Edgar Filing: UNITED COMMUNITY FINANCIAL CORP

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2013

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

For the transition period from to

UNITED COMMUNITY FINANCIAL CORP.

(Exact name of the registrant as specified in its charter)

OHIO

000-024399

34-1856319

(State or other jurisdiction

of incorporation)

(Commission

File No.)

(IRS Employer

I.D. No.)

275 West Federal Street, Youngstown, Ohio 44503-1203

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (330) 742-0500

Not Applicable

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

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

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

Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 39,611,530 common shares as of April 30, 2013.

TABLE OF CONTENTS


	PAGE
Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Statements of Financial Condition as of March 31, 2013 (Unaudited) and December 31, 2012		1

Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2013 and 2012 (Unaudited)		2

Consolidated Statement of Shareholders’ Equity for the Three Months ended March 31, 2013 and 2012 (Unaudited)		4

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 (Unaudited)		5

Notes to Consolidated Financial Statements (Unaudited)		6-46

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		47-56

Item 3. Quantitative and Qualitative Disclosures About Market Risk		57

Item 4. Controls and Procedures		58

Part II. OTHER INFORMATION

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)

Item 4. Mine Safety Disclosures (None)

Item 5. Other Information (None)

Item 6. Exhibits		59

Signatures		60

Exhibits		61

PART I—FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)


	March 31,			December 31,
	2013			2012
	(Dollars in thousands)
Assets:
Cash and deposits with banks	$	20,739		$	26,041
Federal funds sold		57,345			16,572

Total cash and cash equivalents		78,084			42,613
Securities:
Available for sale, at fair value		602,107			574,562
Loans held for sale		9,268			13,031
Loans, net of allowance for loan losses of $21,827 and $21,130		1,034,415			1,066,240
Federal Home Loan Bank stock, at cost		26,464			26,464
Premises and equipment, net		21,400			21,549
Accrued interest receivable		5,587			6,238
Real estate owned and other repossessed assets, net		15,782			18,440
Core deposit intangible		215			238
Cash surrender value of life insurance		29,106			28,881
Other assets		9,348			10,109

Total assets	$	1,831,776		$	1,808,365

Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Interest bearing	$	1,291,170		$	1,302,307
Noninterest bearing		169,790			159,767

Total deposits		1,460,960			1,462,074
Borrowed funds:
Federal Home Loan Bank advances		50,000			50,000
Repurchase agreements and other		90,593			90,598

Total borrowed funds		140,593			140,598
Advance payments by borrowers for taxes and insurance		14,258			23,590
Accrued interest payable		597			563
Accrued expenses and other liabilities		8,857			10,780

Total liabilities		1,625,265			1,637,605

Shareholders’ Equity:
Preferred stock-no par value; 1,000,000 shares authorized and 7,942 and 0 shares, respectively issued and outstanding, $21,841 and $0 liquidation value, respectively		15,911			—
Common stock-no par value; 499,000,000 shares authorized; 44,378,729 and 37,804,457 shares issued, respectively, and 39,606,586 and 33,027,886 shares, respectively, outstanding		148,937			128,026
Retained earnings		88,191			86,345
Accumulated other comprehensive income		3,719			6,682
Treasury stock, at cost, 4,772,143 and 4,776,571 shares, respectively		(50,247	)		(50,293	)

Total shareholders’ equity		206,511			170,760

Total liabilities and shareholders’ equity	$	1,831,776		$	1,808,365

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)


	For the Three Months Ended
	March 31,
	2013			2012
	(Dollars in thousands, except per share data)
Interest income
Loans	$	12,627		$	17,656
Loans held for sale		89			100
Available for sale securities		3,428			3,494
Federal Home Loan Bank stock dividends		283			300
Other interest earning assets		9			12

Total interest income		16,436			21,562
Interest expense
Deposits		2,087			4,032
Federal Home Loan Bank advances		523			732
Repurchase agreements and other		909			919

Total interest expense		3,519			5,683

Net interest income		12,917			15,879
Provision for loan losses		2,064			680

Net interest income after provision for loan losses		10,853			15,199

Non-interest income
Non-deposit investment income		541			541
Service fees and other charges		1,782			2,317
Net gains (losses):
Securities available for sale (includes $721 and $414, respectively, accumulated other comprehensive income reclassifications for unrealized net gains on available for sale securities)		721			414
Mortgage banking income		1,643			1,471
Real estate owned and other repossessed assets		(431	)		(729	)
Other income		1,437			1,077

Total non-interest income		5,693			5,091

Non-interest expense
Salaries and employee benefits		7,451			8,333
Occupancy		822			799
Equipment and data processing		1,760			1,689
Franchise tax		431			438
Advertising		139			141
Amortization of core deposit intangible		23			29
Deposit insurance premiums		554			1,109
Professional fees		408			880
Real estate owned and other repossessed asset expenses		493			702
Other expenses		1,783			2,374

Total non-interest expenses		13,864			16,494

Income before income taxes		2,682			3,796
Income tax expense (includes $0 income tax expense from reclassification items, respectively)		—			—
Net income		2,682			3,796
Amortization of discount on preferred stock		(821	)		—

Earnings available to common shareholders	$	1,861		$	3,796

(Continued)

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)


	For the Three Months Ended
	March 31,
	2013			2012
Net income	$	2,682		$	3,796
Other comprehensive income
Unrealized losses on securities, net of tax		(2,963	)		(2,883	)

Total other comprehensive loss	$	(2,963	)	$	(2,883	)

Comprehensive (loss) income	$	(281	)	$	913

Earnings per common share
Basic	$	0.06		$	0.12
Diluted		0.05			0.12

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Unaudited)


	Preferred Shares Outstanding		Common Shares Outstanding		Preferred Stock		Common Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
	(Dollars in thousands)
Balance December 31, 2011		—		32,597,762	$	—	$	128,031		$	110,681		$	5,032		$	(54,999	)	$	188,745
Comprehensive income:
Net income											3,796									3,796
Comprehensive loss														(2,883	)					(2,883	)
Stock option expenses								4												4
Restricted stock awards		—		278,691				(9	)		(2,750	)					3,111			352

Balance March 31, 2012		—		32,876,453	$	—	$	128,026		$	111,727		$	2,149		$	(51,888	)	$	190,014

Balance December 31, 2012		—		33,027,886	$	—	$	128,026		$	86,345		$	6,682		$	(50,293	)	$	170,760
Comprehensive income:
Net income											2,682									2,682
Comprehensive loss														(2,963	)					(2,963	)
Stock option exercises				2,600							(22	)					27			5
Stock option expenses								4												4
Restricted stock awards				1,828				65			7						19			91
Issuance of common stock, net of issuance costs of $3,988				6,574,272				14,091												14,091
Issuance of preferred stock		7,942				15,090		6,751												21,841
Amortization of preferred stock discount						821					(821	)								—

Balance March 31, 2013		7,942		39,606,586	$	15,911	$	148,937		$	88,191		$	3,719		$	(50,247	)	$	206,511

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three Months Ended March 31,
	2013			2012
	(Dollars in thousands)
Cash Flows from Operating Activities
Net income	$	2,682		$	3,796
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		2,064			680
Mortgage banking income		(1,643	)		(1,471	)
Net losses on real estate owned and other repossessed assets sold		431			729
Net gain on available for sale securities sold		(721	)		(414	)
Amortization of premiums and accretion of discounts		1,127			1,518
Depreciation and amortization		454			389
Decrease in accrued interest receivable		651			119
Increase in accrued interest payable		34			78
Decrease in prepaid and other assets		815			(2,652	)
Decrease in other liabilities		(1,923	)		(873	)
Stock based compensation		95			356
Net principal disbursed on loans originated for sale		(73,171	)		(74,987	)
Proceeds from sale of loans originated for sale		78,577			70,294
Net change in value of interest rate caps		(8	)		287

Net cash used in operating activities		9,464			(2,151	)
Cash Flows from Investing Activities
Proceeds from principal repayments and maturities of:
Securities available for sale		18,386			20,315
Proceeds from sale of:
Securities available for sale		27,912			30,106
Real estate owned and other repossessed assets		2,891			5,107
Loans held for investment		510			1,388
Purchases of:
Securities available for sale		(77,353	)		(124,695	)
Principal disbursed on loans, net of repayments		28,522			50,281
Loans purchased		(50	)		(67	)
Purchases of premises and equipment		(297	)		(305	)

Net cash used in investing activities		521			(17,870	)
Cash Flows from Financing Activities
Net increase in checking, savings and money market accounts		20,189			73,320
Net decrease in certificates of deposit		(21,303	)		(89,958	)
Net decrease in advance payments by borrowers for taxes and insurance		(9,332	)		(8,515	)
Proceeds from Federal Home Loan Bank advances		142,000			156,000
Repayment of Federal Home Loan Bank advances		(142,000	)		(120,039	)
Net change in repurchase agreements and other borrowed funds		(5	)		(5	)
Proceeds from the exercise of stock options		5			—
Issuance of preferred stock		21,841			—
Issuance of common stock, net of issuance cost		14,091			—

Net cash from financing activities		25,486			10,803

Change in cash and cash equivalents		35,471			(9,218	)
Cash and cash equivalents, beginning of period		42,613			54,136

Cash and cash equivalents, end of period	$	78,084		$	44,918

See Notes to Consolidated Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

United Community Financial Corp. (United Community or the Company) was incorporated under Ohio law in February 1998 by The Home Savings and Loan Company of Youngstown, Ohio (Home Savings) in connection with the conversion of Home Savings from an Ohio mutual savings and loan association to an Ohio capital stock savings association (the Conversion). Upon consummation of the Conversion on July 8, 1998, United Community became the unitary thrift holding company for Home Savings. Home Savings, a state-chartered savings bank, conducts business from its main office located in Youngstown, Ohio, 33 full-service branches and nine loan production offices located throughout Ohio and western Pennsylvania.

