United Community Financial 10Q 2017 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2017

☐	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 ☒ 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 ☒ 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”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller reporting company	☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 49,684,751 common shares as of April 30, 2017.

TABLE OF CONTENTS

			PAGE

Part I. FINANCIAL INFORMATION
	Item 1.	Financial Statements	3
	Consolidated Statements of Financial Condition as of March 31, 2017 (Unaudited) and December 31, 2016		3
	Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2017and 2016 (Unaudited)		4
	Consolidated Statement of Shareholders’ Equity for the Three Months ended March 31, 2017and 2016 (Unaudited)		6
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017and 2016 (Unaudited)		7
	Notes to Consolidated Financial Statements (Unaudited)		8-50
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	51-56
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57
	Item 4.	Controls and Procedures	58
Part II.OTHER INFORMATION			59
	Item 1.	Legal Proceedings	59
	Item 1A.	Risk Factors	59
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59
	Item 3.	Defaults Upon Senior Securities (None)	59
	Item 4.	Mine Safety Disclosures (None)	59
	Item 5.	Other Information (None)	59
	Item 6.	Exhibits	60
Signatures			61
Exhibits			62

PART I—FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

	March 31,			December 31,
	2017			2016
	(Dollars in thousands)
Assets:
Cash and deposits with banks	$	32,904		$	27,690
Federal funds sold		16,868			18,197
Total cash and cash equivalents		49,772			45,887
Securities:
Available for sale, at fair value		335,834			343,284
Held to maturity, (fair value of $93,297 and $96,150, respectively)		94,523			97,519
Loans held for sale, at lower of cost or market		197			165
Loans held for sale, at fair value		75,501			62,593
Loans, net of allowance for loan losses of $18,970 and $19,087		1,835,000			1,503,577
Federal Home Loan Bank stock, at cost		19,324			18,068
Premises and equipment, net		23,919			20,963
Accrued interest receivable		7,032			6,900
Real estate owned and other repossessed assets, net		1,137			1,777
Goodwill		19,460			208
Customer list intangible		2,090			1,356
Core deposit intangible		2,182			5
Cash surrender value of life insurance		56,238			55,861
Other assets		34,801			33,182
Total assets	$	2,557,010		$	2,191,345
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest bearing	$	333,940		$	256,918
Interest bearing
Customer deposits		1,439,266			1,181,557
Brokered deposits		131,999			76,516
Total interest bearing deposits		1,571,265			1,258,073
Total deposits		1,905,205			1,514,991
Borrowed funds:
Federal Home Loan Bank advances
Long-term Federal Home Loan Bank advances		47,951			47,756
Short-term Federal Home Loan Bank advances		291,000			343,000
Total Federal Home Loan Bank advances		338,951			390,756
Repurchase agreements and other		6,839			512
Total borrowed funds		345,790			391,268
Advance payments by borrowers for taxes and insurance		17,084			23,812
Accrued interest payable		304			145
Accrued expenses and other liabilities		11,525			11,323
Total liabilities		2,279,908			1,941,539
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 49,695,487 and 46,581,370 shares, respectively, outstanding		177,523			174,360
Retained earnings		152,721			152,675
Accumulated other comprehensive income (loss)		(20,042	)		(21,040	)
Treasury stock, at cost, 4,443,423 and 7,557,540 shares, respectively		(33,100	)		(56,189	)
Total shareholders’ equity		277,102			249,806
Total liabilities and shareholders’ equity	$	2,557,010		$	2,191,345

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

	For the Three Months Ended March 31,
	2017			2016
	(Dollars in thousands, except per share data)
Interest income
Loans	$	17,558		$	13,801
Loans held for sale		661			332
Securities available for sale, nontaxable		418			123
Securities available for sale, taxable		1,602			1,935
Securities held to maturity, nontaxable		62			55
Securities held to maturity, taxable		465			577
Federal Home Loan Bank stock dividends		214			182
Other interest earning assets		80			15
Total interest income		21,060			17,020
Interest expense
Deposits		1,621			1,612
Federal Home Loan Bank advances		955			530
Repurchase agreements and other		8			5
Total interest expense		2,584			2,147
Net interest income		18,476			14,873
Provision for loan losses		1,475			2,155
Net interest income after provision for loan losses		17,001			12,718
Non-interest income
Insurance agency income		473			336
Brokerage income		322			300
Deposit related fees		1,290			1,326
Mortgage servicing fees		735			698
Mortgage servicing rights valuation		(3	)		(435	)
Mortgage servicing rights amortization		(448	)		(468	)
Other service fees		29			18
Net gains (losses):
Securities available for sale (includes $29 and $153, respectively, accumulated other comprehensive income reclassifications for unrealized net gains on available for sale securities)		29			153
Mortgage banking income		1,323			1,382
Real estate owned and other repossessed assets, net		(52	)		(13	)
Debit/credit card fees		923			885
Trust fees		282			—
Other income		481			476
Total non-interest income		5,384			4,658
Non-interest expense
Salaries and employee benefits (includes $0 and $(278), respectively, accumulated other comprehensive income reclassifications from prior service credit on postretirement plan).		8,975			7,088
Occupancy		964			862
Equipment and data processing		2,079			1,835
Financial institutions tax		490			442
Advertising		124			127
Amortization of intangible assets		83			13
FDIC insurance premiums		188			326
Other insurance premiums		112			89
Legal and consulting fees		229			80
Other professional fees		520			187
Real estate owned and other repossessed asset expenses		62			72
Acquisition costs		4,962			—
Other expenses		1,502			1,343
Total non-interest expenses		20,290			12,464
Income before income taxes		2,095			4,912
Income tax expense (includes $10 and $151 income tax expense from reclassification items)		557			1,592
Net income	$	1,538		$	3,320

(Continued)

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

	For the Three Months Ended March 31,
		2017		2016
	(Dollars in thousands, except per share data)
Net income	$	1,538	$	3,320
Other comprehensive income
Unrealized gain on securities, available for sale, net of reclassifications and tax of $520 and $3,460, respectively		965		6,429
Accretion of unrealized losses on securities transferred from available for sale to held to maturity, net of tax of $18 and $18, respectively		33		34
Accretion of unrecognized actuarial gains and amortization of prior service credit on postretirement plan, net of tax of $0 and $(97), respectively recognized in net income		—		(181	)
Total other comprehensive income		998		6,282
Comprehensive income	$	2,536	$	9,602
Earnings per share
Basic	$	0.03	$	0.07
Diluted		0.03		0.07

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

CONDENSED 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, 2017		46,581,370		$	174,360		$	152,675		$	(21,040	)	$	(56,189	)	$	249,806
Net income								1,538									1,538
Other comprehensive income											998						998
Stock option exercises		500						(3	)					4			1
Stock option expense					1												1
Restricted stock grants		61,436			(457	)								457			—
Restricted stock expense					271												271
Vesting of Long-term Incentive Plan		68,783			87									510			597
Purchase of Ohio Legacy Corp.		3,033,604			3,261									22,555			25,816
Cash dividend payments ($0.03 per share)								(1,489	)								(1,489	)
Treasury stock purchases		(50,206	)											(437	)		(437	)
Balance March 31, 2017		49,695,487		$	177,523		$	152,721		$	(20,042	)	$	(33,100	)	$	277,102

	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, 2016		47,517,644		$	174,304		$	140,819		$	(19,220	)	$	(51,658	)	$	244,245
Net income								3,320									3,320
Other comprehensive income											6,282						6,282
Stock option exercises		8,000						(51	)					62			11
Stock option expense					3												3
Restricted stock grants		159,238			(947	)		(285	)					1,232			—
Restricted stock forfeitures		(1,014	)		3			7						(10	)		—
Restricted stock expense					215												215
Purchase of James & Sons Insurance		262,705						(541	)					2,049			1,508
Cash dividend payments ($0.025 per share)								(1,194	)								(1,194	)
Treasury stock purchases		(440,047	)											(2,586	)		(2,586	)
Balance March 31, 2016		47,506,526		$	173,578		$	142,075		$	(12,938	)	$	(50,911	)	$	251,804

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Three Months Ended March 31,
	2017			2016
	(Dollars in thousands)
Cash Flows from Operating Activities
Net income	$	1,538		$	3,320
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		1,475			2,155
Mortgage banking income		(572	)		(579	)
Changes in fair value on loans held for sale		(751	)		(803	)
Net losses on real estate owned and other repossessed assets sold		52			13
Net gain on available for sale securities sold		(29	)		(153	)
Net gain on other assets sold		—			(2	)
Amortization of premiums and accretion of discounts		1,179			1,848
Depreciation and amortization		644			559
Net change in interest receivable		548			195
Net change in interest payable		88			57
Net change in prepaid and other assets		3,013			(630	)
Net change in other liabilities		(1,176	)		(305	)
Stock based compensation		272			218
Net principal disbursed on loans originated for sale		(50,198	)		(51,429	)
Proceeds from sale of loans held for sale		38,225			52,104
Net change in deferred tax assets		1,457			1,437
Cash surrender value of life insurance		(377	)		(365	)
Tax benefit recognized on stock based compensation		(60	)		—
Net change in interest rate caps		—			3
Net cash from operating activities		(4,672	)		7,643
Cash Flows from Investing Activities
Proceeds from the principal repayments and maturities of securities available for sale		13,359			8,211
Proceeds from the principal repayments and maturities of securities held to maturity		2,877			2,739
Proceeds from the sale of securities available for sale		5,029			18,134
Proceeds from the sale of real estate owned and other repossessed assets		677			1,171
Proceeds from the sale of loans held for investment		2,250			1
Proceeds from the sale of premises and equipment		—			2
Purchases of premises and equipment		(652	)		(467	)
Principal disbursed on loans, net of repayments		(60,444	)		(36,809	)
Loans purchased		(15,189	)		(8,681	)
Purchase of securities available for sale		—			(21,496	)
Net cash received in acquisition		25,780			43
Net cash from investing activities		(26,313	)		(37,152	)
Cash Flows from Financing Activities
Net increase in checking, savings and money market accounts		68,144			45,534
Net (decrease) increase in certificates of deposit		55,856			(14,663	)
Net decrease in advance payments by borrowers for taxes and insurance		(7,261	)		(4,927	)
Net change in short-term FHLB advances		(75,500	)		12,000
Net change in repurchase agreements and other borrowed funds		(4,444	)		(6	)
Proceeds from the exercise of stock options		1			11
Dividends paid		(1,489	)		(1,194	)
Purchase of treasury stock		(437	)		(2,586	)
Net cash from financing activities		34,870			34,169
Change in cash and cash equivalents		3,885			4,660
Cash and cash equivalents, beginning of period		45,887			35,910
Cash and cash equivalents, end of period	$	49,772		$	40,570

See Notes to Consolidated Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

BASIS OF PRESENTATION

United Community Financial Corp. (United Community or the Company) was incorporated in the State of Ohio in February 1998 for the purpose of owning all of the outstanding capital stock of Home Savings and Loan Company of Youngstown, Ohio (Home Savings or the Bank) issued upon the conversion of Home Savings from a mutual savings association to a permanent capital stock savings association (Conversion). Upon consummation of the Conversion on July 8, 1998, United Community because the unitary thrift holding company for Home Savings. Home Savings conducts its business from its main office located in Youngstown, Ohio, 35 retail banking offices and 12 loan production centers located throughout Ohio, western Pennsylvania and West Virginia.

On January 29, 2016, United Community acquired James & Sons Insurance. James & Sons Insurance is an insurance agency that offers a wide variety of insurance products for business and residential customers, which include auto, homeowners, life-health, commercial, surety bonds, and aviation. On February 28, 2017, James & Sons Insurance acquired Eich Brothers Insurance. Eich Brothers Insurance is an insurance agency that offers insurance products for business and residential customers, which include auto, commercial, home owners and life-health.

