conditions. As of June 30, 2015, the Company evaluated 11 quarters of net charge-off history and applied this information to the current period.  This component is combined with the qualitative component to arrive at the loss factor, which is applied to the outstanding balance of homogenous loans and is no longer being applied by internal risk grade. This change in methodology did not have a material effect on the calculation of the allowance for loan losses.

During the first six months of 2015, the Company recorded a loan loss provision of $569,000. This recognition was primarily due to the growth of the loan portfolio offset by the level of net charge-offs and disposition of nonperforming loans.  

A loan is considered impaired when there is a deterioration of the credit worthiness of the borrower to the extent that the collection of the full amount of principal and interest is no longer probable. The total outstanding balance of all impaired loans was $43.8 million at June 30, 2015 as compared to $45.9 million at December 31, 2014.

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 a debtor experiencing financial difficulty, 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

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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.

TDR loans aggregated $29.5 million at June 30, 2015 compared to $31.2 million at December 31, 2014.  Of the $29.5 million at June 30, 2015, $26.5 million were performing loans according to their modified terms.  The remaining balance of TDR loans of $3.0 million were considered nonperforming.  

Nonperforming loans consist of nonaccrual loans and loans past due 90 days and still accruing. Nonperforming loans were $19.0 million, or 1.55% of net loans, at June 30, 2015, compared to $20.5 million, or 1.78% of net loans, at December 31, 2014.

Loans held for sale increased $14.4 million, or 69.3%, to $35.1 million at June 30, 2015, compared to $20.7 million at December 31, 2014. The change was primarily attributable to the originations of permanent construction loans during the period.  These loans are not sold until construction of the residence is complete. Additionally, 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.

Real estate owned and other repossessed assets decreased $106,000, or 3.1%, during the six months ended June 30, 2015. Real estate owned and other repossessed assets are recorded at the lower of (a) the loan’s acquisition balance or (b) the fair market value of the property secured less costs to sell. Appraisals are obtained at least annually on real estate properties that exceed $1.0 million in value. A valuation allowance may be established on any property to properly reflect the asset at fair value.

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 benefits provided to participants covered by the BOLI. During the second quarter of 2015, Home Savings purchased an additional $7.0 million in BOLI.  Home Savings recognized $340,000 and $362,000, as other non-interest income based on the change in cash value of the policies in the three months ended June 30, 2015 and 2014, respectively. Home Savings recognized $672,000 and $712,000, as other non-interest income based on the change in cash value of the policies in the six months ended June 30, 2015 and 2014, respectively.

Other assets decreased $2.6 million, largely due to the reversal of the deferred tax assets associated with the Company’s net operating loss carryforward due to current period earnings.

Total deposits increased $91.4 million to $1.4 billion at June 30, 2015, compared to $1.3 billion at December 31, 2014.  Non-interest bearing accounts increased $18.3 million, or 9.7%, since year end.  During the same time period interest bearing deposits increased 6.3%, or $73.1 million, which can be attributed to Home Savings’ planned expansion efforts in attracting public funds.  As of June 30, 2015, Home Savings had $83.4 million in public funds.        

FHLB advances increased from $186.2 million at December 31, 2014 to $192.1 million at June 30, 2015.  The change was due to an increase in overnight advances.

Advance payments by borrowers for taxes and insurance decreased $4.8 million during the first six months of 2015. Remittance of real estate taxes and property insurance made on behalf of customers of Home Savings accounted for $627,000 of the decrease. In addition, funds held for payments received on loans sold where servicing was retained by Home Savings decreased $3.9 million.

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, 2015, Home Savings recognized a recovery of $243,000 associated with such repurchases. Home Savings has included in other liabilities a reserve for future make-whole settlements aggregating $311,000 at June 30, 2015.