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

The results of operations for the three months ended March 31, 2013, are not necessarily indicative of the results to be expected for the year ending December 31, 2013. The consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2012, contained in United Community’s Form 10-K for the year ended December 31, 2012.

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

2. REGULATORY ENFORCEMENT ACTION

United Community is a unitary thrift holding company, and is regulated by the Board of Governors of the Federal Reserve System (FRB). On August 8, 2008, the board of directors of United Community approved a Stipulation and Consent to the Issuance of an Order with the OTS (the Holding Company Order). Simultaneously, the board of directors of Home Savings approved a Stipulation and Consent to the Issuance of an Order to Cease and Desist (the Bank Order) with the Federal Deposit Insurance Corporation (FDIC) and the Ohio Division of Financial Institutions (the Ohio Division), which was terminated as of March 30, 2012 and replaced with a Consent Order (the Consent Order). The Consent Order was terminated on January 31, 2013. On January 31, 2013, Home Savings consented to a Memorandum of Understanding (MOU), as described below. Although United Community and Home Savings agreed to the issuance of the Holding Company Order, the Consent Order and the MOU, as the case may be, neither has admitted or denied any allegations of unsafe or unsound banking practices, or any legal or regulatory violations. No monetary penalties were assessed by the OTS, the FDIC or the Ohio Division when these orders were issued or since that time.

The Holding Company Order requires United Community to obtain FRB approval prior to: (i) incurring or increasing its debt position; (ii) repurchasing any United Community stock; or (iii) paying any dividends. The Holding Company Order also required United Community to develop a debt reduction plan and submit the plan to the OTS for approval. The Holding Company Order remains in effect and was amended November 5, 2010. The amendment removed the requirement in the original Holding Company Order to provide the OTS with a debt reduction plan and added a requirement to provide the OTS with a capital plan. The capital plan was consistent with and incorporated into the strategic planning process that Home Savings undertook when the Bank Order was issued. The capital plan was submitted to the OTS in December 2010. A revised capital plan was submitted to the FRB, FDIC and Ohio Division in December 2011 and a further revised capital plan was submitted in December 2012.

The Consent Order required Home Savings, within specified timeframes, to take or refrain from certain actions, including that it had to: (i) continue to retain qualified management; (ii) seek regulatory approval prior to adding any individuals to the board of directors or employing any individual as a senior executive officer of Home Savings; (iii) not extend additional credit to classified borrowers; (iv) revise its plan to reduce its classified assets, and, within six months, reduce total adversely classified assets to 75% of the level of classified assets as of May 31, 2011 (i.e., to $219.0 million by September 30, 2012) and, within twelve months, to 50% of the level of classified assets as of May 31, 2011 (i.e., to $146.0 million by March 31, 2013); (v) establish a comprehensive policy and methodology for determining the adequacy of the allowance for loan and lease losses (ALLL); (vi) adopt plans to reduce its classified assets and delinquent loans; (vii) adopt a plan to reduce certain loan concentrations; (viii) amend its strategic plan and budget and profit plan; (ix) increase its Tier 1 Leverage Capital Ratio to 9.0% and its Total Risk Based Capital Ratio to 12.0% by June 30, 2012, and revise its capital plan to achieve such capital levels; and (x) seek regulatory approval prior to declaring or paying any cash dividend.

On January 31, 2013, the Consent Order was terminated and Home Savings entered into a MOU with the FDIC and Ohio Division. The MOU requires Home Savings to submit certain plans and reports to the FDIC and the Ohio Division, to seek the FDIC’s and Ohio Division’s prior consent before issuing any dividends to United Community, and to maintain its Tier 1 Leverage Capital Ratio at 8.50% and its Total Risk Based Capital Ratio at 12.0%. Home Savings was in compliance with the MOU. As of March 31, 2013 Home Savings Tier 1 Leverage Capital Ratio was 9.84% and its Total Risk Based Capital Ratio was 18.28%.

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

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

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

3. RECENT ACCOUNTING DEVELOPMENTS

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

4. STOCK COMPENSATION

Stock Options:

On April 26, 2007, shareholders approved the United Community Financial Corp. 2007 Long-Term Incentive Plan (as amended, the 2007 Plan). The purpose of the 2007 Plan is to promote and advance the interests of United Community and its shareholders by enabling United Community to attract, retain and reward directors, directors emeritus, managerial and other key employees of United Community, including Home Savings, by facilitating their purchase of an ownership interest in United Community. The 2007 Plan provides for the issuance of up to 2,000,000 shares that are to be used for awards of restricted stock, stock options, performance awards, stock appreciation rights (SARs), or other forms of stock-based incentive awards. There were 9,637 stock options granted in 2013 and there were 10,898 stock options granted in 2012 under the 2007 Plan. The options must be exercised within 10 years from the date of grant.

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

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

Expenses related to stock option grants are included with salaries and employee benefits. The Company recognized $3,749 in stock option expenses for the three months ended March 31, 2013. The Company expects to recognize additional expense of $13,754 in 2013, $11,067 in 2014, and $6,381 in 2015.

A summary of activity in the plans is as follows:


	For the three months ended March 31, 2013
	Shares			Weighted average exercise price		Aggregate intrinsic value (in thousands)
Outstanding at beginning of year		1,309,942		$	5.77	$	640
Granted		9,637			3.37		5
Exercised		(2,600	)		2.10		3
Forfeited		(236,476	)		8.81		—

Outstanding at end of period		1,080,503			5.09	$	1,325

Options exercisable at end of period		1,046,124			5.19	$	1,265

Information related to the stock option plans for the three months ended March 31, 2013 follows:


	March 31, 2013
Intrinsic value of options exercised	$	2,960
Cash received from option exercises		5,460
Tax benefit realized from option exercises		—
Weighted average fair value of options granted, per share	$	2.64

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

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


	January 3, 2013			February 26, 2013
Risk-free interest rate		0.81	%		0.78	%
Expected term (years)		5			5
Expected stock volatility		86.47	%		86.37	%
Dividend yield		—	%		—	%

Outstanding stock options have a weighted average remaining life of 5.11 years and may be exercised in the range of $1.20 to $12.38.

Restricted Stock Awards:

The 2007 Plan permits the issuance of restricted stock awards to employees and nonemployee directors. Nonvested shares at March 31, 2013 aggregated 119,527, of which 49,251 will vest during 2013, 37,711 will vest during 2014, and 32,565 will vest during 2015. Expenses related to restricted stock awards are charged to salaries and employee benefits and are recognized over the vesting period of the awards based on the market value of the shares at the grant date. The Company recognized approximately $91,000 in restricted stock award expenses for the three months ended March 31, 2013. The Company expects to recognize additional expenses of approximately $237,000 for the remainder of 2013, $220,000 in 2014, and $86,000 in 2015.