On January 31, 2017, United Community completed its acquisition of Ohio Legacy Corp. (OLCB). Immediately following the acquisition of OLCB, Home Savings was merged into Premier Bank & Trust, OLCB’s wholly owned subsidiary state chartered bank (PB&T), and PB&T changed its name to Home Savings Bank. As a result of the acquisition, United Community issued 3,033,604 United Community common shares and paid $20.4 million to OLCB shareholders. Also, in connection with the acquisition, United Community became a financial holding company, and its wholly owned subsidiary is now an Ohio bank.

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 months ended March 31, 2017, are not necessarily indicative of the results to be expected for the year ending December 31, 2017. 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, 2016.

The consolidated financial statements include the accounts of United Community and its subsidiaries. All material inter-company transactions have been eliminated. 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.

RECENT ACCOUNTING DEVELOPMENTS

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 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. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 was originally going to be effective on January 1, 2017; however, the FASB recently issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date which deferred the effective date of ASU 2014-09 by one year to January 1, 2018. United Community’s revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. We expect that ASU 2014-09 will require us to change how we recognize certain insurance commissions and fees; however, we do not expect these changes to have a significant impact on our financial statements. We continue to evaluate the impact of ASU 2014-09 on other components of non-interest income.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair

value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (viii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. The new guidance is effective for annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2017. Management is currently evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements and expects revisions to disclosures included in the consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02 - Leases (Topic 842). The ASU will require all organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Additional qualitative and quantitative disclosures will be required so that users can understand more about the nature of an entity’s leasing activities. The new guidance is effective for annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. Management is currently evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements and expects to recognize an increase in other assets and other liabilities for the rights and obligations created by leasing of branches. Management also expects minimal impact in the income statement with respect to occupancy expense related to leases.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation - Stock Compensation. The ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. Key provisions include the elimination of “windfall pools” and removes the requirement to delay recognition of a windfall tax benefit until it reduces current taxes payable. Additionally, the simplification permits entities to withhold an amount up to the employees’ maximum individual tax rate in the relevant jurisdiction without resulting in a liability classification of the award. Entities are now permitted to make accounting policy elections for the impact of forfeitures on the recognition of expense for share-based payment awards. This ASU was adopted on January 1, 2017. The Company recognized a tax benefit of $60,000 in income tax expense during the three months ended March 31, 2017 as a result of adoption related to vesting of restricted stock awards and exercised stock options.

In June 2016, FASB Issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU adds a new Topic 326 to the Codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. The guidance in ASU 2016-13 is effective for “public business entities,” as defined, that are SEC filers for fiscal years, and for interim periods with those fiscal years, beginning after December 15, 2019. Early adoption of the guidance is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is currently evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements. Management is aggregating the necessary data requirements and addressing any data-archiving improvements necessary for the implementation of this ASU.

In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments, which amends the guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of the ASU is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. The ASU’s amendments add or clarify guidance on eight cash flow issues:

•

Debt prepayment or debt extinguishment costs.

•

Settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing.

•

Contingent consideration payments made after a business combination.

•

Proceeds from the settlement of insurance claims.

•

Proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies.

•

Distributions received from equity method investees.

•

Beneficial interests in securitization transactions.

•

Separately identifiable cash flows and application of the predominance principle.

For public business entities, the guidance in the ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for all entities. Entities must apply the guidance retrospectively to all periods presented but may apply it prospectively from the earliest date practicable if retrospective application would be impracticable. Management is currently evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 from the goodwill impairment test. Instead, under the new guidance, an entity is to perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have an impact on the Company’s consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08 - Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This ASU amends the amortization period for certain purchased callable debt securities held at a premium. It shortens the amortization period for the premium to the earliest call date. Under current U.S. GAAP, premiums on callable debt securities generally are amortized to the maturity date. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted for interim or annual periods. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

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 with respect to awards issued under the 2007 Plan that 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. Because the 2007 Plan terminated, no additional awards may be made under it.

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 with respect to 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.

There were no stock options granted in the three months ended March 31, 2017 and 2016. Any options granted must be exercised within 10 years from the date of grant. Expenses related to prior stock option grants are included with salaries and employee benefits. The Company recognized $1,000 in stock option expense for the three months ended March 31, 2017. The Company recognized $3,000 in stock option expense for the three months ended March 31, 2016. The Company expects to recognize additional expense of $1,000 for the remainder of 2017.

A summary of option activity in the plans is as follows:

	For the three months ended
	March 31, 2017
				Weighted		Aggregate
				average		intrinsic value
	Shares			exercise price		(in thousands)
Outstanding at beginning of year		371,218		$	2.55
Granted		—
Exercised		(500	)		1.30
Forfeited and expired		—			—
Outstanding at end of period		370,718			2.55	$	2,147
Shares subject to options exercisable at end of period		366,292			2.51	$	2,134

Information related to stock options for the three months ended March 31, 2017 and 2016 follows:

	March 31, 2017		March 31, 2016
Intrinsic value of options exercised	$	4,000	$	34,000
Cash received from option exercises		1,000		11,000
Tax benefit realized from option exercises		—		—
Weighted average fair value of options granted, per share	$	—	$	—

As of March 31, 2017, the cost of nonvested stock options is expected to be recognized over a weighted-average period of 3 months.

Outstanding stock options at March 31, 2017 have a weighted average remaining life of 3.16 years and may be exercised in the range of $1.20 to $5.89 per share.

Restricted Stock Awards:

The 2007 Plan permitted and the 2015 Plan permits the issuance of restricted stock awards to employees and nonemployee directors. Nonvested shares at March 31, 2017 aggregated 320,502, of which 67,212 will vest during the remainder of 2017, 115,508 will vest in 2018, 105,109 will vest in 2019 and 32,673 will vest in 2020. Expense related to restricted stock awards is charged to salaries and employee benefits and is recognized over the vesting period of the awards based on the fair value of the shares at the grant date. The Company recognized approximately $271,000 in restricted stock award expenses for the three months ended March 31, 2017. The Company recognized approximately $215,000 in restricted stock award expense for the three months ended March 31, 2016. The Company expects to recognize additional expenses of approximately $570,000 in 2017, $550,000 in 2018, $272,000 in 2019 and $74,000 in 2020. The total average per share fair value of shares vested during the three months ended March 31, 2017 was $8.63.

A summary of changes in the Company’s nonvested restricted shares for the three months ended March 31, 2017 is as follows:

	For the three months ended
	March 31, 2017
				Weighted
				average
				grant date
	Shares			fair value
Nonvested at beginning of year		341,184		$	5.50
Granted		61,436		$	8.67
Vested		(82,118	)	$	5.26
Forfeited		—		$	—
Nonvested shares at end of period		320,502		$	6.17

Annual Incentive Plan

The Annual Incentive Plan (AIP) provides incentive compensation awards to certain officers of the Company. Annual incentive awards are generally based upon the actual performance of the Company and individual participant performance 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 AIP are calculated, they are paid in cash and in restricted stock. The restricted stock vests equally over three years, beginning on the first

anniversary of the date the restricted stock is issued. The Company incurred $76,000 in expense for the restricted stock portion of the AIP for the three months ended March 31, 2017 and $496,000 for the cash portion of the AIP for the three months ended March 31, 2017. The Company incurred $76,000 in expense for the restricted stock portion of the AIP for the three months ended March 31, 2016 and $325,000 for the cash portion of the AIP for the three months ended March 31, 2016.

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 $152,000 for the LTIP for the three months ended March 31, 2017. The Company incurred $96,000 in expense for the LTIP for the three months ended March 31, 2016.

SECURITIES

Components of the available for sale portfolio are as follows:

	March 31, 2017
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(Dollars in thousands)
Available for Sale
U.S. Treasury and government sponsored entities' securities	$	182,855	$	234	$	(1,436	)	$	181,653
States of the U.S. and political subdivisions		59,264		10		(1,410	)		57,864
Mortgage-backed GSE securities: residential		97,045		61		(789	)		96,317
Total	$	339,164	$	305	$	(3,635	)	$	335,834

	December 31, 2016
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(Dollars in thousands)
Available for Sale
U.S. Treasury and government sponsored entities' securities	$	188,082	$	172	$	(2,221	)	$	186,033
States of the U.S. and political subdivisions		59,415		3		(1,661	)		57,757
Mortgage-backed GSE securities: residential		100,602		50		(1,158	)		99,494
Total	$	348,099	$	225	$	(5,040	)	$	343,284

Components of held to maturity securities portfolio are as follows:

	March 31, 2017
			Gross		Gross
	Amortized		unrecognized		unrecognized			Fair
	cost		gains		losses			value
	(Dollars in thousands)
Held to maturity
Mortgage-backed GSE securities: residential	$	82,076	$	—	$	(1,203	)	$	80,873
States of the U.S. and political subdivisions		12,447		17		(40	)		12,424
Total	$	94,523	$	17	$	(1,243	)	$	93,297

	December 31, 2016
			Gross		Gross
	Amortized		unrecognized		unrecognized			Fair
	cost		gains		losses			value
	(Dollars in thousands)
Held to maturity
Mortgage-backed GSE securities: residential	$	85,065	$	—	$	(1,300	)	$	83,765
States of the U.S. and political subdivisions		12,454		17		(86	)		12,385
Total	$	97,519	$	17	$	(1,386	)	$	96,150

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

	March 31, 2017
	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		183,271		182,068
Due after ten years		58,848		57,449
Mortgage-backed GSE securities: residential		97,045		96,317
Total	$	339,164	$	335,834

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

	March 31, 2017
	Amortized cost		Fair value
	(Dollars in thousands)
Due in one year or less	$	3,200	$	3,202
Due after one year through five years		—		—
Due after five years through ten years		5,775		5,761
Due after ten years		3,472		3,461
Mortgage-backed GSE securities: residential		82,076		80,873
Total	$	94,523	$	93,297

Securities pledged for public funds were approximately $143.6 million at March 31, 2017 and approximately $146.5 million at December 31, 2016.

Securities available for sale that have been in an unrealized loss position for less than twelve months or twelve months or more at March 31, 2017 are as follows:

	March 31, 2017
	Less than 12 months					12 months or more				Total
	Fair		Unrealized loss			Fair		Unrealized		Fair		Unrealized
	value		Loss			value		Loss		value		Loss
	(Dollars in thousands)
Description of securities:
U.S. Treasury and government sponsored entities	$	161,215	$	(1,436	)	$	—	$	—	$	161,215	$	(1,436	)
States of the U.S. and political subdivisions		47,500		(1,410	)		—		—		47,500		(1,410	)
Mortgage-backed GSE securities: residential		82,490		(789	)		—		—		82,490		(789	)
Total temporarily impaired securities	$	291,205	$	(3,635	)	$	—	$	—	$	291,205	$	(3,635	)

Securities available for sale that have been in an unrealized loss position for less than twelve months or twelve months or more at December 31, 2016 are as follows:

	December 31, 2016
	Less than 12 months					12 months or more				Total
	Fair		Unrealized loss			Fair		Unrealized		Fair		Unrealized
	value		Loss			value		Loss		value		Loss
	(Dollars in thousands)
Description of securities:
U.S. Treasury and government sponsored entities	$	171,411	$	(2,221	)	$	—	$	—	$	171,411	$	(2,221	)
States of the U.S. and political subdivisions		53,283		(1,661	)		—		—		53,283		(1,661	)
Mortgage-backed GSE securities: residential		98,775		(1,158	)		—		—		98,775		(1,158	)
Total temporarily impaired securities	$	323,469	$	(5,040	)	$	—	$	—	$	323,469	$	(5,040	)

All of the U.S. treasury and government sponsored entities and mortgage-backed securities available for sale that were temporarily impaired at March 31, 2017 and December 31, 2016, were impaired due to the level of interest rates at the time of purchase compared to current interest rates. Unrealized losses on these securities have not been recognized into income during the three months ended March 31, 2017 or 2016 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. 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.

All of the obligations of U.S. states and political subdivisions held for sale that were temporarily impaired at March 31, 2017 and December 31, 2016, were impaired due to the level of interest rates at that time. Unrealized losses on these securities have not been recognized into income for the three months ended March 31, 2017 or 2016 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 and has no intent 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.