Shareholders’ equity decreased $3.7 million to $236.5 million at June 30, 2015, from $240.1 million at December 31, 2014. During the first half of the year, the Company repurchased back into treasury $8.8 million of outstanding shares.  Also impacting the change was a decrease in other comprehensive income of $2.0 million as a result of changes in interest rates.  A substantial portion of these changes were offset by regular earnings.

Book value per common share as of June 30, 2015 was $4.95 as compared to $4.88 per common share as of December 31, 2014. 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.

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In July 2013, United Community’s primary federal regulator, the Federal Reserve Bank (FRB), and Home Savings’ primary federal regulator, the FDIC, along with other regulatory agencies, published final rules (the Basel III Capital Rules) that revised 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 rules establish 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 rules also require 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. In connection with the adoption of the Basel III Capital Rules, United Community and Home Savings elected to opt-out of the requirement to include most components of accumulated other comprehensive income in Common Equity Tier 1.  The rules limit 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 rules became 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 rules also implements consolidated capital requirements, which were 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.

Comparison of Operating Results for the Three Months Ended

June 30, 2015 and June 30, 2014

Net Income. United Community recognized net income for the three months ended June 30, 2015, of $4.1 million, or $0.08 per diluted common share compared to net income of $42.4 million for the three months ended June 30, 2014, or $0.84 per diluted share.

The significant change in earnings from the second quarter of 2014 to the second quarter of 2015 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 recognized in the second quarter of 2014.

The increase in pre-tax earnings for the second quarter of 2015, compared to the same quarter last year, was primarily a result of higher net interest income due to loan growth and the positive impact of the 2014 modification of an FHLB advance and the prepayment of two repurchase agreements.  Also contributing to the change was $1.8 million increase in non-interest income. In addition, the Company recorded a reduction of $2.0 million in non-interest expenses.  

Net Interest Income. Net interest income was $13.9 million in the second quarter of 2015 up from the $12.7 million recorded in the second quarter of 2014.  Net interest margin was 3.16% for the second quarter of 2015 compared to 3.09% in the second quarter of 2014.

Total interest income increased by $300,000 in the second quarter of 2015 compared to the same period in 2014, to $16.1 million from $15.8 million. The increase is a result of an increase in net loans and loans held for sale. Average net loans increased $120.8 million in the second quarter compared to the same period in 2014 and yields declined 29 basis points to 4.33% at June 30, 2015 from 4.62% for the same period in 2014. Average loans held for sale increased $27.8 million in the second quarter compared to the same period in 2014, yields declined to 4.10% for the three months ended June 30, 2015 from 5.37% for the same period in 2014. Interest income from net loans increased to $12.9 million for the quarter ended June 30, 2015 compared to $12.4 million for the same period in 2014, and income from loans held for sale increased to $341,000 for the quarter ended June 30, 2015 compared to $74,000 million for the same period in 2014.  These increases were partially offset by a decline of $446,000 in available for sale securities.

Interest expense decreased by $810,000 in the second quarter of 2015 to $2.3 million compared to $3.1 million in the same period in 2014. This decrease was due to a 27 basis point decline in the average cost of interest-bearing liabilities in the second quarter of 2015 due to the 2014 modification of an FHLB advance and the prepayment of two repurchase agreements. Interest expense related to interest-bearing deposits was $1.6 million in the second quarter of 2015 and 2014. Expenses on FHLB advances and securities sold under repurchase agreements were $302,000 and $319,000 respectively in the second quarter of 2015 compared to $524,000 and $919,000 respectively for the same period in 2014.  

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The following table shows the impact of interest rate and outstanding balance (volume) changes compared to the first quarter of last year. The interest rate spread for the three months ended June 30, 2015 and 2014, was 3.03 % and 2.92%, respectively. The net interest margin increased 7 basis points to 3.16% for the three months ended June 30, 2015 compared to 3.09% for the same quarter in 2014.