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


	Shares			Weighted average grant date fair value
Nonvested shares at January 1, 2013		129,321		$	2.86
Granted		1,828			3.25
Vested		(11,622	)		1.29

Nonvested shares at March 31, 2013		119,527		$	3.04

5. SECURITIES

Components of the available for sale portfolio are as follows:


	March 31, 2013
	(Dollars in thousands)
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available for Sale
U.S. Treasury and government sponsored entities’ securities	$	233,405	$	2,448	$	(704	)	$	235,149
Equity securities		100		238		—			338
Mortgage-backed GSE securities: residential		363,512		4,189		(1,081	)		366,620

Total	$	597,017	$	6,875	$	(1,785	)	$	602,107


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

Total	$	566,509	$	8,763	$	(710	)	$	574,562

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


	March 31, 2013
	(Dollars in thousands)
	Amortized		Fair
	Cost		Value
Due in one year or less	$	—	$	—
Due after one year through five years		—		—
Due after five years through ten years		139,078		140,879
Due after ten years through fifteen years		94,327		94,270
Mortgage-related securities		363,512		366,620

Total	$	596,917	$	601,769

Securities pledged for the Company’s participation in the VISA payment processing program were approximately $3.0 million at March 31, 2013 and $5.8 million at December 31, 2012. Securities pledged for participation in the Ohio Linked Deposit Program were approximately $400,000 and $417,000 at March 31, 2013 and December 31, 2012, respectively.

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


	March 31, 2013
	(Dollars in thousands)
	Less Than 12 Months					12 Months or More				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Loss			Value		Loss		Value		Loss
U.S. Treasury and government sponsored entities’ securities	$	68,138	$	(704	)	$	—	$	—	$	68,138	$	(704	)
Mortgage-related securities		104,402		(1,081	)		—		—		104,402		(1,081	)

Total	$	172,540	$	(1,785	)	$	—	$	—	$	172,540	$	(1,785	)


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

Total	$	114,500	$	(710	)	$	—	$	—	$	114,500	$	(710	)

All of the U.S. Treasury and government sponsored entities and mortgage-backed securities that were temporarily impaired at March 31, 2013 and December 31, 2012, were impaired due to the level of interest rates at that time.

Proceeds from sales of securities available for sale were $27.9 million and $30.1 million for the three months ended March 31, 2013 and 2012, respectively. Gross gains of $721,000 and $414,000 were realized on these sales during the first quarter of 2013 and 2012, respectively.

6. LOANS

Portfolio loans consist of the following:


	March 31,			December 31,
	2013			2012
	(Dollars in thousands)
Real Estate:
One-to four-family residential	$	570,377		$	577,249
Multi-family residential		69,857			80,923
Nonresidential		132,662			138,188
Land		15,216			15,808
Construction:
One-to four-family residential and land development		32,866			28,318
Multi-family and nonresidential		4,584			4,534

Total real estate		825,562			845,020
Consumer
Home equity		171,895			177,230
Auto		7,040			7,648
Marine		4,853			4,942
Recreational vehicles		20,388			22,250
Other		2,320			2,523

Total consumer		206,496			214,593
Commercial
Secured		21,076			24,243
Unsecured		2,001			2,300

Total commercial		23,077			26,543

Total loans		1,055,135			1,086,156

Less:
Allowance for loan losses		21,827			21,130
Deferred loan costs, net		(1,107	)		(1,214	)

Total		20,720			19,916

Loans, net	$	1,034,415		$	1,066,240

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

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

Allowance For Loan Losses

(Dollars in thousands)


	Permanent Real Estate Loans			Construction Loans			Consumer Loans			Commercial Loans			Total
For the three months ended March 31, 2013
Beginning balance (12/31/12)	$	13,819		$	1,404		$	4,459		$	1,448		$	21,130
Provision		2,029			(18	)		238			(185	)		2,064
Chargeoffs		(1,206	)		(226	)		(600	)		(128	)		(2,160	)
Recoveries		265			283			157			88			793

Ending balance (03/31/13)	$	14,907		$	1,443		$	4,254		$	1,223		$	21,827

March 31, 2013
Period-end amount allocated to:
Loans individually evaluated for impairment	$	3,108		$	318		$	—		$	10		$	3,436
Loans collectively evaluated for impairment		11,799			1,125			4,254			1,213			18,391

Ending balance	$	14,907		$	1,443		$	4,254		$	1,223		$	21,827

Period-end balances:
Loans individually evaluated for impairment	$	43,513		$	4,937		$	10,106		$	2,057		$	60,613
Loans collectively evaluated for impairment		744,599			32,513			196,390			21,020			994,522

Ending balance	$	788,112		$	37,450		$	206,496		$	23,077		$	1,055,135

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

Allowance For Loan Losses

(Dollars in thousands)


	Permanent Real Estate Loans			Construction Loans			Consumer Loans			Commercial Loans			Total
For the three months ended March 31, 2012
Beginning balance (12/31/11)	$	31,323		$	4,493		$	4,576		$	1,879		$	42,271
Provision		(1,537	)		523			1,131			563			680
Chargeoffs		(5,356	)		(2,144	)		(860	)		(424	)		(8,784	)
Recoveries		171			46			115			24			356

Ending balance (03/31/12)	$	24,601		$	2,918		$	4,962		$	2,042		$	34,523

December 31, 2012
Period-end amount allocated to:
Loans individually evaluated for impairment	$	2,380		$	478		$	—		$	166		$	3,024
Loans collectively evaluated for impairment		11,439			926			4,459			1,282			18,106

Ending balance	$	13,819		$	1,404		$	4,459		$	1,448		$	21,130

Period-end balances:
Loans individually evaluated for impairment	$	43,013		$	7,547		$	8,784		$	1,673		$	61,017
Loans collectively evaluated for impairment		769,155			25,305			205,809			24,870			1,025,139

Ending balance	$	812,168		$	32,852		$	214,593		$	26,543		$	1,086,156

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

The following table presents loans individually evaluated for impairment by class of loans as of and for the three months ended March 31, 2013:

Impaired Loans

(Dollars in thousands)


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With no specific allowance recorded
Permanent real estate
One-to four-family residential	$	19,294	$	17,454	$	—	$	19,759	$	155	$	164
Multifamily residential		775		681		—		1,784		—		1
Nonresidential		6,255		5,657		—		13,545		9		35
Land		3,700		3,700		—		4,278		—		—

Total		30,024		27,492		—		39,366		164		200
Construction loans
One-to four-family residential		12,493		1,526		—		3,855		—		3
Multifamily and nonresidential		—		—		—		—		—		—

Total		12,493		1,526		—		3,855		—		3
Consumer loans
Home Equity		9,463		8,874		—		6,685		108		116
Auto		58		37		—		48		—		1
Marine		188		188		—		226		—		2
Recreational vehicle		1,131		1,000		—		722		5		6
Other		7		7		—		5		—		—

Total		10,847		10,106		—		7,686		113		125
Commercial loans
Secured		2,046		1,141		—		1,307		—		18
Unsecured		3,291		712		—		250		15		11

Total		5,337		1,853		—		1,557		15		29

Total with no specific allowance recorded	$	58,701	$	40,977	$	—	$	52,464	$	292	$	357

(Continued)

Impaired Loans

(Dollars in thousands)


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With a specific allowance recorded
Permanent real estate
One-to four-family residential	$	735	$	735	$	260	$	1,269	$	—	$	—
Multifamily residential		1,120		1,064		281		2,062		2		2
Nonresidential		12,610		12,095		1,840		11,933		5		15
Land		3,913		2,127		727		2,441		—		—

Total		18,378		16,021		3,108		17,705		7		17
Construction loans
One-to four-family residential		5,306		3,411		318		6,801		—		—
Multifamily and nonresidential		—		—		—		—		—		—

Total		5,306		3,411		318		6,801		—		—
Consumer loans
Home Equity		—		—		—		—		—		—
Auto		—		—		—		—		—		—
Marine		—		—		—		—		—		—
Recreational vehicle		—		—		—		18		—		—
Other		—		—		—		—		—		—

Total		—		—		—		18		—		—
Commercial loans
Secured		571		204		10		409		—		3
Unsecured		—		—		—		—		—		—

Total		571		204		10		409		—		3

Total with a specific allowance recorded		24,255		19,636		3,436		24,933		7		20

Total impaired	$	82,956	$	60,613	$	3,436	$	77,397	$	299	$	377

The following table presents loans individually evaluated for impairment by class of loans as of and for the three months ended March 31, 2012:

Impaired Loans

(Dollars in thousands)


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With no specific allowance recorded
Permanent real estate
One-to four-family residential	$	32,370	$	28,522	$	—	$	26,423	$	139	$	209
Multifamily residential		4,840		3,871		—		4,143		10		51
Nonresidential		31,560		29,180		—		27,261		105		207
Land		7,822		6,260		—		6,727		8		16

Total		76,592		67,833		—		64,554		262		483
Construction loans
One-to four-family residential		17,006		10,310		—		13,199		43		82
Multifamily and nonresidential		707		—		—		—		—		—