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

	March 31, 2017
	Less than 12 months					12 months or more					Total
	Fair		Unrealized loss			Fair		Unrealized			Fair		Unrealized
	value		Loss			value		Loss			value		Loss
	(Dollars in thousands)
Description of securities:
Mortgage-backed GSE securities: residential	$	55,341	$	(1,071	)	$	25,532	$	(1,312	)	$	80,873	$	(2,383	)
States of the U.S. and political subdivisions		6,245		(40	)		—		—			6,245		(40	)
Total temporarily impaired securities	$	61,586	$	(1,111	)	$	25,532	$	(1,312	)	$	87,118	$	(2,423	)

	December 31, 2016
	Less than 12 months					12 months or more					Total
	Fair		Unrealized loss			Fair		Unrealized			Fair		Unrealized
	value		Loss			value		Loss			value		Loss
	(Dollars in thousands)
Description of securities:
Mortgage-backed GSE securities: residential	$	57,340	$	(1,243	)	$	26,426	$	(1,287	)	$	83,766	$	(2,530	)
States of the U.S. and political subdivisions		7,416		(86	)							7,416		(86	)
Total temporarily impaired securities	$	64,756	$	(1,329	)	$	26,426	$	(1,287	)	$	91,182	$	(2,616	)

All of the mortgage-backed securities held to maturity that were temporarily impaired at March 31, 2017 and December 31, 2016, were impaired due to the level of interest rates at the time of purchase compared to current interest rates. Unrealized losses on these securities have not been recognized into income for the three months ended March 31, 2017 or 2016 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. 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.

All of the obligations of U.S. states and political subdivisions held to maturity that were temporarily impaired at March 31, 2017 and December 31, 2016, were impaired due to the level of interest rates at the time of purchase compared to current interest rates. Unrealized losses on these securities have not been recognized into income for the three months ended March 31, 2017 or 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 and has no intent 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 $5.0 million and $18.1 million, for the three months ended March 31, 2017 and 2016, respectively. Gross gains of $29,000 and $153,000 were realized on these sales during the three months ended March 31, 2017 and 2016, respectively. Income tax expense related to net realized gains was $10,000 and $54,000 for the three months ended March 31, 2017 and 2016, respectively.

LOANS

Portfolio loans consist of the following:

	March 31,			December 31,
	2017			2016
	(Dollars in thousands)
Commercial loans
Multifamily	$	108,330		$	93,597
Nonresidential		325,633			231,401
Land		9,276			8,373
Construction		94,727			68,158
Secured		161,945			95,343
Unsecured		8,453			7,386
Total commercial loans		708,364			504,258
Residential mortgage loans
One-to four-family		839,413			762,926
Construction		51,372			35,695
Total residential mortgage loans		890,785			798,621
Consumer loans
Home equity		190,751			165,054
Auto		46,804			39,609
Marine		1,672			1,796
Recreational vehicle		7,066			7,602
Other		4,922			2,537
Total consumer loans		251,215			216,598
Total loans		1,850,364			1,519,477
Less:
Allowance for loan losses		18,970			19,087
Deferred loan costs, net		(3,606	)		(3,187	)
Total		15,364			15,900
Loans, net	$	1,835,000		$	1,503,577

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 March 31, 2017 and December 31, 2016 and activity for the three months ended March 31, 2017 and 2016.

Allowance For Loan Losses

	Commercial Loans			Residential Loans			Consumer Loans			Total
	(Dollars in thousands)
For the three months ended March 31, 2017
Beginning balance	$	10,824		$	5,538		$	2,725		$	19,087
Provision		522			570			383			1,475
Charge-offs		(1,311	)		(230	)		(329	)		(1,870	)
Recoveries		147			34			97			278
Ending balance	$	10,182		$	5,912		$	2,876		$	18,970
March 31, 2017
Period-end amount allocated to:
Loans individually evaluated for impairment	$	19		$	1,231		$	482			1,732
Loans collectively evaluated for impairment		10,163			4,681			2,394			17,238
Loans acquired with deteriorated credit quality		—			—			—			—
Ending balance	$	10,182		$	5,912		$	2,876		$	18,970
Period-end balances:
Loans individually evaluated for impairment		2,685			16,902			8,252			27,839
Loans collectively evaluated for impairment		704,241			873,883			242,963			1,821,087
Loans acquired with deteriorated credit quality		1,438			—			—			1,438
Ending balance	$	708,364		$	890,785		$	251,215		$	1,850,364

Allowance For Loan Losses

	Commercial Loans			Residential Loans			Consumer Loans			Total
For the three months ended March 31, 2016
Beginning balance	$	8,077		$	6,630		$	3,005		$	17,712
Provision (recovery)		2,724			(594	)		25			2,155
Charge-offs		(2,346	)		(362	)		(479	)		(3,187	)
Recoveries		66			62			95			223
Ending balance	$	8,521		$	5,736		$	2,646		$	16,903
December 31, 2016
Period-end amount allocated to:
Loans individually evaluated for impairment	$	1,271		$	1,245		$	500		$	3,016
Loans collectively evaluated for impairment		9,553			4,293			2,225			16,071
Ending balance	$	10,824		$	5,538		$	2,725		$	19,087
Period-end balances:
Loans individually evaluated for impairment	$	6,018		$	17,485		$	8,045		$	31,548
Loans collectively evaluated for impairment		498,240			781,136			208,553			1,487,929
Ending balance	$	504,258		$	798,621		$	216,598		$	1,519,477

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 recoveries. 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, economic cycles and other external factors. As of March 31, 2017, the Company evaluated 19 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.

The following table presents loans individually evaluated for impairment by class of loans as of and for three months ended March 31, 2017:

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	$	476	$	419	$	—	$	210	$	9	$	9
Nonresidential		738		166		—		828		22		22
Land		3,922		9		—		22		—		—
Construction		3,593		—		—		—		—		—
Secured		242		189		—		190		—		—
Unsecured		607		—		—		—		17		17
Total commercial loans		9,578		783		—		1,250		48		48
Residential mortgage loans
One-to four-family		7,584		5,764		—		6,261		53		46
Construction		—		—		—		—		—		—
Total residential mortgage loans		7,584		5,764		—		6,261		53		46
Consumer loans
Home equity		2,179		1,612		—		1,598		12		11
Auto		24		13		—		8		—		—
Marine		584		195		—		231		1		1
Recreational vehicle		674		220		—		170		3		2
Other		—		—		—		—		—		—
Total consumer loans		3,461		2,040		—		2,007		16		14
Total	$	20,623	$	8,587	$	—	$	9,518	$	117	$	108
With a specific allowance recorded
Commercial loans
Multifamily	$	—	$	—	$	—	$	—	$	—	$	—
Nonresidential		1,946		1,902		19		3,018		35		33
Land		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Secured		—		—		—		86		—		—
Unsecured		—		—		—		—		—		—
Total commercial loans		1,946		1,902		19		3,104		35		33
Residential mortgage loans
One-to four-family		11,252		11,138		1,231		10,933		162		122
Construction		—		—		—		—		—		—
Total residential mortgage loans		11,252		11,138		1,231		10,933		162		122
Consumer loans
Home equity		5,461		5,382		409		5,359		92		76
Auto		—		—		—		—		—		—
Marine		106		106		1		107		2		1
Recreational vehicle		734		724		72		677		10		9
Other		—		—		—		—		—		—
Total consumer loans		6,301		6,212		482		6,143		104		86
Total		19,499		19,252		1,732		20,180		301		241
Total impaired loans	$	40,122	$	27,839	$	1,732	$	29,698	$	418	$	349

The following table presents loans individually evaluated for impairment by class of loans as of and for three months ended March 31, 2016:

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	$	97	$	—	$	—	$	—	$	—	$	—
Nonresidential		1,042		212		—		259		1		1
Land		3,922		384		—		384		—		—
Construction		3,593		—		—		—		—		—
Secured		3,860		3,700		—		3,700		—		—
Unsecured		1,124		—		—		—		—		—
Total commercial loans		13,638		4,296		—		4,343		1		1
Residential mortgage loans
One-to four-family		7,875		6,081		—		5,974		20		14
Construction		—		—		—		—		—		—
Total residential mortgage loans		7,875		6,081		—		5,974		20		14
Consumer loans
Home equity		1,951		1,332		—		1,525		3		2
Auto		15		9		—		12		—		—
Marine		546		303		—		287		—		—
Recreational vehicle		534		289		—		184		1		1
Other		3		3		—		3		—		—
Total consumer loans		3,049		1,936		—		2,011		4		3
Total	$	24,562	$	12,313	$	—	$	12,328	$	25	$	18
With a specific allowance recorded
Commercial loans
Multifamily	$	—	$	—	$	—	$	—	$	—	$	—
Nonresidential		11,348		8,924		936		6,954		109		107
Land		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Secured		1,054		960		93		642		—		—
Unsecured		—		—		—		—		—		—
Total commercial loans		12,402		9,884		1,029		7,596		109		107
Residential mortgage loans
One-to four-family		12,710		12,710		1,407		13,096		189		136
Construction		—		—		—		—		—		—
Total residential mortgage loans		12,710		12,710		1,407		13,096		189		136
Consumer loans
Home equity		6,857		6,857		497		7,047		110		90
Auto		—		—		—		—		—		—
Marine		159		159		3		161		2		2
Recreational vehicle		688		688		86		905		7		7
Other		—		—		—		4		—		—
Total consumer loans		7,704		7,704		586		8,117		119		99
Total		32,816		30,298		3,022		28,809		417		342
Total impaired loans	$	57,378	$	42,611	$	3,022	$	41,137	$	442	$	360

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2016:

Impaired Loans

(Dollars in thousands)

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no specific allowance recorded
Commercial loans
Multifamily	$	55	$	—	$	—
Nonresidential		2,278		1,489		—
Land		3,922		34		—
Construction		3,594		—		—
Secured		242		190		—
Unsecured		713		—		—
Total commercial loans		10,804		1,713		—
Residential mortgage loans
One-to four-family		8,736		6,758		—
Construction		—		—		—
Total residential mortgage loans		8,736		6,758		—
Consumer loans
Home equity		2,159		1,583		—
Auto		11		3		—
Marine		585		267		—
Recreational vehicle		433		120		—
Other		—		—		—
Total consumer loans		3,188		1,973		—
Total	$	22,728	$	10,444	$	—
With a specific allowance recorded
Commercial loans
Multifamily	$	—	$	—	$	—
Nonresidential		6,930		4,133		1,193
Land		—		—		—
Construction		—		—		—
Secured		237		172		78
Unsecured		—		—		—
Total commercial loans		7,167		4,305		1,271
Residential mortgage loans
One-to four-family		10,810		10,727		1,245
Construction		—		—		—
Total residential mortgage loans		10,810		10,727		1,245
Consumer loans
Home equity		5,390		5,335		426
Auto		—		—		—
Marine		108		108		1
Recreational vehicle		639		629		73
Other		—		—		—
Total consumer loans		6,137		6,072		500
Total		24,114		21,104		3,016
Total impaired loans	$	46,842	$	31,548	$	3,016

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

Home Savings reclassifies a collateralized mortgage loan and a consumer loan 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 March 31, 2017 and December 31, 2016, but legal title, deed in lieu of foreclosure or similar legal agreement to the property has not yet been obtained:

	March 31, 2017				December 31, 2016
	Unpaid Principal Balance		Recorded Investment		Unpaid Principal Balance		Recorded Investment
	(Dollars in thousands)				(Dollars in thousands)
Mortgage loans in process of foreclosure	$	3,356	$	2,986	$	3,025	$	2,576
Consumer loans in process of foreclosure		1,309		1,016		1,069		795

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days and still on accrual by class of loans as of March 31, 2017:

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

As of March 31, 2017

	Nonaccrual		Loans past due over 90 days and still accruing
	(Dollars in thousands)
Commercial loans
Multifamily	$	419	$	—
Nonresidential		1,398		—
Land		9		—
Construction		—		—
Secured		354		—
Unsecured		—		—
Total commercial loans		2,180		—
Residential mortgage loans
One-to four-family		5,868		—
Construction		—		—
Total residential mortgage loans		5,868		—
Consumer Loans
Home equity		2,042		—
Auto		92		—
Marine		195		—
Recreational vehicle		176		—
Other		8		—
Total consumer loans		2,513		—
Total nonaccrual loans and loans past due over 90 days and still accruing	$	10,561	$	—