	For the Three Months Ended June 30,
	2015 vs. 2014
	Increase						Total
	(decrease) due to						increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest earning assets:
Loans	$	(668	)	$	1,197		$	529
Loans held for sale		(13	)		280			267
Securities:
Available for sale		(254	)		(192	)		(446	)
Held to maturity		9			9			18
Federal Home Loan Bank stock		(52	)		—			(52	)
Other interest earning assets		(2	)		(8	)		(10	)
Total interest earning assets	$	(980	)	$	1,286		$	306
Interest bearing liabilities:
Savings accounts	$	(4	)	$	1		$	(3	)
Checking accounts		18			13			31
Certificates of deposit		22			(38	)		(16	)
Federal Home Loan Bank advances		(376	)		154			(222	)
Repurchase agreements and other		28			(628	)		(600	)
Total interest bearing liabilities		(312	)		(498	)		(810	)
Change in net interest income							$	1,116

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 loan loss provision of $753,000 in the second quarter of 2015, compared to a negative provision of $1.6 million in the second quarter of 2014.  The increase in provision expense during the second quarter of 2015 was substantially driven by strong loan growth.  Additionally, the Company incurred chargeoffs that exceeded specific reserves during the second quarter of 2015, which was primarily the result of the charge-off of one commercial construction loan.  For the second quarter of 2015, net chargeoffs to average outstanding loans was 37 basis points on an annualized basis.  This compares to 25 basis points for the same period last year.

Noninterest Income. Noninterest income in the second quarter of 2015 was $5.3 million, as compared to noninterest income for the second quarter of 2014 of $3.4 million. The increase in noninterest income was driven by increased mortgage banking income.  The increase in mortgage banking income was due to an increase in the volume of loans sold in the secondary market in the current quarter, as compared to the same quarter last year.  Additionally, Home Savings was able to benefit from the increased pricing from loans originated in the previous year.  Home Savings adopted fair-value accounting for newly-originated construction perm loans in 2015.  The Company has elected the fair value option for newly originated permanent construction loans held for sale.  Fair value accounting more appropriately aligns the recognition of gains with hedging costs incurred during the construction period.  See Note 9 discussing fair value.  

Noninterest Expense. Non-interest expense was $12.2 million for the second quarter of 2015 compared to $14.2 million for the second quarter of 2014, a decrease of $2.0 million.  Significantly impacting this comparison was the recognition of a $923,000 charge related to cost reduction initiatives incurred during the second quarter of 2014.  Additionally, all other major expense categories were down.  Total non-interest expense also decreased $473,000, when comparing the second quarter of 2015 to the prior quarter.

Income Taxes. During the three months ended June 30, 2015, the Company recognized a tax expense of $2.0 million on pre-tax income of $6.2 million, compared to a tax benefit of $38.8 million on pre-tax income of $3.6 million for the three months ended June 30, 2014.  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.

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Comparison of Operating Results for the Six Months Ended

June 30, 2015 and June 30, 2014

Net Income. United Community recognized net income for the six months ended June 30, 2015, of $7.8 million, or $0.16 per diluted common share compared to net income of $44.5 million for the six months ended June 30, 2014, or $0.88 per diluted share.

The significant change in earnings from the first six months of 2014 to the first six months of 2015 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 recognized in the first half of 2014.

The increase in pre-tax earnings for the six months ended June 30, 2015, compared to the same period last year, was primarily a result of higher net interest income due to loan growth and the positive impact of the 2014 modification of an FHLB advance and the prepayment of two repurchase agreements.  Also contributing to the change was a $2.7 million increase in non-interest income. In addition, the Company recorded a reduction of $2.9 million in non-interest expenses.  

Net Interest Income. Net interest income was $27.7 million for the six months ended June 30, 2015 up from the $25.3 million recorded in the six months ended June 30, 2014.  Net interest margin was 3.20% for the first six months of 2015 compared to 3.08% in the first six months of 2014.