Total		17,713		10,310		—		13,199		43		82
Consumer loans
Home Equity		5,954		4,415		—		2,410		39		51
Auto		74		53		—		64		—		1
Marine		371		357		—		89		—		5
Recreational vehicle		1,094		749		—		214		—		10
Other		7		7		—		7		—		—

Total		7,500		5,581		—		2,784		39		67
Commercial loans
Secured		2,670		1,834		—		1,708		7		42
Unsecured		23,397		756		—		496		6		13

Total		26,067		2,590		—		2,204		13		55
Total with no specific allowance recorded	$	127,872	$	86,314	$	—	$	82,741	$	357	$	687

Impaired Loans

(Dollars in thousands)


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With a specific allowance recorded
Permanent real estate
One-to four-family residential	$	1,177	$	630	$	51	$	2,882	$	—	$	7
Multifamily residential		4,072		2,375		158		2,617		—		15
Nonresidential		37,594		34,043		3,993		37,846		193		370
Land		4,657		2,775		304		3,595		—		—

Total		47,500		39,823		4,506		46,940		193		392
Construction loans
One-to four-family residential		31,596		14,252		1,569		20,505		5		17
Multifamily and nonresidential		—		—		—		—		—		—

Total		31,596		14,252		1,569		20,505		5		17
Consumer loans
Home Equity		—		—		—		—		—		—
Auto		—		—		—		—		—		—
Marine		—		—		—		121		—		—
Recreational vehicle		88		36		19		18		—		—
Other		—		—		—		—		—		—

Total		88		36		19		139		—		—
Commercial loans
Secured		865		516		181		3,857		1		2
Unsecured		—		—		—		452		—		—

Total		865		516		181		4,309		1		2

Total with a specific allowance recorded		80,049		54,627		6,275		71,893		199		411

Total impaired	$	207,921	$	140,941	$	6,275	$	154,634	$	556	$	1,098

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

Impaired Loans

(Dollars in thousands)


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no specific allowance recorded
Permanent real estate
One-to four-family residential	$	18,672	$	16,947	$	—
Multifamily residential		1,173		1,078		—
Nonresidential		13,240		12,638		—
Land		4,577		3,804		—

Total		37,662		34,467		—
Construction loans
One-to four-family residential		17,912		3,580		—
Multifamily and nonresidential		571		—		—

Total		18,483		3,580		—
Consumer loans
Home Equity		8,867		7,958		—
Auto		68		44		—
Marine		190		190		—
Recreational vehicle		887		592		—
Other		—		—		—

Total		10,012		8,784		—
Commercial loans
Secured		2,122		1,212		—
Unsecured		2,861		38		—

Total		4,983		1,250		—

Total	$	71,140	$	48,081	$	—

(Continued)

Impaired Loans

(Dollars in thousands)


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With a specific allowance recorded
Permanent real estate
One-to four-family residential	$	735	$	735	$	260
Multifamily residential		996		981		57
Nonresidential		5,218		4,703		1,336
Land		3,913		2,127		727

Total		10,862		8,546		2,380
Construction loans
One-to four-family residential		6,455		3,967		478
Multifamily and nonresidential		—		—		—

Total		6,455		3,967		478
Consumer loans
Home Equity		—		—		—
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—

Total		—		—		—
Commercial loans
Secured		798		423		166
Unsecured		—		—		—

Total		798		423		166

Total		18,115		12,936		3,024

Total	$	89,255	$	61,017	$	3,024

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

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

(Dollars in thousands)


	Nonaccrual		Loans past due over 90 days and still accruing
Real Estate Loans
Permanent
One-to four-family residential	$	5,978	$	—
Multifamily residential		1,727		—
Nonresidential		17,432		3,589
Land		5,957		—

Total		31,094		3,589

Construction Loans
One-to four-family residential		4,931		—
Multifamily and nonresidential		0		—

Total		4,931		—

Consumer Loans
Home Equity		2,994		—
Auto		91		—
Marine		171		5
Recreational vehicle		340		—
Other		7		—

Total		3,603		5

Commercial Loans
Secured		891		—
Unsecured		601		—

Total		1,492		—

Total	$	41,120	$	3,594

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

As of December 31, 2012

(Dollars in thousands)


	Nonaccrual		Loans past due over 90 days and still accruing
Real Estate Loans
Permanent
One-to four-family residential	$	5,437	$	—
Multifamily residential		2,027		—
Nonresidential		17,065		3,678
Land		6,047		—

Total		30,576		3,678

Construction Loans
One-to four-family residential		7,466		—
Multifamily and nonresidential		—		—

Total		7,466		—

Consumer Loans
Home Equity		3,298		—
Auto		105		—
Marine		176		—
Recreational vehicle		1,259		—
Other		4		—

Total		4,842		—

Commercial Loans
Secured		1,194		—
Unsecured		31		—

Total		1,225		—

Total	$	44,109	$	3,678

The following tables present an age analysis of past-due loans, segregated by class of loans as of March 31, 2013:

Past Due Loans

(Dollars in thousands)


	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current Loans		Total Loans
Real Estate Loans
Permanent
One-to four-family residential	$	2,878	$	208	$	4,567	$	7,653	$	562,724	$	570,377
Multifamily residential		—		—		1,727		1,727		68,130		69,857
Nonresidential		273		256		19,809		20,338		112,324		132,662
Land		148		36		5,957		6,141		9,075		15,216

Total		3,299		500		32,060		35,859		752,253		788,112

Construction Loans
One-to four-family residential		—		137		4,863		5,000		27,866		32,866
Multifamily and nonresidential		—		—		—		—		4,584		4,584

Total		—		137		4,863		5,000		32,450		37,450

Consumer Loans
Home Equity		905		349		2,148		3,402		168,493		171,895
Auto		6		3		52		61		6,979		7,040
Marine		67		—		21		88		4,765		4,853
Recreational vehicle		853		86		151		1,090		19,298		20,388
Other		1		10		6		17		2,303		2,320

Total		1,832		448		2,378		4,658		201,838		206,496

Commercial Loans
Secured		325		—		204		529		20,547		21,076
Unsecured		—		—		604		604		1,397		2,001

Total		325		—		808		1,133		21,944		23,077

Total	$	5,456	$	1,085	$	40,109	$	46,650	$	1,008,485	$	1,055,135

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

Past Due Loans

(Dollars in thousands)


	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current Loans		Total Loans
Real Estate Loans
Permanent
One-to four-family residential	$	1,995	$	784	$	4,495	$	7,274	$	569,975	$	577,249
Multifamily residential		158		—		1,630		1,788		79,135		80,923
Nonresidential		—		176		19,942		20,118		118,070		138,188
Land		83		—		6,044		6,127		9,681		15,808

Total		2,236		960		32,111		35,307		776,861		812,168

Construction Loans
One-to four-family residential		54		—		7,398		7,452		20,866		28,318
Multifamily and nonresidential		—		—		—		—		4,534		4,534

Total		54		—		7,398		7,452		25,400		32,852

Consumer Loans
Home Equity		1,135		475		2,071		3,681		173,549		177,230
Auto		35		7		83		125		7,523		7,648
Marine		—		—		8		8		4,934		4,942
Recreational vehicle		447		32		353		832		21,418		22,250
Other		—		1		3		4		2,519		2,523

Total		1,617		515		2,518		4,650		209,943		214,593

Commercial Loans
Secured		16		—		23		39		24,204		24,243
Unsecured		—		728		6		734		1,566		2,300

Total		16		728		29		773		25,770		26,543

Total	$	3,923	$	2,203	$	42,056	$	48,182	$	1,037,974	$	1,086,156

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended March 31, 2013:


	Number of loans		Pre-Modification Outstanding Recorded Investment		Post- Modification Recorded Investment
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family		13	$	743	$	762
Multifamily residential		—		—		—
Nonresidential		—		—		—
Land		—		—		—

Total		13		743		762

Construction Loans
One-to four-family residential		—		—		—
Multifamily and nonresidential		—		—		—

Total		—		—		—

Consumer Loans
Home Equity		26		871		877
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		4		791		804
Other		—		—		—

Total		30		1,662		1,681

Commercial Loans
Secured		—		—		—
Unsecured		—		—		—

Total		—		—		—

Total Restructured Loans		43	$	2,405	$	2,443

The troubled debt restructurings described above increased the allowance for loan losses by $374,000, but did not result in any chargeoffs during the three months ended March 31, 2013.