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days and still on accrual by class of loans as of December 31, 2016:

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

As of December 31, 2016

	Nonaccrual		Loans past due over 90 days and still accruing
	(Dollars in thousands)
Commercial loans
Multifamily	$	—	$	—
Nonresidential		3,546		—
Land		34		—
Construction		—		—
Secured		361		—
Unsecured		—		—
Total commercial loans		3,941		—
Residential mortgage loans
One-to four-family		6,084		—
Construction		—		—
Total residential mortgage loans		6,084		—
Consumer Loans
Home equity		1,936		—
Auto		31		—
Marine		267		—
Recreational vehicle		178		—
Other		2		—
Total consumer loans		2,414		—
Total nonaccrual loans and loans past due over 90 days and still accruing	$	12,439	$	—

The following table presents an age analysis of past-due loans, segregated by class of loans as of March 31, 2017:

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	$	—	$	—	$	—	$	—	$	108,330	$	108,330
Nonresidential		25		—		22		47		325,586		325,633
Land		—		—		9		9		9,267		9,276
Construction		—		—		—		—		94,727		94,727
Secured		83		—		354		437		161,508		161,945
Unsecured		—		—		—		—		8,453		8,453
Total commercial loans		108		—		385		493		707,871		708,364
Residential mortgage loans
One- to four-family		4,429		1,348		5,117		10,894		828,519		839,413
Construction		—		—		—		—		51,372		51,372
Total residential mortgage loans		4,429		1,348		5,117		10,894		879,891		890,785
Consumer loans:
Home equity		534		389		1,747		2,670		188,081		190,751
Automobile		103		41		25		169		46,635		46,804
Marine		—		—		195		195		1,477		1,672
Recreational vehicle		16		112		104		232		6,834		7,066
Other		15		3		8		26		4,896		4,922
Total consumer loans		668		545		2,079		3,292		247,923		251,215
Total loans	$	5,205	$	1,893	$	7,581	$	14,679	$	1,835,685	$	1,850,364

The following table presents an age analysis of past-due loans, segregated by class of loans as of December 31, 2016:

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	$	—	$	—	$	—	$	—	$	93,597	$	93,597
Nonresidential		3,511		—		61		3,572		227,829		231,401
Land		—		—		34		34		8,339		8,373
Construction		—		—		—		—		68,158		68,158
Secured				—		361		361		94,982		95,343
Unsecured				—		—		—		7,386		7,386
Total commercial loans		3,511		—		456		3,967		500,291		504,258
Residential mortgage loans
One- to four-family		3,774		1,717		5,461		10,952		751,974		762,926
Construction		—		—		—		—		35,695		35,695
Total residential mortgage loans		3,774		1,717		5,461		10,952		787,669		798,621
Consumer loans:
Home equity		941		458		1,669		3,068		161,986		165,054
Automobile		130		—		3		133		39,476		39,609
Marine		—		-		267		267		1,529		1,796
Recreational vehicle		131		347		-		478		7,124		7,602
Other		1		3		2		6		2,531		2,537
Total consumer loans		1,203		808		1,941		3,952		212,646		216,598
Total loans	$	8,488	$	2,525	$	7,858	$	18,871	$	1,500,606	$	1,519,477

As of March 31, 2017 and December 31, 2016, the Company has a recorded investment in troubled debt restructurings of $23.1 million and $26.6 million, respectively. The Company allocated $1.7 million of specific allowance for those loans at March 31, 2017 and $3.0 million at December 31, 2016. The Company has committed to lend additional amounts totaling up to $34,000 and $31,000 at March 31, 2017 and December 31, 2016, respectively.

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended March 31, 2017:

	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		1		75		84
Construction		—		—		—
Total residential mortgage loans		1		75		84
Consumer loans
Home equity		—		—		—
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		1		115		115
Other		—		—		—
Total consumer loans		1		115		115
Total restructured loans		2	$	190	$	199

The troubled debt restructurings described above increased the allowance for loan losses by $6,000 and resulted in no charge-offs during the three months ended March 31, 2017.

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended March 31, 2016:

	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Recorded Investment
			(Dollars in thousands)
Commercial loans
Multifamily		—	$	—	$	—
Nonresidential		1		88		88
Land		—		—		—
Construction		—		—		—
Secured		—		—		—
Unsecured		—		—		—
Total commercial loans		1		88		88
Residential mortgage loans
One- to four-family		2		219		237
Construction		—		—		—
Total residential mortgage loans		2		219		237
Consumer loans
Home equity		1		20		20
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—
Total consumer loans		1		20		20
Total restructured loans		4	$	327	$	345

The troubled debt restructurings described above increased the allowance for loan losses by $5,000, and resulted in $30,000 in charge-offs during the three months ended March 31, 2016.

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 period ended March 31, 2017.

	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		165
Construction		—		—
Total residential mortgage loans		1		165
Consumer loans
Home equity		—		—
Auto		—		—
Marine		—		—
Recreational vehicle		—		—
Other		—		—
Total consumer loans		—		—
Total restructured loans		1	$	165

The troubled debt restructurings that subsequently defaulted described above resulted in no charge-offs during the three months ended March 31, 2017, 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 period ended March 31, 2016:

	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		25
Construction		—		—
Total residential mortgage loans		2		25
Consumer loans
Home equity		—		—
Auto		—		—
Marine		—		—
Recreational vehicle		—		—
Other		—		—
Total consumer loans		—		—
Total restructured loans		2	$	25

The troubled debt restructurings that subsequently defaulted described above resulted in $3,000 of charge-offs during the three months ended March 31, 2016, 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. 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.

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 March 31, 2017 and December 31, 2016, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Loans

March 31, 2017

(Dollars in thousands)

	Unclassified				Classified
	Unclassified		Special Mention		Substandard		Doubtful		Loss		Total Classified		Total Loans
Commercial Loans
Multifamily	$	104,037	$	3,524	$	769	$	—	$	—	$	769	$	108,330
Nonresidential		310,787		7,873		6,973		—		—		6,973		325,633
Land		9,267		—		9		—		—		9		9,276
Construction		94,727		—		—		—		—		—		94,727
Secured		138,543		7,721		15,681		—		—		15,681		161,945
Unsecured		8,358		—		95		—		—		95		8,453
Total commercial loans		665,719		19,118		23,527		—		—		23,527		708,364
Residential mortgage loans
One- to four-family		831,964		257		7,192		—		—		7,192		839,413
Construction		51,372		—		—		—		—		—		51,372
Total residential mortgage loans		883,336		257		7,192		—		—		7,192		890,785
Consumer loans
Home equity		188,709		—		2,042		—		—		2,042		190,751
Auto		46,712		—		92		—		—		92		46,804
Marine		1,477		—		195		—		—		195		1,672
Recreational vehicle		6,890		—		176		—		—		176		7,066
Other		4,914		—		8		—		—		8		4,922
Total consumer loans		248,702		—		2,513		—		—		2,513		251,215
Total loans	$	1,797,757	$	19,375	$	33,232	$	—	$	—	$	33,232	$	1,850,364

Loans

December 31, 2016

(Dollars in thousands)

	Unclassified				Classified
	Unclassified		Special Mention		Substandard		Doubtful		Loss		Total Classified		Total Loans
Commercial Loans
Multifamily	$	89,468	$	3,564	$	565	$	—	$	—	$	565	$	93,597
Nonresidential		217,204		6,037		8,160		—		—		8,160		231,401
Land		8,339		—		34		—		—		34		8,373
Construction		68,158		—		—		—		—		—		68,158
Secured		89,756		3,420		2,167		—		—		2,167		95,343
Unsecured		7,291		—		95		—		—		95		7,386
Total commercial loans		480,216		13,021		11,021		—		—		11,021		504,258
Residential mortgage loans
One- to four-family		754,996		104		7,826		—		—		7,826		762,926
Construction		35,695		—		—		—		—		—		35,695
Total residential mortgage loans		790,691		104		7,826		—		—		7,826		798,621
Consumer loans
Home equity		163,101		—		1,953		—		—		1,953		165,054
Auto		39,577		1		31		—		—		31		39,609
Marine		1,530		—		266		—		—		266		1,796
Recreational vehicle		7,424		—		178		—		—		178		7,602
Other		2,535		—		2		—		—		2		2,537
Total consumer loans		214,167		1		2,430		—		—		2,430		216,598
Total loans	$	1,485,074	$	13,126	$	21,277	$	—	$	—	$	21,277	$	1,519,477

Purchased Credit Impaired Loans:

The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is as follows:

	March 31, 2017
	(Dollars in thousands)
Commercial loans	$	1,438
Residential mortgage loans		—
Consumer loans		—
Outstanding balance	$	1,438

Carrying amount, net of allowance of $0	$	1,438

Accretable yield, or income expected to be collected, is as follows:

	March 31, 2017
	(Dollars in thousands)
Balance at January 1	$	—
New loans purchased		1,797
Accretion of income		30
Reclassifications from nonaccretable difference		—
Principal payments received		21
Disposals		308
Balance at March 31	$	1,438

For the purchased credit impaired loans disclosed above, there was no change in the allowance for loan losses.

Purchased credit impaired loans purchased during the three months ended March 31, 2017 for which it was probable at acquisition that all contractually required payments would not be collected are as follows:

	March 31, 2017
	(Dollars in thousands)
Contractually required payments receivable of loans purchased during the year:
Commercial loans	$	4,499
Residential mortgage loans		—
Consumer loans		—
	$	4,499

Cash flow expected to be collected at acquisition	$	1,600
Fair value of acquired loans at acquisition		1,797

Income is not recognized on purchased credit impaired loans if the Company cannot reasonably estimate cash flows expected to be collected. The carrying amounts of such loans are as follows:

	March 31, 2017
	(Dollars in thousands)
Loans at beginning of year	$	—
Loans purchased during the year		1,797
Loans at end of period		1,438

MORTGAGE BANKING ACTIVITIES

Mortgage loans serviced for others, which are not reported in United Community’s assets, totaled $1.2 billion as of March 31, 2017 and $1.2 billion as of December 31, 2016. Mortgage banking income is comprised of gains recognized on the sale of loans and changes in fair value of mortgage banking derivatives.

The principal balances of mortgage loans serviced for others are as follows:

	March 31, 2017		December 31, 2016
	(Dollars in thousands)
Mortgage loan portfolios serviced for:
FHLMC	$	958,111	$	956,278
FNMA		206,472		208,114

Customer escrow balances with loans serviced for FHLMC and FNMA totaled $9.6 million and $14.3 million at March 31, 2017 and December 31, 2016, respectively.

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

	For the Three Months Ended March 31,
	2017			2016
	(Dollars in thousands)
Balance, beginning of period	$	6,070		$	5,686
Originations		355			509
Amortized to expense		(448	)		(468	)
Balance, end of period		5,977			5,727
Less valuation allowance		(3	)		(474	)
Net balance	$	5,974		$	5,253

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

	For the Three Months Ended March 31,
	2017			2016
	(Dollars in thousands)
Balance, beginning of period	$	—		$	(39	)
Impairment charges		(3	)		(435	)
Recoveries		—			—
Balance, end of period	$	(3	)	$	(474	)

The fair value of mortgage servicing rights as of March 31, 2017, was approximately $10.3 million and at December 31, 2016, the fair value was approximately $10.2 million.