Total interest income increased by $629,000 in the first half of 2015 compared to the same period in 2014, to $32.1 million from $31.5 million. The change in income was a result of an increase in outstanding net loans and loans held for sale. Average net loans increased $115.1 million in the first six months of 2015 compared to the same period in 2014. Average loans held for sale increased $25.0 million in the first six months of 2015 compared to the same period in 2014. Interest income from net loans increased to $25.6 million for the six months ended June 30, 2015 compared to $24.5 million for the same period in 2014, and income from loans held for sale increased to $635,000 for the six months ended June 30, 2015 compared to $123,000 million for the same period in 2014.  These increases were partially offset by a decline of $826,000 in available for sale securities income.

Interest expense decreased by $1.8 million in the first half of 2015 compared to the same period in 2014, to $4.4 million from $6.2 million. This decrease was due to a 28 basis point decline in the average cost of interest-bearing liabilities in the first half of 2015 due to the 2014 modification of an FHLB advance and the prepayment of two repurchase agreements. Interest expense related to interest-bearing deposits was $3.2 million in the first half of 2015 compared to $3.3 million for the same period in 2014. Expenses on FHLB advances and securities sold under repurchase agreements were $607,000 and $635,000 respectively in the first six months of 2015 compared to $1.0 million and $1.8 million, respectively, for the same period in 2014.  

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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, 2015 and 2014, was 3.07 % and 2.92%, respectively. The net interest margin increased 12 basis points to 3.20% for the six months ended June 30, 2015 compared to 3.08% for the same period in 2014.

	For the Six Months Ended June 30,
	2015 vs. 2014
	Increase						Total
	(decrease) due to						increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest earning assets:
Loans	$	(1,242	)	$	2,340		$	1,098
Loans held for sale		(15	)		527			512
Securities:
Available for sale		(526	)		(300	)		(826	)
Held to maturity		9			9			18
Federal Home Loan Bank stock		(80	)		(57	)		(137	)
Other interest earning assets		(9	)		(21	)		(30	)
Total interest earning assets	$	(1,863	)	$	2,498		$	635
Interest bearing liabilities:
Savings accounts	$	(9	)	$	2		$	(7	)
Checking accounts		16			15			31
Certificates of deposit		16			(172	)		(156	)
Federal Home Loan Bank advances		(698	)		263			(435	)
Repurchase agreements and other		57			(1,249	)		(1,192	)
Total interest bearing liabilities		(618	)		(1,141	)		(1,759	)
Change in net interest income							$	2,394

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 loan loss provision of $569,000 in the first six months of 2015, compared to a negative provision of $1.6 million in the first six months of 2014.  The increase in provision for loan losses was caused by an overall increase in outstanding loans during the first half of 2015.  Also affecting the comparison, during this time period, a large commercial real estate loan paid off in the second quarter of 2014, releasing approximately $748,000 in reserves at that time.  For the six months ended  June 30, 2015, net chargeoffs to average outstanding loans was 24 basis points on an annualized basis.  This compares to 23 basis points for the same period last year.

Noninterest Income. Noninterest income in the first six months of 2015 was $9.4 million, as compared to noninterest income for the first six months of 2014 of $6.7 million. The increase in noninterest income was driven by increased mortgage banking income and lower losses on the disposition of real estate owned and other repossessed assets.  The increase in mortgage banking income was due to an increase in the volume of loans sold in the secondary market in the current six months, as compared to the same period last year.  Additionally, Home Savings was able to benefit from the increased pricing from loans originated in the previous year.  Home Savings adopted fair-value accounting for newly-originated construction perm loans in 2015.  The Company has elected the fair value option for newly originated permanent construction loans held for sale.  Fair value accounting more appropriately aligns the recognition of gains with hedging costs incurred during the construction period.  See Note 9 discussing fair value.  