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended March 31, 2012:


	Number of loans		Pre-Modification Outstanding Recorded Investment		Post- Modification Recorded Investment
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family		14	$	1,956	$	1,919
Multifamily residential		6		1,439		1,438
Nonresidential		1		424		424
Land		—		—		—

Total		21		3,819		3,781

Construction Loans
One-to four-family residential		3		853		830
Multifamily and nonresidential		—		—		—

Total		3		853		830

Consumer Loans
Home Equity		22		833		834
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—

Total		22		833		834

Commercial Loans
Secured		—		—		—
Unsecured		1		446		446

Total		1		446		446

Total Restructured Loans		47	$	5,951	$	5,891

The troubled debt restructurings described above increased the allowance for loan losses by $78,000 and resulted in no charge offs during the three months ending March 31, 2012.

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the period ended March 31, 2013:


	Number of loans		Recorded Investment
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family		5	$	293
Multifamily residential		—		—
Nonresidential		—		—
Land		—		—

Total		5		293

Construction Loans
One-to four-family residential		—		—
Multifamily and nonresidential		—		—

Total		—		—

Consumer Loans
Home Equity		7		389
Auto		—		—
Marine		—		—
Recreational vehicle		—		—
Other		—		—

Total		7		389

Commercial Loans
Secured		—		—
Unsecured		—		—

Total		—		—

Total Restructured Loans		12	$	682


	Number of loans		Recorded Investment
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family		9	$	851
Multifamily residential		—		—
Nonresidential		—		—
Land		—		—

Total		9		851

Construction Loans
One-to four-family residential		—		—
Multifamily and nonresidential		—		—

Total		—		—

Consumer Loans
Home Equity		2		77
Auto		—		—
Marine		—		—
Recreational vehicle		—		—
Other		—		—

Total		2		77

Commercial Loans
Secured		—		—
Unsecured		—		—

Total		—		—

Total Restructured Loans		11	$	928

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

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

The terms of certain other loans were modified during the period ended March 31, 2013, but they did not meet the definition of a troubled debt restructuring. These loans have a total recorded investment as of March 31, 2013 of $9.3 million. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be significant.

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

Credit Quality Indicators:

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

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

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

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

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

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

The Company monitors loans on a monthly basis to determine if they should be included in one of the categories listed above. All impaired non-homogeneous credits classified as Substandard, Doubtful or Loss are analyzed on an individual basis for a specific reserve requirement. This analysis is performed on each individual credit at least annually or more frequently if warranted.

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

Loans

March 31, 2013

(Dollars in thousands)


	Unclassified				Classified
	Unclassified		Special Mention		Substandard		Doubtful		Loss		Total Classified		Total Loans
Real Estate Loans
Permanent
One-to four-family residential	$	562,131	$	412	$	7,834	$	—	$	—	$	7,834	$	570,377
Multifamily residential		57,458		8,338		4,061		—		—		4,061		69,857
Nonresidential		97,860		7,461		27,341		—		—		27,341		132,662
Land		9,116		273		5,827		—		—		5,827		15,216

Total		726,565		16,484		45,063		—		—		45,063		788,112

Construction Loans
One-to four-family residential		27,735		194		4,937		—		—		4,937		32,866
Multifamily and nonresidential		4,584		—		—		—		—		—		4,584

Total		32,319		194		4,937		—		—		4,937		37,450

Consumer Loans
Home Equity		168,649		—		3,246		—		—		3,246		171,895
Auto		6,885		47		108		—		—		108		7,040
Marine		4,659		6		188		—		—		188		4,853
Recreational vehicle		19,998		—		390		—		—		390		20,388
Other		2,306		—		14		—		—		14		2,320

Total		202,497		53		3,946		—		—		3,946		206,496

Commercial Loans
Secured		17,427		868		2,781		—		—		2,781		21,076
Unsecured		1,071		55		875		—		—		875		2,001

Total		18,498		923		3,656		—		—		3,656		23,077

Total	$	979,879	$	17,654	$	57,602	$	—	$	—	$	57,602	$	1,055,135

Loans

December 31, 2012

(Dollars in thousands)


	Unclassified				Classified
	Unclassified		Special Mention		Substandard		Doubtful		Loss		Total Classified		Total Loans
Real Estate Loans
Permanent
One-to four-family residential	$	569,204	$	459	$	7,586	$	—	$	—	$	7,586	$	577,249
Multifamily Residential		69,060		8,409		3,454		—		—		3,454		80,923
Nonresidential		99,275		12,234		26,679		—		—		26,679		138,188
Land		9,596		280		5,932		—		—		5,932		15,808

Total		747,135		21,382		43,651		—		—		43,651		812,168

Construction Loans
One-to four-family Residential		20,577		196		7,545		—		—		7,545		28,318
Multifamily and Nonresidential		4,534		—		—		—		—		—		4,534

Total		25,111		196		7,545		—		—		7,545		32,852

Consumer Loans
Home Equity		173,696		82		3,534		—		—		3,534		177,230
Auto		7,453		7		113		—		—		113		7,648
Marine		4,745		—		190		—		—		190		4,942
Recreational vehicle		20,859		—		1,391		—		—		1,391		22,250
Other		2,507		—		16		—		—		16		2,523

Total		209,260		89		5,244		—		—		5,244		214,593

Commercial Loans
Secured		20,843		769		2,631		—		—		2,631		24,243
Unsecured		1,481		11		808		—		—		808		2,300

Total		22,324		780		3,439		—		—		3,439		26,543

Total	$	1,003,830	$	22,447	$	59,879	$	—	$	—	$	59,879	$	1,086,156

7. MORTGAGE BANKING ACTIVITIES

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

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


	March 31, 2013		December 31, 2012
Mortgage loan portfolios serviced for:
FHLMC	$	819,209	$	817,108
FNMA		311,026		316,142

Escrow balances are maintained at the FHLB in connection with serviced loans totaling $2.2 million and $1.7 million at March 31, 2013 and December 31, 2012, respectively.

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


	Three Months Ended March 31, 2013			Three Months Ended March 31, 2012
	(Dollars in thousands)
Balance, beginning of year	$	5,506		$	6,375
Originations		1,282			531
Amortized to expense		(660	)		(641	)

Balance, end of period		6,128			6,265
Less valuation allowance		(245	)		(837	)

Net balance	$	5,883		$	5,428

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


	Three Months Ended March 31, 2013			Three Months Ended March 31, 2012
	(Dollars in thousands)
Balance, beginning of year	$	(680	)	$	(1,785	)
Impairment charges		—			—
Recoveries		435			948

Balance, end of period	$	(245	)	$	(837	)

The fair value of mortgage servicing rights as of March 31, 2013, was approximately $7.6 million and at December 31, 2012, the fair value was approximately $6.8 million.

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


	March 31, 2013	December 31, 2012
Weighted average prepayment rate	347 PSA	401 PSA
Weighted average life (in years)	3.97	3.93
Weighted average discount rate	8.00%	8.00%

8. OTHER REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS

Real estate owned and other repossessed assets at March 31, 2013 and 2012 were as follows:


	March 31,			March 31,
	2013			2012
	(Dollars in thousands)
Real estate owned and other repossessed assets	$	21,989		$	34,959
Valuation allowance		(6,207	)		(5,902	)

End of period	$	15,782		$	29,057

Activity in the valuation allowance was as follows:


	March 31,			March 31,
	2013			2012
	(Dollars in thousands)
Beginning of year	$	6,796		$	8,764
Additions charged to expense		323			128
Direct write-downs		(912	)		(2,990	)

End of period	$	6,207		$	5,902

Expenses related to foreclosed and repossessed assets include:


	Three Months Ended		Three Months Ended
	March 31, 2013		March 31, 2012
	(Dollars in thousands)
Net loss on sales	$	108	$	601
Provision for unrealized losses, net		323		128
Operating expenses, net of rental income		493		702

Total expenses	$	924	$	1,431

9. OTHER POSTRETIREMENT BENEFIT PLANS

Home Savings sponsors a defined benefit health care plan that was curtailed in 2000, but continues to provide postretirement medical benefits for employees who had worked 20 years and attained a minimum age of 60 by September 1, 2000, while in service with Home Savings. The plan is contributory and contains minor cost-sharing features such as deductibles and coinsurance. In addition, postretirement life insurance coverage is provided for employees who were participants prior to December 10, 1976. The life insurance plan is non-contributory. Home Savings’ policy is to pay premiums monthly, with no pre-funding.

Components of net periodic benefit cost are as follows:


	Three Months Ended			Three Months Ended
	March 31, 2013			March 31, 2012
	(Dollars in thousands)
Service cost		$ 0			$ 0
Interest cost		13			19
Expected return on plan assets		0			0
Net amortization of prior service cost		(19	)		(20	)
Recognized net actuarial gain		(28	)		(23	)

Net periodic benefit cost/(gain)		($34	)		($24	)

Assumptions used in the valuations were as follows:
Weighted average discount rate		3.00	%		4.00	%

10. FAIR VALUE MEASUREMENT

Fair value is the exchange price that would be received for an asset if paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own beliefs about the assumptions that market participants would use in pricing an asset or liability.