Key economic assumptions in measuring the value of mortgage servicing rights at March 31, 2017, and December 31, 2016, were as follows:

	March 31, 2017		December 31, 2016
Weighted average prepayment rate	162 PSA		165 PSA
Weighted average life (in years)	6.72		6.64
Weighted average discount rate		9.00%		9.00%

OTHER REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS

Real estate owned and other repossessed assets at March 31, 2017 and December 31, 2016 were as follows:

	March 31, 2017			December 31, 2016
	(Dollars in thousands)
Real estate owned and other repossessed assets	$	1,686		$	2,789
Valuation allowance		(549	)		(1,012	)
End of period	$	1,137		$	1,777

Activity in the valuation allowance was as follows:

	Three Months Ended
	March 31, 2017			March 31, 2016
	(Dollars in thousands)
Beginning of period	$	1,012		$	1,229
Additions charged to expense		(38	)		1
Reductions due to sales		(425	)		(106	)
End of period	$	549		$	1,124

Expenses related to foreclosed and repossessed assets include:

	Three Months Ended
	March 31, 2017			March 31, 2016
	(Dollars in thousands)
Net (gain) loss on sales	$	90		$	12
Provision for unrealized losses (gains), net		(38	)		1
Operating expenses, net of rental income		62			72
Total expenses	$	114		$	85

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), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

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 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 conventional residential one-to four-family loans held for sale originated after January 1, 2016 and all permanent construction loans held for sale originated on or after January 1, 2015. The fair value of conventional loans held for sale is determined using the current 15 day forward contract price for either 15 or 30 year convential mortgages (Level 2)

The fair value of the Company’s permanent construction loans held for sale is determined using the current 60 day forward contract price for 30 year conventional loans which is then adjusted by extrapolating this rate to the estimated time period remaining until construction is complete. The fair value is also adjusted for unobservable market data such as estimated fall out rates and the estimated time from origination to completion of construction (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 March 31, 2017 Using:
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	March 31,		Assets		Inputs		Inputs
	2017		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Available for sale securities
U.S. Treasury and government sponsored entities' securities	$	181,653	$	—	$	181,653	$	—
States of the U.S. and political subdivisions		57,864		—		57,864
Mortgage-backed GSE securities: residential		96,317		—		96,317		—
Loans held for sale, at fair value		75,501		—		8,062		67,439
Purchased certificate of deposit option		824		—		824		—
Liabilities
Written certificate of deposit option		824		—		824		—

			Fair Value Measurements at December 31, 2016 Using:
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
	2016		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Available for sale securities
U.S. Treasury and government sponsored entities' securities	$	186,033	$	—	$	186,033	$	—
States of the U.S. and political subdivisions		57,757		—		57,757		—
Mortgage-backed GSE securities: residential		99,494		—		99,494		—
Loans held for sale, at fair value		62,593		—		8,832		53,761
Purchased certificate of deposit option		882		—		882		—
Liabilities
Written certificate of deposit option		882		—		882		—

There were no transfers between Level 1 and Level 2 during 2017 or 2016.

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2017 and 2016.

	Loans Held for Sale, At Fair Value
	For the Three Months Ended March 31,
	2017			2016
	(Dollars in thousands)
Balance of recurring Level 3 assets at beginning of period	$	53,761		$	26,716
Total gains (losses) for the period
Included in change in fair value of loans held for sale		590			669
Included in other comprehensive income					—
Originations/Draws on construction perm loans		25,300			16,687
Amortization					—
Sales		(12,212	)		(17,312	)
Balance of recurring Level 3 assets at end of period	$	67,439		$	26,760

	Interest Rate Caps
	For the Three Months Ended March 31,
	March 31, 2016
	(Dollars in thousands)
Balance of recurring Level 3 assets at beginning of period	$	3
Total gains (losses) for the period
Included in other income		127
Included in other comprehensive income		—
Purchases		—
Amortization		(130	)
Sales
Balance of recurring Level 3 assets at end of period	$	—

The following table presents quantitative information about recurring Level 3 fair value measurements at March 31, 2017:

			Valuation	Unobservable
	Fair Value		Technique(s)	Input(s)	Range
Loans held for sale, at fair value	$	67,439	Comparable sales	Time discount	0.00-1.80%

The following table presents quantitative information about recurring Level 3 fair value measurements at December 31, 2016:

			Valuation	Unobservable
	Fair Value		Technique(s)	Input(s)	Range
Loans held for sale, at fair value	$	53,761	Comparable sales	Time discount	0.00-1.80%

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 March 31, 2017 Using:
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	March 31,		Assets		Inputs		Inputs
	2017		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Impaired loans:
Commercial loans
Multifamily	$	424	$	—	$	—	$	424
Residential loans
One-to four-family residential		601		—		—		601
Consumer loans
Home Equity		16		—		—		16
Auto		11		—		—		11
Marine		169		—		—		169
Recreational vehicle		111		—		—		111
Mortgage servicing rights		56		—		56		—
Other real estate owned, net
Commercial loans
Construction loans		471		—		—		471
Residential loans
One-to four-family residential		132		—		—		132

			Fair Value Measurements at December 31, 2016 Using:
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
	2016		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Impaired loans:
Commercial loans
Nonresidential	$	2,257	$	—	$	—	$	2,257
Secured		284		—		—		284
Residential loans
One-to four-family residential		919		—		—		919
Consumer loans
Home Equity		228		—		—		228
Auto		177		—		—		177
Recreational vehicle		89		—		—		89
Other real estate owned, net
Commercial loans
Construction loans		748		—		—		748
Residential loans
One-to four-family residential		281		—		—		281

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 $1.3 million at March 31, 2017, that includes a specific valuation allowance of $5,000. This resulted in an increase of the provision for loan losses of $227,000 during the three months ended March 31, 2017. 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 $8.3 million at March 31, 2016, which includes a specific valuation allowance of $1.0 million. This resulted in an increase in the provision for loan losses of $3.0 million for the three months ended March 31, 2016. 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 $4.0 million at December 31, 2016, that includes a specific valuation allowance of $1.3 million.

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 March 31, 2017, mortgage servicing rights carried at fair value were $56,000, with a net valuation allowance of $3,000. At March 31, 2016, mortgage servicing rights, carried at fair value totaled $2.7 million, resulting in a net valuation allowance of $474,000. Mortgage servicing rights are valued by an independent third party that is active in purchasing and selling these instruments. Net impairment reflected in other income totaled $3,000 for the three months ended March 31, 2017. Net impairment reflected in other income totaled $435,000 for the three months ended March 31, 2016. The value reflects the characteristics of the underlying loans.

At March 31, 2017, other real estate owned, carried at fair value, which is measured for impairment using the fair value of the property less estimated selling costs, and had a net carrying amount of $603,000, with a valuation allowance of $549,000. This resulted in a recovery of expense of $38,000 during the three months ended March 31, 2017. At March 31, 2016, other real estate owned, carried at fair value, which is measured for impairment using the fair value of the property less estimated selling costs, and had a net carrying amount of $1.3 million with a valuation allowance of $1.1 million. This resulted in additional expenses of $1,000 during the three months ended March 31, 2016. At December 31, 2016, other real estate owned had a net carrying amount of $1.0 million, with a valuation allowance of $1.0 million.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at March 31, 2017:

	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
Impaired loans:
Commercial loans
Multi Family	$	424	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-35.00% (15.00%)
Residential loans
One-to four-family residential		601	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-10.77% (4.27%)
Consumer loans
Home Equity		16	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-17.85% (8.93%)
Marine		169	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-37.00% (37.00%)
Other real estate owned, net
Commercial loans
Construction loans		471	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-24.80% (26.94%)
Residential loans
One-to four-family residential		132	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-21.00% (3.85%)

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, 2016:

	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
Impaired loans:
Commercial loans
Nonresidential	$	2,257	Sales comparison approach	Adjustment for differences between comparable sales	0.00-35.00% (15.00%)
Secured		284	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-64.00% (16.00%)
Residential loans
One-to four-family residential		919	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-10.77% (4.27%)
Consumer loans
Home Equity		228	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-17.85% (8.93%)
Other real estate owned:
Commercial loans
Construction loans		748	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-90.40% (27.46%)
			Cost approach	Adjustment for differences in cost	0.00%-33.33% (16.67%)
Residential loans
One-to four-family residential		281	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-27.00% (7.74%)

Auto and recreational vehicle loans were excluded from the table above as their value is considered immaterial.

The Company has elected the fair value option for newly originated residential mortgage and 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 March 31, 2017 and December 31, 2016.

	March 31, 2017		December 31, 2016
	(Dollars in thousands)
Aggregate fair value	$	75,501	$	62,593
Contractual balance		75,000		62,843
Gain (loss)		501		(250	)

The total amount of gains and losses from changes in fair value included in earnings for the three months ended March 31, 2017 and 2016 for loans held for sale, at fair value were:

	For the Three Months Ended
	March 31, 2017		March 31, 2016
	(Dollars in thousands)
Interest income	$	—	$	—
Interest expense		—		—
Change in fair value		751		803
Total change in fair value	$	751	$	803

In accordance with U.S. GAAP, the carrying value and estimated fair values of financial instruments at March 31, 2017 and December 31, 2016, were as follows:

				Fair Value Measurements at March 31, 2017 Using:
	March 31,
	2017
	Carrying Value			(Level 1)			(Level 2)			(Level 3)
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	49,772		$	49,772		$	—		$	—
Available for sale securities		335,834			—			335,834			—
Held to maturity securities		94,523			—			90,095			3,202
Loans held for sale		197			—			201			—
Loans held for sale, at fair value		75,501			—			8,062			67,439
Loans, net		1,835,000			—			—			1,823,516
FHLB stock		19,324		n/a			n/a			n/a
Accrued interest receivable		7,032			—			2,021			5,011
Purchased certificate of deposit option		824			—			824			—
Liabilities:
Deposits:
Checking, savings and money market accounts		(1,272,797	)		(1,272,797	)		—			—
Certificates of deposit		(632,408	)		—			(635,917	)		—
FHLB advances		(338,951	)		—			(338,952	)		—
Repurchase agreements and other		(6,839	)		—			(6,661	)		—
Advance payments by borrowers for taxes and insurance		(17,084	)		(17,084	)		—			—
Accrued interest payable		(304	)		—			(304	)		—
Written certificate of deposit option		(824	)		—			(824	)		—

				Fair Value Measurements at December 31, 2016 Using:
	December 31,
	2016
	Carrying Value			(Level 1)			(Level 2)			(Level 3)
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	45,887		$	45,887		$	—		$	—
Available for sale securities		343,284			—			343,284			—
Held to maturity securities		97,519			—			92,940			3,210
Loans held for sale at lower of cost or market		165			—			169			—
Loans held for sale, at fair value		62,593			—			8,832			53,761
Loans, net		1,503,577			—			—			1,494,534
FHLB stock		18,068		n/a			n/a			n/a
Accrued interest receivable		6,900			—			2,624			4,276
Purchased certificate of deposit option		882			—			882			—
Liabilities:
Deposits:
Checking, savings and money market accounts		(1,026,565	)		(1,026,565	)		—			—
Certificates of deposit		(488,426	)		—			(491,278	)		—
FHLB advances		(390,756	)		—			(390,750	)		—
Repurchase agreements and other		(512	)		—			(513	)		—
Advance payments by borrowers for taxes and insurance		(23,812	)		(23,812	)		—			—
Accrued interest payable		(145	)		—			(145	)		—
Written certificate of deposit option		(882	)		—			(882	)		—

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.

Fair values for held to maturity securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows.

(d) 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.

(e) 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.

(f) 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.

(g) Accrued Interest Receivable/Payable

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

(h) Off-balance Sheet Instruments

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

STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURE

Supplemental disclosures of cash flow information are summarized below.

	For the Three Months Ended March 31,
	2017		2016
	(Dollars in thousands)
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest on deposits and borrowings	$	2,425	$	2,090
Supplemental schedule of noncash activities:
Transfers from loans to real estate owned and other repossessed assets		—		303
Accretion of securities held to maturity		50		53
Issuance of common stock - James & Sons acquisition		—		1,508
Issuance of common stock - Ohio Legacy Corp. acquisition		25,816		—
Net assets acquired from Ohio Legacy Corp., excluding cash and cash equivalents		36		—

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. No stock options were anti-dilutive for the three months ended March 31, 2017 and stock options for 71,891 shares were anti-dilutive for the three months ended March 31, 2016.