Noninterest Expense. Noninterest expense was $24.9 million in the first half of 2015, compared to $27.8 million in the first half of 2014, a difference of $2.9 million.  In the first six months of 2015, salaries and employee benefits declined, primarily due to the recognition of a $923,000 charge related to cost reduction initiatives incurred during the second quarter of 2014.  Equipment and data processing expense declined as a result of lower core-processing system costs.  Other expenses declined $537,000 to $2.4 million for the six months ended June 30, 2015, compared to the same six month period last year.  Other expenses decreased primarily because of lower expenses incurred on loans sold in the secondary market. In the first half of the current year, Home Savings recognized a recovery of $243,000, based on historical losses and the quantity of loans with potential weakness that would require repurchase.  In the first half of 2014, Home Savings incurred expenses of $25,000 for repurchased loans.  

Income Taxes. During the six months ended June 30, 2015, the Company recognized a tax expense of $3.9 million on pre-tax income of $11.7 million, compared to a tax benefit of $38.7 million on pre-tax income of $5.8 million for the six months ended June 30,

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2014. The primary reason for the variance was the reversal of substantially all of the Company’s deferred tax asset valuation allowance during the six months ended June 30, 2014.  

Liquidity

United Community's liquidity, primarily represented by cash and cash equivalents, is a result of its operating, investing and financing activities.

The principal sources of funds for United Community are deposits, loan repayments, maturities of securities, borrowings from financial institutions, repurchase agreements and other funds provided by operations.  Home Savings also has the ability to borrow from the Federal Home Loan Bank.  While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan prepayments are more influenced by interest rates, general economic conditions and competition.  Investments in liquid assets maintained by United Community and Home Savings are based upon management's assessment of (1) the need for funds, (2) expected deposit flows, (3) yields available on short-term liquid assets, and (4) objectives of the asset and liability management program.  At June 30, 2015, approximately $183.1 million of Home Savings’ certificates of deposit were expected to mature within one year.  Based on past experience and Home Savings’ prevailing pricing strategies, management believes that a substantial percentage of such certificates will be renewed with Home Savings at maturity, although there can be no assurance that this will occur.

Home Savings’ Asset/Liability Committee (ALCO) is responsible for establishing and monitoring liquidity guidelines, policies and procedures.  ALCO uses a variety of methods to monitor the liquidity position of Home Savings including a liquidity analysis that measures potential sources and uses of funds over future time periods out to one year.  ALCO also performs contingency funding analyses to determine Home Savings’ ability to meet potential liquidity needs under stress scenarios that cover varying time horizons ranging from immediate to long-term.

At June 30, 2015, United Community had total on-hand liquidity, defined as cash and cash equivalents, unencumbered securities and additional FHLB borrowing capacity, of $605.8 million.

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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 months ended June 30, 2015 and 2014. Average balance calculations were based on daily balances.

	For the Three Months Ended June 30,
	2015							2014
	Average		Interest					Average		Interest
	outstanding		earned/		Yield/			outstanding		earned/		Yield/
	balance		paid		rate			balance		paid		rate
	(Dollars in thousands)
Interest earning assets:
Net loans (1)	$	1,190,446	$	12,890		4.33	%	$	1,069,690	$	12,361		4.62	%
Loans held for sale		33,268		341		4.10	%		5,514		74		5.37	%
Securities:
Available for sale		485,576		2,679		2.21	%		518,553		3,125		2.41	%
Held to maturity (2)		2,184		18		3.30	%		—		—		0.00	%
Federal Home Loan Bank stock		18,068		178		3.94	%		18,068		230		5.09	%
Other interest earning assets		22,928		11		0.19	%		38,469		21		0.22	%
Total interest earning assets		1,752,470		16,117		3.68	%		1,650,294		15,811		3.84	%
Non-interest earning assets		129,858							103,976
Total assets	$	1,882,328						$	1,754,270
Interest bearing liabilities:
Deposits:
Checking accounts	$	489,690		257		0.21	%	$	463,786		226		0.19	%
Savings accounts		283,070		40		0.06	%		279,004		43		0.06	%
Certificates of deposit		445,707		1,342		1.20	%		457,945		1,358		1.19	%
Federal Home Loan Bank advances		149,551		302		0.81	%		50,385		524		4.16	%
Repurchase agreements and other		30,550		319		4.18	%		90,570		919		4.06	%
Total interest bearing liabilities	$	1,398,568		2,260		0.65	%	$	1,341,690		3,070		0.92	%
Non-interest bearing liabilities		238,641							212,664
Total liabilities	$	1,637,209						$	1,554,354
Shareholders’ equity		245,119							199,916
Total liabilities and equity	$	1,882,328						$	1,754,270
Net interest income and interest rate spread			$	13,857		3.03	%			$	12,741		2.92	%
Net interest margin						3.16	%						3.09	%
Average interest earning assets to average interest    bearing liabilities						125.30	%						123.00	%