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

Available for sale securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2).

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

Other real estate owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

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

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

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

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

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


			Fair Value Measurements at March 31, 2013 Using:
	March 31,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2013		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Available for sale securities
US Treasury and government sponsored entities’ securities	$	235,149	$	—	$	235,149	$	—
Equity securities		338		338		—		—
Mortgage-backed GSE securities: residential		366,620		—		366,620		—
Interest rate caps		444		—		—		444


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

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

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2013 and 2012, in thousands:


	Interest Rate Caps
	Three Months Ended			Three Months Ended
	March 31, 2013			March 31, 2012
	(Dollars in thousands)
Balance of recurring Level 3 assets at beginning of period	$	436		$	1,933
Total gains (losses) for the period
Included in other income		138			(157	)
Included in other comprehensive income		—			—
Purchases		—			—
Amortization		(130	)		(130	)
Sales		—			—

Balance of recurring Level 3 assets at end of period	$	444		$	1,646

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

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

Fair
Value

Valuation Technique(s)

Unobservable
Input(s)

Range

(Dollars in thousands)

Interest rate caps

444

Discounted cash flow

Discount rate

0.47%-1.5%

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

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, 2013 Using:
	March 31,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2013		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Impaired loans:
Permanent real estate loans	$	12,913	$	—	$	—	$	12,913
Construction loans		3,093		—		—		3,093
Commercial loans		194		—		—		194
Mortgage servicing assets		2,112		—		2,112		—
Other real estate owned, net:
Permanent real estate loans		3,365		—		—		3,365
Construction loans		5,396		—		—		5,396


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

Impaired loans with specific allocations of the allowance for loan losses, carried at fair value, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a net carrying amount of $16.2 million at March 31, 2013, which includes a specific valuation allowance of $3.4 million. This resulted in an increase in the provision for loan losses of $2.9 million during the three months ended March 31, 2013. Impaired loans with specific allocations of the allowance for loan losses, carried at fair value, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $54.6 million at March 31, 2012, with a specific valuation allowance of $6.3 million. This resulted in a decrease of provision for loan losses of $631,000 during the three months ended March 31, 2012. Impaired loans with specific allocations of the allowance for loan losses, carried at fair value, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a net carrying amount of $9.9 million at December 31, 2012, which includes a specific valuation allowance of $3.0 million. This resulted in an increase of the provision for loan losses of $27,000 during the twelve months ended December 31, 2012.

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

At March 31, 2013, mortgage servicing rights, carried at fair value, totaled $5.9 million, which is made up of the outstanding balance of $6.1 million, net of a valuation allowance of $245,000. At March 31, 2012, mortgage servicing rights, carried at fair value, totaled $4.2 million, which is made up of the outstanding balance of $6.3 million, net of valuation allowance. At December 31, 2012, mortgage servicing rights, carried at fair value, totaled $4.9 million, which is made up of the outstanding balance of $5.6 million, net of a valuation allowance of $680,000, resulting in a net recovery of $1.1 million for the year ended December 31, 2012. Mortgage servicing rights are valued by an independent third party that is active in purchasing and selling these instruments. The value reflects the characteristics of the underlying loans discounted at a market multiple.

At March 31, 2013, other real estate owned, carried at fair value, which is measured for impairment using the fair value of the property less estimated selling costs, had a net carrying amount of $8.8 million with a valuation allowance of $6.2 million. This resulted in additional expenses of $323,000 during the three months ended March 31, 2013. Other real estate owned, carried at fair value, which are measured for impairment using the fair value of the property less estimated selling costs, had a carrying amount of $16.4 million, with a valuation allowance of $5.9 million at March 31, 2012. This resulted in additional expenses of $128,000 during the three months ended March 31, 2012. At December 31, 2012, other real estate owned, carried at fair value, which is measured for impairment using the fair value of the property less estimated selling costs, had a net carrying amount of $10.1 million with a valuation allowance of $6.8 million. This resulted in additional expenses of $2.2 million during the twelve months ended December 31, 2012.

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, 2013:


	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Average)
(In thousands)
Impaired loans:
Permanent real estate loans	$	12,913	Sales comparison approach Income approach	Adjustment for differences between comparable sales Adjustment for differences in net operating income Capitalization rate	12.07%-45.44% (28.75%) 7.52%-10.73% (9.49%)

Construction loans		3,093	Sales comparison approach Income approach	Adjustment for differences between comparable sales Adjustment for differences in net operating income Capitalization rate	0.00%-25.00% (9.83%) 10.00%

Commercial loans		194	Sales comparison approach Income approach	Adjustment for differences between comparable sales Adjustment for differences in net operating income Capitalization rate	1.6%-24.18% (11.15%) 8.5%-10% (9.25%)
Foreclosed assets:
Permanent real estate loans		3,365	Sales comparison approach	Adjustment for differences between comparable sales	3.60%-16.47% (10.20%)

Construction loans		5,396	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-47.24% (17.63%)

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


	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Average)
(Dollars in thousands)
Impaired loans:
Permanent real estate loans	$	6,166	Sales comparison approach Income approach	Adjustment for differences between comparable sales Adjustment for differences in net operating income Capitalization rate	12.07%-45.44% (28.75%) 7.52%-10.73% (9.49%)

Construction loans		3,489	Sales comparison approach Income approach	Adjustment for differences between comparable sales Adjustment for differences in net operating income Capitalization rate	0.00%-25.00% (9.83%) 10.00%

Commercial loans		257	Sales comparison approach Income approach	Adjustment for differences between comparable sales Adjustment for differences in net operating income Capitalization rate	1.6%-24.18% (11.15%) 8.5%-10% (9.25%)
Foreclosed assets:
Permanent real estate loans		3,172	Sales comparison approach	Adjustment for differences between comparable sales	3.60%-16.47% (10.20%)

Construction loans		6,918	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-47.24% (17.63%)

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


				Fair Value Measurements at March 31, 2013 Using:
	March 31, 2013			Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs
	Carrying Value			(Level 1)			(Level 2)			(Level 3)
	(In thousands)
Assets:
Cash and cash equivalents	$	78,084		$	78,084		$	—		$	—
Available for sale securities		602,107			338			601,769			—
Loans held for sale		9,268			—			9,422			—
Loans, net		1,034,415			—			—			1,051,176
FHLB stock		26,464			n/a			n/a			n/a
Accrued interest receivable		5,587			—			—			5,587
Interest rate caps		444			—			—			444
Liabilities:
Deposits:
Checking, savings and money market accounts		(922,965	)		(922,965	)		—			—
Certificates of deposit		(537,995	)		—			(549,523	)		—
FHLB advances		(50,000	)		—			(57,005	)		—
Repurchase agreements and other		(90,593	)		—			(100,641	)		—
Advance payments by borrowers for taxes and insurance		(14,258	)		—			(14,258	)		—
Accrued interest payable		(597	)		—			(597	)		—


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

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

(a) Cash and Cash Equivalents

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

(b) FHLB Stock

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

(c) Loans

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

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

(d) Deposits

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

(e) Short-term Borrowings

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

(f) Other Borrowings

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

(g) Accrued Interest Receivable/Payable

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

(h) Off-balance Sheet Instruments

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

11. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURE

Supplemental disclosures of cash flow information are summarized below.


	Three Months Ended		Three Months Ended
	March 31,		March 31,
	2013		2012
	(Dollars in thousands)
Supplemental disclosures of cash flow information
Cash paid (received) during the period for:
Interest on deposits and borrowings	$	3,485	$	5,605
Supplemental schedule of noncash activities:
Loans transferred from portfolio to held for sale		—		1,214
Transfers from loans to real estate owned and other repossessed assets		664		3,154
Transfers from real estate owned to premises and equipment		—		1,746
Amortization of preferred stock discount		821		—

12. EARNINGS PER SHARE

The Company has granted stock compensation awards with nonforfeitable dividend rights which are considered participating securities. As such, earnings per share is computed using the two-class method as required by Accounting Standard Codification 206-10-45. Basic earnings per common share is computed by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during the period which excludes the participating securities. Diluted earnings per common share includes the dilutive effect of additional potential common shares from stock compensation awards, but also excludes awards considered participating securities. Stock options for 816,342 shares were anti-dilutive for the three months ended March 31, 2013. Stock options for 1,644,503 shares were anti-dilutive for the three months ended March 31, 2012. Convertible preferred stock totaling 7,942 shares was anti-dilutive for the three months ended March 31, 2013.