	For the Three Months Ended March 31,
	2017			2016
	(Dollars in thousands, except per share data)
Net income per consolidated statements of income	$	1,538		$	3,320
Net income allocated to participating securities		(11	)		(22	)
Net income allocated to common stock	$	1,527		$	3,298

Basic earnings per common share computation:
Distributed earnings allocated to common stock	$	1,479		$	1,188
Undistributed earnings allocated to common stock		48			2,110
Net income allocated to common stock	$	1,527		$	3,298
Weighted average common shares outstanding, including shares considered participating securities		48,620			47,587
Less: Average participating securities		(331	)		(315	)
Weighted average shares		48,289			47,272
Basic earnings per common share	$	0.03		$	0.07

Diluted earnings per common share computation:
Net income allocated to common stock	$	1,527		$	3,298
Weighted average common shares outstanding for basic earnings per common share		48,289			47,272
Add: Dilutive effects of assumed exercises of stock options and LTIP awards		357			279
Weighted average shares and dilutive potential common shares		48,646			47,551
Diluted earnings per common share	$	0.03		$	0.07

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 $29,000 and $153,000 for the three months ended March 31, 2017and 2016, respectively. Reclassifications also include amortization of unrealized gains on postretirement plan and accretion of unrealized loss on held to maturity securities.

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			Losses on Securities Transferred From Available for Sale to Held to Maturity			Total
March 31, 2017	(Dollars in thousands)
Balances at beginning of period, net of tax		(3,130	)		(17,110	)		(800	)		(21,040	)
Other comprehensive income before reclassifications		984			—			—			984
Accretion of unrealized losses of securities transferred from available for sale to held to maturity recognized in other comprehensive income		—			—			33			33
Reclassification adjustment for gains realized in income		(19	)		—			—			(19	)
Net current period other comprehensive income		965			—			33			998
Balances at end of period, net of tax	$	(2,165	)	$	(17,110	)	$	(767	)	$	(20,042	)

	Unrealized Gains (Losses) on Securities Available for Sale			Disproportionate Tax Effect from Securities Available for Sale			Losses on Securities Transferred From Available for Sale to Held to Maturity			Unrealized Gains (Losses) from Postretirement Plan			Disproportionate Tax Effect from Postretirement Plan		Total
March 31, 2016	(Dollars in thousands)
Balances at beginning of period, net of tax		(2,492	)		(17,110	)		(960	)		831			511		(19,220	)
Other comprehensive income before reclassifications		6,528			—			—			—			—		6,528
Amortization of unrealized gains of postretirement plan recognized in other comprehensive income		—			—			—			(181	)		—		(181	)
Accretion of unrealized losses of securities transferred from available for sale to held to maturity recognized in other comprehensive income		—			—			34			—			—		34
Reclassification adjustment for gains realized in income		(99	)		—			—			—			—		(99	)
Net current period other comprehensive income		6,429			—			34			(181	)		—		6,282
Balances at end of period, net of tax	$	3,937		$	(17,110	)	$	(926	)	$	650		$	511	$	(12,938	)

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 March 31, 2017:

	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	$	(29	)	Net gains on securities available for sale
		10		Tax expense
Total reclassification during the period	$	(19	)	Net of tax, increase to net income

The following are significant amounts reclassified out of each component of accumulated comprehensive income (loss) for the three months ended March 31, 2016:

	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	$	(153	)	Net gains on securities available for sale
		54		Tax expense
		(99	)	Net of tax
Amortization of postretirement benefits prior service costs		(278	)	Reduction in salaries and employee benefits
		97		Tax expense
		(181	)	Net of tax
Total reclassification during the period	$	(280	)	Increase to net income

12.

REGULATORY CAPITAL REQUIREMENTS

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

The Basel III Capital Rules establish a common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), a minimum Tier 1 capital to risk-based assets requirement (6% of risk-weighted assets) and assigns a 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 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 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 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 capital conservation buffer for 2017 is 1.25%. The final rule also implemented consolidated capital requirements.

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. 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.

	March 31, 2017
											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)	$	265,328		14.41	%	$	170,277		9.25	%	$	184,083		10.00	%
Tier 1 capital (to risk-weighted assets)		246,382		13.38	%		133,460		7.25	%		147,266		8.00	%
Common equity Tier 1 capital (to risk-weighted assets)		246,382		13.38	%		105,848		5.75	%		119,654		6.50	%
Tier 1 capital (to average assets)**		246,382		10.20	%		96,598		4.00	%		120,748		5.00	%

	December 31, 2016
											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 capital (to risk-weighted assets)	$	248,861		16.47	%	$	130,292		8.625	%	$	151,063		10.00	%
Tier 1 capital (to risk-weighted assets)		229,938		15.22	%		100,079		6.625	%		120,850		8.00	%
Common equity Tier 1 capital (to risk-weighted assets)		229,938		15.22	%		77,420		5.125	%		98,191		6.50	%
Tier 1 capital (to average assets)**		229,938		10.65	%		86,360		4.00	%		107,950		5.00	%

**	Tier 1 Leverage Capital Ratio

***	The capital ratios are reflective of the capital conservation buffer

Management believes that as of March 31, 2017 and December 31, 2016, Home Savings met all capital adequacy requirements to which it was subject. As of March 31, 2017 and December 31, 2016, Home Savings met the capital requirements to be deemed well capitalized. There are no known conditions that would change this classification subsequent to March 31, 2017.

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

	March 31, 2017			December 31, 2016
Total shareholders' equity	$	254,575		$	216,475
Add (deduct)
Accumulated other comprehensive income		20,057			21,056
Intangible assets		(20,377	)		(3	)
Disallowed deferred tax assets		(7,873	)		(7,590	)
Disallowed capitalized mortgage loan servicing rights		—			—
Tier 1 Capital		246,382			229,938
Allowance for loan losses and allowance for unfunded lending commitments limited to 1.25% of total risk-weighted assets		18,946			18,923
Total risk-based capital	$	265,328		$	248,861

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

	March 31, 2017

	Actual					Minimum Capital
	Actual					Requirements
	Actual					Per Regulation***
	Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total capital (to risk-weighted assets)	$	281,830		15.31	%	$	170,304		9.25	%
Tier 1 capital (to risk-weighted assets)		262,860		14.28	%		133,481		7.25	%
Common equity Tier 1 capital (to risk-weighted assets)		262,860		14.28	%		105,865		5.75	%
Tier 1 capital (to average assets)**		262,860		10.89	%		96,575		4.00	%

	December 31, 2016

						Minimum Capital
						Requirements
	Actual					Per Regulation***
	Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total capital (to risk-weighted assets)	$	277,817		18.38	%	$	130,369		8.625	%
Tier 1 capital (to risk-weighted assets)		258,869		17.13	%		100,139		6.625	%
Common equity Tier 1 capital (to risk-weighted assets)		258,869		17.13	%		77,466		5.125	%
Tier 1 capital (to average assets)**		258,869		11.98	%		86,425		4.000	%

As of March 31, 2017 and December 31, 2016, United Community’s capital exceeded the requirements to be deemed well capitalized.

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

	March 31, 2017			December 31, 2016
Total shareholders' equity	$	277,102		$	249,806
Add (deduct)
Accumulated other comprehensive income		20,042			21,040
Intangible assets		(22,877	)		(1,567	)
Disallowed deferred tax assets		(11,407	)		(10,410	)
Disallowed capitalized mortgage loan servicing rights		—			—
Tier 1 Capital		262,860			258,869
Allowance for loan losses and allowance for unfunded lending commitments limited to 1.25% of total risk-weighted assets		18,970			18,948
Total risk-based capital	$	281,830		$	277,817

13.

INCOME TAXES

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

	March 31,		December 31,
	2017		2016
	(Dollars in thousands)
Deferred tax assets:
Loan loss reserves	$	6,460	$	6,680
Depreciation		828		748
Other real estate owned valuation		192		354
Tax credits carryforward		1,736		1,471
Unrealized loss on securities available for sale		1,165		1,685
Unrealized loss on securities held to maturity		413		431
Interest on nonaccrual loans		980		1,039
Net operating loss carryforward		9,672		8,574
Purchase accounting adjustment		1,353		—
Accrued bonuses		574		812
Other		152		221
Deferred tax assets		23,525		22,015
Deferred tax liabilities:
Deferred loan fees		1,437		1,275
Federal Home Loan Bank stock dividends		4,645		4,585
Mortgage servicing rights		2,091		2,124
FHLB prepayment penalty		717		786
Purchase accounting adjustment		—		371
Prepaid expenses		171		139
Deferred tax liabilities		9,061		9,280
Net deferred tax asset	$	14,464	$	12,735

As of March 31, 2017, the net deferred tax asset was $14.5 million, and as of December 31, 2016, the net deferred tax asset was $12.7 million.

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

United Community’s net operating loss of $27.6 million at March 31, 2017 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 $1.7 million of alternative minimum tax credits. The alternative minimum tax credits are carried forward indefinitely.

14.

BUSINESS COMBINATION

On January 31, 2017, United Community completed its acquisition of Ohio Legacy Corp. (OLCB) pursuant to the terms and conditions of the Agreement and Plan of Merger, dated as of September 8, 2016 by and among United Community, the Bank, OLCB and Premier Bank & Trust (Merger Agreement). Pursuant to the terms of the Merger Agreement, OLCB was merged with and into United Community. Immediately following the merger, Home Savings was merged with and into Premier Bank & Trust, a subsidiary of OLCB, and changed its name to Home Savings Bank.

As a result of the merger and in accordance with the terms of the Merger Agreement, each preferred share of OLCB was deemed to have been converted into OLCB common shares. Each OLCB common share was converted into the right to receive either $18.00 in cash or 2.736 United Community common shares, subject to certain allocation procedures set forth in the Merger Agreement that ensured that 50% of OLCB’s common shares outstanding were converted into United Community common shares and 50% of OLCB’s common shares outstanding were exchanged for the cash consideration. The Company issued cash in lieu of issuing fractional shares.

After the allocation procedures were applied, the Company issued 3,033,604 United Community common shares and paid $20.4 million to OLCB shareholders as a result of the merger. Acquisition related costs aggregating $5.0 million were included in United Community’s Consolidated Statements of Operations for the three months ended March 31, 2017. The fair value of the common shares issued as part of the consideration paid for OLCB was determined in the basis of the closing price of United Community’s commons shares on the acquisition date.

The following table summarizes the consideration paid for OLCB.

	(In thousands)
Cash	$	20,379
United Community shares issued		25,816
Total fair value of consideration paid	$	46,195

At the acquisition date, United Community added the following to the Company’s consolidated statements of financial position:

	(In thousands)
Cash	$	46,159
Loans		259,373
Available for sale securities		9,996
FHLB stock, at cost		1,256
Premises and equipment		2,940
Accrued interest		679
Other intangible assets		2,426
Other real estate owned		89
Other assets		7,988
Total assets acquired	$	330,906

Deposits assumed	$	266,279
Federal Home Loan Bank advances		23,500
Repurchase agreements and other borrowings		10,771
Accrued expenses and other liabilities		2,581
Total liabilities assumed	$	303,131

Goodwill created	$	18,420

The changes to goodwill during the three months ended March 31, 2017 are primarily due to changes in the final market value for the customer list intangible asset, as well as the related tax effect from those adjustments related to the James & Sons acquisition in January 2016.

The fair value of net assets acquired included fair value adjustments to certain receivables that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted contractural cash flows. However, the Company believes that all contractual cash flows related to these financial instruments will be collected. As such, these receivables were not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans, which have shown evidence of credit deterioration since origination. Receivables acquired that were not subject to these requirements include non-impaired loans and customer receivables with a fair value and gross contractual amounts receivable of $2.5 million and $2.6 million, respectively, on the date of acquisition.

Upon adoption of ASU 2016-16, Business Combinations (Topic 805), adjustments to provisional amounts booked in previous years are to be adjusted through current year goodwill with the full effect of changes to depreciation, amortization, or other income recorded in current year earnings as if the change had been completed as of the acquisition date.