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

(2) Yields are on a fully taxable equivalent basis.

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The following table presents the total dollar amounts of interest income and interest expense on the indicated amounts of average interest-earning assets or interest-bearing liabilities, together with the weighted average interest rates for the six months ended June 30, 2015 and 2014. Average balance calculations were based on daily balances.

	For the Six Months Ended June 30,
	2015							2014
	Average		Interest					Average		Interest
	outstanding		earned/		Yield/			outstanding		earned/		Yield/
	balance		paid		rate			balance		paid		rate
	(Dollars in thousands)
Interest earning assets:
Net loans (1)	$	1,171,195	$	25,581		4.37	%	$	1,056,054	$	24,483		4.64	%
Loans held for sale		29,969		635		4.24	%		4,986		123		4.93	%
Securities:
Available for sale		492,139		5,540		2.25	%		517,297		6,366		2.46	%
Held to maturity (2)		1,098		18		3.28	%		—		—		0.00	%
Federal Home Loan Bank stock		18,068		360		3.98	%		20,619		497		4.82	%
Other interest earning assets		21,652		17		0.16	%		45,898		47		0.20	%
Total interest earning assets		1,734,121		32,151		3.71	%		1,644,854		31,516		3.84	%
Non-interest earning assets		130,978							104,682
Total assets	$	1,865,099						$	1,749,536
Interest bearing liabilities:
Deposits:
Checking accounts	$	479,513		487		0.20	%	$	464,295		456		0.20	%
Savings accounts		280,630		80		0.06	%		275,468		87		0.06	%
Certificates of deposit		438,738		2,605		1.19	%		467,680		2,761		1.18	%
Federal Home Loan Bank advances		158,843		607		0.76	%		50,193		1,042		4.15	%
Repurchase agreements and other		30,552		635		4.16	%		90,572		1,827		4.03	%
Total interest bearing liabilities	$	1,388,276		4,414		0.64	%	$	1,348,208		6,173		0.92	%
Non-interest bearing liabilities		231,187							208,592
Total liabilities	$	1,619,463						$	1,556,800
Shareholders’ equity		245,636							192,736
Total liabilities and equity	$	1,865,099						$	1,749,536
Net interest income and interest rate spread			$	27,737		3.07	%			$	25,343		2.92	%
Net interest margin						3.20	%						3.08	%
Average interest earning assets to average interest    bearing liabilities						124.91	%						122.00	%

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

(2) Yields are on a fully taxable equivalent basis

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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, 2014, and the quarter ended June 30, 2015, the percentage changes fall within the policy limits set by the Board of Directors of Home Savings as the minimum NPV ratio and the maximum change in interest income the Home Savings Board deems advisable in the event of various changes in interest rates. See the table below for Board adopted policy limits.