	Three months ended			Three months ended
	March 31,			March 31,
	2013			2012
	(In thousands, except per share data)
Net income per consolidated statements of income	$	2,682		$	3,796
Amortization of discount on preferred stock		(821	)		—

Net income available to common shareholders		1,861			3,796
Net income allocated to participating securities		(10	)		(13	)

Net income allocated to common shareholders	$	1,851		$	3,783

Basic earnings per common share computation:
Distributed earnings allocated to common shareholders	$	—		$	—
Undistributed earnings allocated to common shareholders		1,851			3,783

Net income allocated to common shareholders	$	1,851		$	3,783

Weighted average common shares outstanding, including shares considered participating securities		33,689			32,803
Less: Average participating securities		(124	)		(110	)

Weighted average shares		33,565			32,693

Basic earnings per common share	$	0.06		$	0.12

Diluted earnings per common share computation:
Net earnings allocated to common shareholders	$	1,851		$	3,783

Weighted average common shares outstanding for basic earnings per common share		33,565			32,693
Add: Dilutive effects of assumed exercises of stock options		264			4
Add: Dilutive effects of convertible preferred stock		—			—

Weighted average shares and dilutive potential common shares		33,829			32,693

Diluted earnings per common share	$	0.05		$	0.12

As previously announced and described under Note 15 below, on March 22, 2013, United Community sold 7,942 preferred shares to various investors. In accordance with U.S. Generally Accepted Accounting Principles, United Community will record a beneficial conversion feature (“BCF”) related to the issuance of these preferred shares because they contain a conversion feature at a fixed rate that was in-the-money when issued. A BCF is “in-the-money” when the investor is deemed to be able to obtain the underlying common shares at a below market price upon conversion of the preferred shares. The BCF will be recognized in United Community’s Shareholders’ Equity and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The effective purchase price of the common shares into which the preferred shares are convertible is deemed to be $2.75, which is used to compute the intrinsic value. The intrinsic value is calculated as the difference between the deemed purchase price of the common shares ($2.75 per share) and the market value ($3.60 per share) on the date the preferred shares were issued, March 22, 2013, multiplied by the number of shares into which the preferred shares are convertible. The BCF from the issuance of the convertible preferred shares resulted in $6,750,700 being recorded in United Community’s Shareholders’ Equity as a reduction of preferred stock and an increase to additional paid-in capital. Because additional paid-in capital is included in United Community’s calculation of book value per common share, the additional paid-in capital recorded as a result of the BCF increased United Community’s book value per common share as of March 31, 2013. However, because the BCF is amortized over the period that the preferred shares are expected to be outstanding, this amortization will result in a reduction of book value per common share (defined as shareholders’ equity minus preferred stock divided by the number of common shares outstanding) over this time period for the same amount.

The BCF resulting from the issuance of the preferred shares of United Community is calculated as follows:


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

Beneficial conversion feature	$	6,750,700

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

13. OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) included in the Consolidated Statements of Shareholders’ Equity consists of unrealized gains and losses on available for sale securities and reflects no change in unrealized gains and losses on postretirement liability. The change includes reclassification of gains on sales of securities of $721,000 and no impairment charges at March 31, 2013, and gains on sales of securities of $414,000 and no impairment charges at March 31, 2012.

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


	Three Months Ended			Three Months Ended
	March 31,			March 31,
	2013			2012
	(Dollars in thousands)
Unrealized holding gain (loss) on securities available for sale	$	(2,242	)	$	(2,469	)
Unrealized holding gain (loss) on postretirement benefits		—			—
Reclassification adjustment for (gains) losses realized in income		(721	)		(414	)

Net unrealized gains		(2,963	)		(2,883	)
Tax effect		—			—

Net of tax amount	$	(2,963	)	$	(2,883	)

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


	Balance at December 31, 2012		Current Period Change			Balance at March 31, 2013
Unrealized gains (losses) on securities available for sale	$	5,082	$	(2,963	)	$	2,119
Unrealized gains (losses) on post-retirement benefits		1,600		—			1,600

Total	$	6,682	$	(2,963	)	$	3,719

The following is a summary of each component of accumulated other comprehensive income (loss) that was reclassified into net income during the period:


	Unrealized gains/losses on Available for Sale Securities			Postretirement Benefits		Total
Beginning balance	$	5,082		$	1,600	$	6,682
Other comprehensive loss before reclassification		(2,242	)		—		(2,242	)
Amounts reclassified from accumulated other comprehensive income		(721	)		—		(721	)

Net current period other comprehensive loss		(2,963	)		—		(2,963	)

Ending balance	$	2,119		$	1,600	$	3,719

14. REGULATORY CAPITAL REQUIREMENTS

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

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


	As of March 31, 2013
	Actual					Minimum Capital Requirements Per Memorandum of Understanding
	Amount		Ratio			Amount		Ratio
	(In thousands)
Total risk-based capital to risk-weighted assets	$	192,863		18.28	%	$	126,632		12.00	%
Tier 1 capital to risk-weighted assets		179,566		17.02	%		*		*
Tier 1 capital to average total assets**		179,566		9.84	%		164,221		8.50	%

	As of March 31, 2013
	Minimum Capital Requirements Per Regulation					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio
	(In thousands)
Total risk-based capital to risk-weighted assets	$	84,421		8.00	%	$	105,527		10.00	%
Tier 1 capital to risk-weighted assets		*		*			63,316		6.00	%
Tier 1 capital to average total assets**		72,987		4.00	%		91,234		5.00	%


	As of December 31, 2012
	Actual					Minimum Capital Requirements Per Bank Order
	Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total risk-based capital to risk-weighted assets	$	174,139		16.21	%	$	128,948		12.00	%
Tier 1 capital to risk-weighted assets		160,612		14.95	%		*		*
Tier 1 capital to average total assets**		160,612		8.70	%		166,226		9.00	%

	As of December 31, 2012
	Minimum Capital Requirements Per Regulation					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total risk-based capital to risk-weighted assets	$	85,965		8.00	%	$	107,457		10.00	%
Tier 1 capital to risk-weighted assets		*		*			64,474		6.00	%
Tier 1 capital to average total assets**		73,878		4.00	%		92,348		5.00	%

*	Ratio is not required under regulations

**	Tier 1 Leverage Capital Ratio

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

Pursuant to the Consent Order issued by the FDIC and Ohio Division, Home Savings needed to maintain a Tier 1 Leverage Capital Ratio greater than 9.0% and a Total Risk Based Capital Ratio greater than 12.0% at the end of every quarter beginning with the quarter ending June 30, 2012. While the Consent Order was in effect, if either ratio had fallen below its limit at the end of any given quarter, then Home Savings would have had to have restored its capital ratios to required levels within 90 days.

The Bank’s Tier 1 Leverage Capital Ratio was 8.70% at December 31, 2012. While Home Savings was still operating under a Consent Order at December 31, 2012 requiring a minimum Tier 1 Leverage Capital Ratio of 9.0%, the Company worked closely with its regulators to keep them informed of the bulk sale of troubled assets that took place on September 22, 2012, and obtained their concurrence to complete the bulk sale along with the Bank’s commitment to meet the 9.0% requirement by March 31, 2013. Under the terms of the MOU entered into on January 31, 2013, Home Savings is required to maintain a Tier 1 Leverage Capital Ratio of 8.50%.

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

15. CAPITAL RAISE

On March 22, 2013, United Community sold to 28 accredited investors (the Investors), in a private offering, an aggregate of approximately $39.9 million in United Community securities, including 6,574,272 newly issued common shares at a purchase price of $2.75 per share, and 7,942 newly created and issued perpetual mandatorily convertible non-cumulative preferred shares of United Community at a purchase price of $2,750 per share. Legal, investment banking and other consulting expenses incurred by United Community to complete this private placement portion of the capital raise aggregated $4.0 million. The increase in equity from this private placement was reduced by these expenses. On March 26, 2013, the Board of Directors of United Community approved an equity investment by United Community of $16.0 million into Home Savings.

Upon receipt of United Community shareholder approval, each of the preferred shares will automatically convert into 1,000 United Community common shares. However, there can be no assurance that United Community will receive such shareholder approval. The preferred shares will initially not pay any dividends, but if they are not converted into common shares prior to June 30, 2013, semi-annual non-cumulative cash dividends will take effect at an annual rate of 12.00%, payment of which is subject to regulatory approval. The preferred shares are redeemable by United Community at any time upon prior receipt of applicable regulatory approvals.