The following table presents proforma information as if the acquisition had occurred at the beginning of 2016. The proforma information includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, depreciation expense on property acquired, interest expense on deposits acquired, and the related income tax effects. The proforma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed dates. Net income includes the recognition of $4.1 million in merger releated expenses incurred by United Community and $368,000 in merger related expenses for OLCB during the threee months ended March 31, 2017.

	For the three months ended		For the three months ended
	March 31, 2017		March 31, 2016
	(In thousands, except per share data)
Net interest income	$	19,735	$	17,839
Net income		1,183		3,995
Basic earnings per share	$	0.02	$	0.08
Diluted earnings per share	$	0.02	$	0.08

Goodwill is recorded arising from the acquisition, which consisted largely of synergies and the cost savings resulting from combining the operations of the companies. No goodwill is expected to be deductible for income tax purposes.

At the time of the closing, Home Savings charter changed to a state chartered commercial bank and United Community became a financial holding company.

The acquisition benefits the Company and its shareholders by enabling the Company to further expand into the markets currently served by OLCB and strengthening the competitive position of the combined organization. Furthermore, the Company believes its increased asset size after the Merger will create additional economies of scale and provide opportunities for asset and earnings growth in an extremely competitive banking environment. Bank results of operations were included in the Company’s results beginning January 31, 2017.

The fair value of $2.2 million of intangible assets related to core deposits is subject to change pending final receipt of the final valuation.

15.

GOODWILL AND INTANGIBLE ASSETS

Goodwill:

The change in goodwill during the periods presented is as follows:

	March 31, 2017		December 31, 2016
	(In thousands)
Beginning of the year	$	208	$	—
Effect of adjustments		824		—
Acquired goodwill OLCB		18,240		208
Acquired goodwill Eich Brothers Insurance		188		—
Impairment	—		—
End of the year	$	19,460	$	208

Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. If the carrying amount of a reporting unit is zero or less than zero, a qualitative analysis of whether it is more likely than not that the reporting unit goodwill is impaired will be performed. The qualitative assessment indicated that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. The Company did not have any reporting unites with a carrying amount of zero or less than zero at March 31, 2017 or December 31, 2016.

Acquired Intangible Assets:

	March 31, 2017				December 31, 2016
	Gross				Gross
	Carrying		Accumulated		Carrying		Accumulated
	Amount		Amortization		Amount		Amortization
	(In thousands)
Amortized intangible assets:
Core deposit intangibles	$	11,184	$	9,002	$	8,952	$	8,947
Customer list intangible		2,162		72		1,400		44
Total	$	13,346	$	9,074	$	10,352	$	8,991

Aggregate amortization expense for the three months ended March 31, 2017 and 2016 was $83,000 and $13,000, respectively. Estimated amortization expense for the remainder of 2017 and the next five years is as follows:

Remainder of 2017	$	336,000
2018		448,000
2019		448,000
2020		448,000
2021		448,000
2022		448,000

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNITED COMMUNITY FINANCIAL CORP.

	For the Three Months Ended March 31,
Selected financial ratios and other data: (1)	2017			2016
Performance ratios:
Return on average assets (2)		0.25	%		0.66	%
Return on average equity (3)		2.24	%		5.33	%
Interest rate spread (4)		3.17	%		3.09	%
Net interest margin (5)		3.28	%		3.21	%
Noninterest expense to average assets		3.32	%		2.49	%
Efficiency ratio (6)		83.78	%		63.90	%
Average interest-earning assets to average interest-bearing liabilities		124.50	%		124.75	%
Capital ratios:
Average equity to average assets		11.22	%		12.45	%
Equity to assets, end of period		10.84	%		12.36	%
Tier 1 leverage ratio (Bank only)		10.20	%		11.53	%
Common equity Tier 1 capital (Bank only)		13.38	%		17.13	%
Tier 1 risk-based capital ratio (Bank only)		13.38	%		17.13	%
Total risk-based capital ratio (Bank only)		14.41	%		18.39	%
Asset quality ratios:
Nonperforming loans to net loans at end of period (7)		0.58	%		1.48	%
Nonperforming assets to average assets (8)		0.74	%		1.10	%
Nonperforming assets to total assets at end of period		0.71	%		1.08	%
Allowance for loan losses as a percent of loans		1.02	%		1.23	%
Allowance for loan losses as a percent of nonperforming loans (7)		179.62	%		84.07	%
Total classified assets as a percent of Tier 1 Capital (Bank only)		17.38	%		17.35	%
Total classified loans as a percent of Tier 1 Capital and ALLL (Bank only)		13.30	%		15.41	%
Total classified assets as a percent of Tier 1 Capital and ALLL (Bank only)		16.14	%		16.16	%
Net chargeoffs as a percent of average loans		0.37	%		0.89	%
Total 90+ days past due as a percent of net loans		0.42	%		1.15	%
Per share data:
Basic earnings per common share (9)	$	0.03		$	0.07
Diluted earnings per common share (9)		0.03			0.07
Book value per common share (10)		5.58			5.30
Tangible book value per common share (11)		5.10			5.27
Cash dividend per common share		0.030			0.025
Dividend payout ratio (12)		93.75	%		35.71	%

Notes:

1.	Ratios for the three 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 and prepayment penalty, 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 and other assets

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

10.	Shareholders’ equity divided by number of shares outstanding

11.	Shareholders’ equity minus goodwill and core deposit intangible divided by number of shares outstanding

12.	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.

Material Changes in Financial Condition at March 31, 2017 and December 31, 2016

On January 31, 2017, United Community completed its acquisition of OLCB pursuant to the terms and conditions of the Merger Agreement. Pursuant to the terms of the Merger Agreement, OLCB was merged with and into United Community (the merger). Immediately following the merger, Home Savings was merged with and into Premier Bank & Trust, a subsidiary of OLCB, and changed its name to Home Savings Bank.

As a result of the merger and in accordance with the terms of the Merger Agreement, each preferred share of OLCB was deemed to have been converted into OLCB common shares. Each OLCB common share was converted into the right to receive either $18.00 in cash or 2.736 United Community common shares, subject to certain allocation procedures set forth in the Merger Agreement that ensured that 50% of OLCB’s common shares outstanding were converted into United Community common shares, and 50% of OLCB’s common shares outstanding were converted into the right to receive the cash consideration. The Company paid cash in lieu of issuing fractional shares. This transaction resulted in the addition of approximately $349 million in assets and the addition of 4 branch locations in Summit, Stark and Belmont counties.

Cash and cash equivalents increased $3.9 million during the first three months of 2017. The addition of OLCB added cash and cash equivalents of $46.2 million to the combined company. This cash was used to pay for the cash portion of the acquisition and to support lending activities of the combined companies. Cash levels are expected to remain stable during the remainder of 2017.

Available for sale securities decreased $7.5 million during the first three months of 2017. The acquisition of OLCB added $10.0 million dollars in securities to the available for sale portfolio, but the securities matured prior to the end of the quarter. The decrease in the available for sale securities balance since December 31, 2016 was the result of maturities, paydowns and amortization of securities and a sale of $5.0 million in securities available for sale. Partially offsetting this activity was a decrease in the unrealized loss on securities. The unrealized loss in the available for sale portfolio was $3.3 million at March 31, 2017, compared to an unrealized loss of $4.8 million at December 31, 2016.

Net loans increased $331.4 million during the first three months of 2017 primarily as a result of the acquisition of OLCB but also due to $72.0 of organic loan growth. The organic loan growth increase was substantially attributed to the commercial portfolio 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 $19.0 million at March 31, 2017, down slightly from the $19.1 million reported at December 31, 2016. The allowance for loan losses as a percentage of loans was 1.02% at March 31, 2017, compared to 1.25% at December 31, 2016. The decrease is the result of the acquired loan portfolio being recorded at fair value without an allowance for loan losses.

The allowance for loan losses as a percentage of nonperforming loans was 179.62% at March 31, 2017, compared to 153.44% at December 31, 2016. 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”. As of March 31, 2017, the Company evaluated 19 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.

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 $27.8 million at March 31, 2017 as compared to $31.5 million at December 31, 2016.

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 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 $23.1 million at March 31, 2017 compared to $26.6 million at December 31, 2016. Of the $23.1 million at March 31, 2017, $20.0 million were performing loans according to their modified terms. The remaining balance of TDR loans of $3.1 million were considered nonperforming.

Nonperforming loans consist of nonaccrual loans and loans past due 90 days and still accruing. Nonperforming loans were $10.6 million, or 0.58% of net loans, at March 31, 2017, compared to $12.4 million, or 0.83% of net loans, at December 31, 2016.

Loans held for sale, carried at lower of cost or market, were $197,000 at March 31, 2017, compared to $165,000 at December 31, 2016. Loans held for sale, carried at fair value, were $75.5 million at March 31, 2017, compared to $62.6 million at December 31, 2016. OLCB had no loans held for sale at the time of acquisition. 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, which is usually within nine to ten months of origination. Home Savings continues to sell a majority of its newly originated fixed rate 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 $640,000 to $1.1 million during the three months ended March 31, 2017. Real estate owned and other repossessed assets are recorded at the fair market value of the property 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.

Goodwill increased $22.2 million during the first quarter of 2017 was primarily due to the acquisition of OLCB.

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. Home Savings recognized $377,000 as other non-interest income based on the change in cash value of the policies in the three months ended March 31, 2017 compared to $365,000 for the three months ended March 31, 2016.

Total deposits increased $390.2 million from $1.5 billion at December 31, 2016, to $1.9 billion at March 31, 2017. The increase in deposits is primarily the result of the $266.3 in deposits acquired in the OLCB transaction. In addition, brokered certificates of deposit increased $55.5 million during the quarter. All deposit types have shown increases as a result of the acquisition and non-interest bearing accounts now represent 17.5% of total deposits up from 15.7% of deposits compared to one year ago. As of March 31, 2017, the Company had $129.7 million in public funds compared to $106.3 million in public funds at December 31, 2016. No public funds were acquired in the acquisition.

FHLB advances decreased from $390.8 million at December 31, 2016 to $339.0 million at March 31, 2017. The change was due to an increase in brokered certificates of deposit that were used to pay down FHLB advances.

Shareholders’ equity increased $27.3 million to $277.1 million at March 31, 2017 from $249.8 million at December 31, 2016. The increase is primarily due to the $25.8 million of stock that was issued as part of the purchase of OLCB. Shareholders received a cash dividend of $0.03 per share during the first quarter.

Book value per common share as of March 31, 2017 was $5.58 as compared to $5.36 per common share as of December 31, 2016. The Company’s tangible book value per share decreased from $5.32 per share at December 31, 2016 to $5.10 at March 31, 2017. The increase in book value was due to the issuance of shares in the OLCB acquisition while the decrease in tangible book value can be attributed to the creation of goodwill and other intangible assets. Book value per share is calculated as total shareholders’ equity divided by the number of common shares outstanding. Tangible book value per share is calculated as total shareholders’ equity less goodwill and other intangible assets divided by the number of common shares outstanding.

Material Changes in Results of Operations for the Three Months Ended

March 31, 2017 and March 31, 2016

Net Income. United Community recognized net income for the three months ended March 31, 2017, of $1.5 million, or $0.03 per diluted common share compared to net income of $3.3 million for the three months ended March 31, 2016, or $0.07 per diluted share. Merger expenses, net of tax, of $3.3 million related to acquisition activities accounted for the decline in net income for the three month period.

Net Interest Income. Net interest income was $18.5 million in the first quarter of 2017 up from the $14.9 million recorded in the first quarter of 2016. The growth of interest earning assets, both organically and from the acquisition of OLCB, drove this increase along with a seven basis point improvement in the yield on interest earning assets. Net interest margin was 3.28% for the first quarter of 2017 compared to 3.21% in the first quarter of 2016.

Interest income increased by $4.0 million in the first quarter of 2017 compared to the same period in 2016, to $21.1 million from $17.0 million. The increase is primarily a result of an increase in average net loans and loans held for sale from both the acquisition and organic growth. Average net loans increased $374.7 million in the first quarter compared to the same period in 2016. Interest income from net loans increased to $17.6 million for the quarter ended March 31, 2017 compared to $13.8 million for the same period in 2016. Income from loans held for sale increased to $661,000 for the quarter ended March 31, 2017 compared to $332,000 for the quarter ended March 31, 2016.