Quarter Ended June 30, 2015
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		12.79	%		6.00	%		(1.52	)%		30.00	%	$	(1,841	)		(20.00	)%		(3.29	)%
300		13.39	%		6.00	%		(0.92	)%		25.00	%		(1,621	)		(15.00	)%		(2.89	)%
200		13.91	%		7.00	%		(0.40	)%		20.00	%		(1,424	)		(10.00	)%		(2.54	)%
100		14.30	%		7.00	%		(0.01	)%		15.00	%		(995	)		(5.00	)%		(1.77	)%
Static		14.31	%		9.00	%		0.00	%		0.00	%		—			—	%		—	%

Year Ended December 31, 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		11.71	%		6.00	%		(2.77	)%		30.00	%	$	(4,650	)		(20.00	)%		(8.31	)%
300		12.63	%		6.00	%		(1.85	)%		25.00	%		(3,647	)		(15.00	)%		(6.52	)%
200		13.50	%		7.00	%		(0.98	)%		20.00	%		(2,655	)		(10.00	)%		(4.75	)%
100		14.22	%		7.00	%		(0.26	)%		15.00	%		(1,556	)		(5.00	)%		(2.78	)%
Static		14.48	%		9.00	%		0.00	%		0.00	%		—			—	%		—	%

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

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

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

ITEM 4. Controls and Procedures.

An evaluation was carried out by United Community’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of United Community’s disclosure controls and procedures (as defined in Rules 13a-15(e)/15d-15(e) of the Securities Exchange Act of 1934) as of June 30, 2015. 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, 2015, 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, 2015, there were no changes in United Community’s internal controls over financial reporting that have materially affected or are reasonably likely to materially affect United Community’s internal controls over financial reporting.

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PART II. OTHER INFORMATION

UNITED COMMUNITY FINANCIAL CORP.

ITEM 1. Legal Proceedings.

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

ITEM 1A. Risk Factors.

There have been no significant changes in United Community’s risk factors as outlined in United Community’s Form 10-K for the period ended December 31, 2014.  The risk factors described in the Annual Report on Form 10-K are not the only risks facing the Company.  Additional risks and uncertainties not currently known to the Company or that management currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.  Moreover, the Company undertakes no obligation and disclaims any intention to publish revised information or updates to forward-looking statements contained in such risk factors or in any other statement made at any time by the Company or any of its directors, officers, employees or other representatives, unless and until any such revisions or updates are expressly required to be disclosed by securities laws or regulations.

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

(a) Not applicable

(b) Not applicable

(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, 2015:

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 that may yet be purchased under the plan
April 1 through April 30, 2015 (1)		179,400	$	5.55		165,400	(2)		2,397,589
May 1 through May 31, 2015 (1)		1,014,500		5.48		1,014,500			1,383,089
June 1 through June 30, 2015 (1)		362,790		5.45		361,200	(3)		1,021,889
Total		1,556,690	$	5.48		1,541,100			1,021,889

(1) United Community’s stock repurchase program became effective December 29, 2014.  It authorized the purchase of up to 2,500,000 shares.  There is no expiration date for the program.

(2) United Community purchased 14,000 shares at an average share price of $5.49 per share.  These shares were purchased from employees that used shares to pay employment taxes during the period.  The purchase of these shares were not part of United Community’s share repurchase programs.

(3) United Community purchased 1,590 shares at an average share price of $5.38.  These shares were purchased from employees that used shares to pay employment taxes during the period.  The purchase of these shares were not part of United Community’s share repurchase programs.

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ITEM 6. Exhibits.

Exhibit Number	Description
3.1	Articles of Incorporation, including amendments
3.2	Amended Code of Regulations
31.1	Section 302 Certification by Chief Executive Officer
31.2	Section 302 Certification by Principal Accounting Officer
32	Certification of Statements by Chief Executive Officer and Principal Accounting Officer
101	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, 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 5, 2015	/S/ Gary M. Small
	Gary M. Small President and Chief Executive Officer
	(Principal Executive Officer)
Date: August 5, 2015	/S/ Timothy W. Esson
	Timothy W. Esson Chief Financial Officer and Treasurer
	(Principal Financial Officer)

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UNITED COMMUNITY FINANCIAL CORP.

Exhibit 3.1

Incorporated by reference to the Form 10-Q filed by United Community on May 7, 2015 with the SEC, film number 15842770, Exhibit 3.1.

Exhibit 3.2

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

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