Interest expense increased by $437,000 in the first quarter of 2017 to $2.6 million compared to the same period in 2016. This increase was primarily due to a $333.5 million increase in average interest-bearing liabilities from the acquisition and growth over the previous twelve months. The cost of average interest-bearing deposits declined 8 basis points to 45 basis points for the three months ended March 31, 2017 from 53 basis points at March 31, 2016. Offsetting this was an 18 basis point increase in the cost of average borrowed funds for the quarter ending March 31, 2017 compared to the quarter ended March 31, 2016.

	For the Three Months Ended March 31,
	2017 vs. 2016
	Increase						Total
	(decrease) due to						increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest earning assets:
Loans	$	(99	)	$	3,858		$	3,759
Loans held for sale		13			316			329
Securities:
Available for sale-taxable		(56	)		(277	)		(333	)
Available for sale-nontaxable		1			431			432
Held to maturity-taxable		(26	)		(86	)		(112	)
Held to maturity-nontaxable		(4	)		15			11
Federal Home Loan Bank stock		23			9			32
Other interest earning assets		31			34			65
Total interest earning assets	$	(117	)	$	4,300		$	4,183
Interest bearing liabilities:
Interest bearing deposits:
Savings accounts	$	(14	)	$	3		$	(11	)
Checking accounts		22			49			71
Certificates of deposit		(520	)		469			(51	)
Federal Home Loan Bank advances:
Long-term advances		55			5			60
Short-term advances		221			144			365
Repurchase agreements and other		(1	)		4			3
Total interest bearing liabilities	$	(237	)	$	674			437
Change in net interest income							$	3,746

Provision for Loan Losses. A provision for loan losses is charged to income to bring the total allowance for loan losses to a level considered by management to be adequate, based on management’s evaluation of such factors as the delinquency status of loans,

current economic conditions, the net realizable value of the underlying collateral, changes in the composition of the loan portfolio and prior loan loss experience. The Company recognized a loan loss provision of $1.5 million in the first quarter of 2017, compared to $2.2 million in the first quarter of 2016. Provision expense in the first quarter of 2017 was driven by organic loan growth during the period.

Noninterest Income. Non-interest income was $5.4 million in the first quarter of 2017 compared to $4.7 million in the first quarter of 2016. Favorably affecting this change was the recognition of OLCB’s fee income for two months including $282,000 in trust fees recognized during that time frame. The Company also a had minimal negative change in the valuation adjustment of the mortgage serving asset in the first quarter of 2017, compared with a negative adjustment of $435,000 in the first quarter of 2016.

Noninterest Expense. Non-interest expense increased to $20.3 million during the first quarter of 2017 compared to $12.5 million during the first quarter of 2016. Excluding the $5.0 million of merger related expense, non-interest expense was up $2.8 million during the quarter compared to the first quarter of 2016. The increase is primarily due to the acquisition of OLCB. The Company expects much of the cost savings associated with the acquisition to materialize during the second quarter of 2017. Cost savings will include reduced salary and employee benefits due to employee termination costs.

Income Taxes. During the three months ended March 31, 2017, the Company recognized tax expense of $557,000 on pre-tax income of $2.1 million, compared to tax expense of $1.6 million on pre-tax income of $4.9 million for the three months ended March 31, 2016. The increased merger costs negatively impacted pre-tax income therefore reducing overall tax expense for the period.

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 March 31, 2017, approximately $426.3 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 March 31, 2017, United Community had total on-hand liquidity, defined as cash and cash equivalents, unencumbered securities and additional FHLB borrowing capacity, of $551.3 million.

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 March 31, 2017 and 2016. Average balance calculations were based on daily balances.

	For the Three Months Ended March 31,
	2017							2016
	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⁾	$	1,706,009	$	17,560		4.12	%	$	1,331,265	$	13,801		4.15	%
Loans held for sale		67,860		661		3.90	%		35,359		332		3.76	%
Total loans, net		1,773,869		18,221		4.11	%		1,366,624		14,133		4.14	%
Securities:
Available for sale-taxable		287,775		1,602		2.23	%		337,226		1,935		2.30	%
Available for sale-nontaxable ⁽²⁾		59,361		621		4.18	%		18,134		189		4.17	%
Held to maturity-taxable		83,655		465		2.22	%		99,043		577		2.33	%
Held to maturity-nontaxable ⁽²⁾		12,451		94		3.02	%		10,375		83		3.20	%
Total securities		443,242		2,782		2.51	%		464,778		2,784		2.40	%
Federal Home Loan Bank stock		18,905		214		4.53	%		18,068		182		4.03	%
Other interest earning assets		43,059		80		0.74	%		18,130		15		0.33	%
Total interest earning assets		2,279,075		21,297		3.74	%		1,867,600		17,114		3.67	%
Non-interest earning assets		166,070							133,988
Total assets	$	2,445,145						$	2,001,588
Interest bearing liabilities:
Deposits:
Checking accounts	$	564,903		337		0.24	%	$	481,350		266		0.22	%
Savings accounts		301,675		30		0.04	%		283,892		41		0.06	%
Certificates of deposit
Customer certificates of deposit		468,686		1,073		0.92	%		447,459		1,305		1.17	%
Brokered certificates of deposit		99,380		181		0.73	%		—		—		—	%
Total certificates of deposit		568,066		1,254		0.88	%		447,459		1,305		1.17	%
Total interest bearing deposits		1,434,644		1,621		0.45	%		1,212,701		1,612		0.53	%
Federal Home Loan Bank advances
Long-term advances		47,823		349		2.92	%		47,043		289		2.46	%
Short-term advances		347,050		606		0.70	%		236,747		241		0.41	%
Total Federal Home Loan Bank advances		394,873		955		0.97	%		283,790		530		0.75	%
Repurchase agreements and other		1,051		8		3.04	%		532		5		3.76	%
Total borrowed funds		395,924		963		0.97	%		284,322		535		0.75	%
Total interest bearing liabilities	$	1,830,568		2,584		0.56	%	$	1,497,023		2,147		0.57	%
Non-interest bearing liabilities
Noninterest-bearing deposits		306,402							228,308
Other noninterest-bearing liabilities		33,898							27,111
Total noninterest bearing liabilities		340,300							255,419
Total liabilities	$	2,170,868						$	1,752,442
Shareholders’ equity		274,277							249,146
Total liabilities and equity	$	2,445,145						$	2,001,588
Net interest income and interest rate spread			$	18,713		3.17	%			$	14,967		3.09	%
Net interest margin						3.28	%						3.21	%
Average interest earning assets to average interest bearing liabilities						124.50	%						124.75	%

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

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

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 quarter ended March 31, 2017 and the year ended December 31, 2016, the percentage changes fall within the policy limits set by the Board of Directors of Home Savings as the minimum NPV ratio and the maximum change in interest income the Home Savings Board deems advisable in the event of various changes in interest rates. See the table below for Board adopted policy limits.

Quarter Ended March 31, 2017
NPV as % of portfolio value of assets													Next 12 months net interest income
													(Dollars in thousands)
Change in rates (Basis points)	NPV Ratio			Internal policy limitations			Change in %			Internal policy limitations on NPV Change			$ Change			Internal policy limitations			% Change
400		10.83	%		6.00	%		(0.75	)%		25.00	%	$	(8,572	)		(18.00	)%		(10.89	)%
300		11.18	%		6.00	%		(0.40	)%		20.00	%		(6,546	)		(13.00	)%		(8.31	)%
200		11.45	%		7.00	%		(0.13	)%		15.00	%		(4,200	)		(8.00	)%		(5.33	)%
100		11.63	%		7.00	%		0.05	%		10.00	%		(2,169	)		(3.00	)%		(2.75	)%
Static		11.58	%		9.00	%		—	%		0.00	%		—			—	%		—	%

Year Ended December 31, 2016
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		11.51	%		6.00	%		(1.19	)%		30.00	%	$	(4,686	)		(20.00	)%		(7.69	)%
300		12.18	%		6.00	%		(0.53	)%		25.00	%		(2,448	)		(15.00	)%		(5.66	)%
200		12.67	%		7.00	%		(0.03	)%		20.00	%		(2,263	)		(10.00	)%		(3.71	)%
100		12.99	%		7.00	%		0.29	%		15.00	%		(1,177	)		(5.00	)%		(1.93	)%
Static		12.70	%		9.00	%		—	%		0.00	%		—			—	%		—	%

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

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

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

ITEM 4. Controls and Procedures.

An evaluation was carried out by United Community’s management, including the Chief Executive Officer and 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 (the Exchange Act)) as of March 31, 2017. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that United Community’s disclosure controls and procedures as of March 31, 2017, were effective in ensuring that information required to be disclosed in the reports that United Community files or submits under the Exchange Act was recorded, processed, summarized and reported on a timely basis, including those controls and procedures designed to ensure that such information is accumulated and communicated to management, including United Community’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. During the quarter ended March 31, 2017, there were no changes in United Community’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect United Community’s internal control over financial reporting.

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 material changes in United Community’s risk factors as outlined in United Community’s Annual Report on Form 10-K for the year ended December 31, 2016. 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)

None.

(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 March 31, 2017:

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⁽⁴⁾
January 1 through January 31, 2017⁽¹⁾		2,438	$	8.10		—		1,683,830
February 1 through February 28, 2017⁽²⁾		30,780		8.71		—		1,683,830
March 1 through March 31, 2017⁽³⁾		16,988		8.78		—		1,683,830
Total		50,206	$	8.71		—		1,683,830

⁽¹⁾	In January 2017, United Community purchased 2,438 shares at $8.10 per share from employees for the payment of employment taxes. The purchase of these shares was not part of United Community’s share repurchase program.

⁽²⁾	In February 2017, United Community purchased 30,780 shares at $8.71 per share from employees for the payment of employment taxes. The purchase of these shares was not part of United Community’s share repurchase program.

⁽³⁾	In March 2017, United Community purchased 16,988 shares at an average cost of $8.78 per share from employees for the payment of employment taxes. The purchase of these shares was not part of United Community’s share repurchase program.

⁽⁴⁾

Untied Community’s stock repurchase program was publically announced on April 28, 2016 in a press release, a copy of which can be found in United Community’s Form 8-K filed on May 2, 2016. The program permits the repurchase of up to 2,500,000 common shares. There is no expiration date for the program.

ITEM 3. Defaults Upon Senior Securities

Not Applicable

ITEM 4. Mine Safety Disclosures

Not Applicable

ITEM 5. Other Information

(a)

None.

(b)

None.

ITEM 6. Exhibits.

Exhibit Number

Description

3.1

Articles of Incorporation (reflecting all amendments filed with the Ohio Secretary of State) [for purposes of SEC reporting compliance only – not filed with the Ohio Secretary of State]

3.2

Amended Code of Regulations

31.1

Section 302 Certification by Chief Executive Officer

31.2

Section 302 Certification by Chief Financial Officer

Section 1350 Certifications by Chief Executive Officer and Chief Financial Officer

101

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, 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.

UNITED COMMUNITY FINANCIAL CORP.

SIGNATURES

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

			UNITED COMMUNITY FINANCIAL CORP.
Date: May 10, 2017			/s/ Gary M. Small
			Gary M. Small President and Chief Executive Officer
			(Principal Executive Officer)
Date: May 10, 2017			/s/ Timothy W. Esson
			Timothy W. Esson Executive Vice President and Chief Financial Officer
			(Principal Financial Officer)

UNITED COMMUNITY FINANCIAL CORP.

EXHIBIT INDEX

Exhibit 3.1

Incorporated by reference to Exhibit 3.1 in the Third Quarter 2016 Form 10-Q filed by United Community on August 5, 2016 with the SEC, film number 161811451.

Exhibit 3.2

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

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United Community Financial (UCFC) 10-Q2017 Q1 Quarterly report

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