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

16. INCOME TAXES

As of March 31, 2013 and December 31, 2012, the deferred tax asset was $28.8 million. Management recorded a valuation allowance against deferred tax assets at March 31, 2013 and December 31, 2012 based primarily on its cumulative pre-tax losses during the past three years. When determining the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded as a benefit, the Company conducts a regular assessment of all available information. This information includes, but is not limited to, taxable income in prior periods, projected future income, and projected future reversals of deferred tax items. Based on these criteria, the Company determined that it was necessary to establish a full valuation allowance against the entire net deferred tax asset.

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

17. SUBSEQUENT EVENTS

On April 26, 2013, United Community issued a prospectus for the purpose of offering existing shareholders the right to purchase up to $5.0 million of United Community common shares at $2.75 per share.

Under the terms of this rights offering, United Community will distribute, at no charge to shareholders of record, non-transferable subscription rights to purchase up to 1,818,181 of United Community common shares. Each shareholder will receive the right to purchase 0.06 common shares for each common share held as of 5:00 p.m. Eastern Standard Time, on March 21, 2013, the record date of the rights offering. Each subscription right will entitle the shareholder to purchase one common share at a subscription price of $2.75 per share, which is referred to as the basic subscription privilege, subject to certain limitations and subject to allotment. Shareholders will also be entitled to exercise an oversubscription privilege, subject to certain limitations and subject to allotment, to purchase a portion of any unsubscribed common shares at the same subscription price of $2.75 per share.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


	At or For the Three Months Ended March 31,
	2013			2012
Selected financial ratios and other data: (1)
Performance ratios:
Return on average assets (2)		0.59	%		0.74	%
Return on average equity (3)		6.14	%		7.89	%
Interest rate spread (4)		2.86	%		3.11	%
Net interest margin (5)		3.01	%		3.30	%
Noninterest expense to average assets		3.05	%		3.23	%
Efficiency ratio (6)		75.55	%		77.35	%
Average interest-earning assets to average interest-bearing liabilities		118.44	%		115.63	%
Capital ratios:
Average equity to average assets		9.60	%		9.41	%
Equity to assets, end of period		11.27	%		9.31	%
Tier 1 leverage ratio		9.84	%		8.96	%
Tier 1 risk-based capital ratio		17.02	%		13.94	%
Total risk-based capital ratio		18.28	%		15.21	%
Asset quality ratio:
Nonperforming loans to total loans at end of period (7)		4.32	%		8.29	%
Nonperforming assets to average assets (8)		3.32	%		6.79	%
Nonperforming assets to total assets at end of period		3.30	%		6.81	%
Allowance for loan losses as a percent of loans		2.07	%		2.54	%
Allowance for loan losses as a percent of nonperforming loans (7)		48.81	%		31.41	%
Texas ratio (9)		26.52	%		61.98	%
Total classified assets as a percent of Tier 1 Capital		40.87	%		106.60	%
Total classified loans as a percent of Tier 1 Capital and ALLL		28.60	%		89.76	%
Total classified assets as a percent of Tier 1 Capital and ALLL		36.44	%		103.06	%
Net chargeoffs as a percent of average loans		0.52	%		2.48	%
Total 90+ days past due as a percent of total loans		3.88	%		6.90	%
Office data:
Number of full service banking offices		33			34
Number of loan production offices		9			8
Per share data:
Basic earnings per common share (10)	$	0.06		$	0.12
Diluted earnings per common share (10)		0.05			0.12
Book value per common share (11)		4.81			5.78
Tangible book value per common share (12)		4.81			5.77

Notes:

Ratios for the three month periods are annualized where appropriate

Net income divided by average total assets

Net income divided by average total equity

Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities

Net interest income as a percent of average interest-earning assets

Noninterest expense, excluding the amortization of the core deposit intangible, divided by the sum of net interest income and noninterest income, excluding gains and losses on securities, other than temporary impairment charges, and gains and losses on foreclosed assets

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

Nonperforming assets consist of nonperforming loans, real estate owned and other repossessed assets

Nonperforming assets divided by the sum of tangible common equity and the allowance for loan losses

10.

Net income available to common shareholders divided by the number of basic or diluted shares outstanding

11.

Shareholders’ equity minus preferred stock divided by number of common shares outstanding

12.

Shareholders’ equity minus preferred stock and core deposit intangible divided by number of common shares outstanding

Forward Looking Statements

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

Comparison of Financial Condition at March 31, 2013 and December 31, 2012

Total assets increased $23.4 million to $1.8 billion at March 31, 2013, compared to December 31, 2012. Contributing to the change was an increase in cash and cash equivalents of $35.5 million and an increase in available for sale securities of $27.5 million offset by a decrease in net loans of $31.8 million, a decrease in net loans held for sale of $3.8 million and a decrease in real estate owned and other repossessed assets of $2.7 million.

Funds not currently utilized for general corporate purposes are invested in overnight funds and available for sale securities. Cash and cash equivalents increased during the first quarter of 2013 as a result of the increase in balances maintained at the Federal Reserve due to the private placement portion of United Community’s capital raise. On March 22, 2013, United Community received $39.9 million ($18.1 million for 6,574,272 common shares and $21.8 million for 7,942 preferred shares) from the private placement portion of the capital raise.

In the first three months of 2013, the Company sold approximately $27.9 million in available for sale securities, recognizing $721,000 in net gains on the sales. The Company also purchased securities with a face value of $115.0 million to replace the securities sold during the period and to replace loan balances that continued to decline. Maturities, paydowns, and the change in the unrealized gain on the portfolio also contributed to the change in the size of the securities portfolio.

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

Net loans decreased $31.8 million during the first three months of 2013. Contributing to the decrease were a decline in overall loan demand during the period, continued refinance activity in Home Savings’ mortgage portfolio, and continued resolution of nonperforming and classified credits.

The following table summarizes the trend in the allowance for loan losses as of March 31, 2013:


	Allowance For Loan Losses
	(Dollars in thousands)
	December 31, 2012		Provision			Recovery		Chargeoff			March 31, 2013
Real Estate Loans
Permanent
One-to four-family residential	$	6,958	$	1,004		$	52	$	(689	)	$	7,325
Multifamily residential		1,223		195			10		(51	)		1,377
Nonresidential		4,801		1,055			7		(466	)		5,397
Land		837		(225	)		196		—			808

Total		13,819		2,029			265		(1,206	)		14,907

Construction Loans
One-to four-family residential		1,267		(37	)		281		(206	)		1,305
Multifamily and nonresidential		137		19			2		(20	)		138

Total		1,404		(18	)		283		(226	)		1,443

Consumer Loans
Home Equity		3,150		325			29		(387	)		3,117
Auto		49		(2	)		3		(2	)		48
Marine		264		(119	)		1		—			146
Recreational vehicle		829		196			46		(144	)		927
Other		167		(162	)		78		(67	)		16

Total		4,459		238			157		(600	)		4,254

Commercial Loans
Secured		783		(45	)		7		(128	)		617
Unsecured		665		(140	)		81		—			606

Total		1,448		(185	)		88		(128	)		1,223

Total	$	21,130	$	2,064		$	793	$	(2,160	)	$	21,827

The allowance for loan losses is a valuation allowance for probable incurred credit losses established through a provision for possible loan losses charged to expense. The allowance for loan losses increased to $21.8 million at March 31, 2013, from $21.1 million at December 31, 2012, an increase of $697,000. The allowance for loan losses as a percentage of loans was 2.07% at March 31, 2013, compared to 1.94% at December 31, 2012. The allowance for loan losses as a percentage of nonperforming loans was 48.81% at March 31, 2013, compared to 44.22% at December 31, 2012. Loan losses are charged against the allowance when the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are added back to the allowance. Home Savings’ allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables,” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies”. Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade applied to specific risk pools, plus specific loss allocations and adjustments for current events and conditions. Home Savings’ process for determining the appropriate level of the allowance for possible loan losses is designed to account for credit deterioration as it occurs. The provision for possible loan losses reflects loan quality trends, including the levels of and trends related to nonaccrual loans, past due loans, classified loans and net chargeoffs or recoveries, among other factors.

A loan is considered impaired when there is a deterioration of the credit worthiness of the borrower to the extent that there is no longer reasonable assurance of the timely collection of the full amount of principal and interest. The total outstanding balance of all impaired loans was $60.6 million at March 31, 2013 as compared to $61.0 million at December 31, 2012. The schedule below summarizes impaired loans for March 31, 2013 and December 31, 2012.

Impaired Loans

(Dollars in thousands)


	March 31, 2013		December 31, 2012		Change
Real Estate Loans
Permanent
One-to four-family residential	$	18,189	$	17,681	$	508
Multifamily residential		1,745		2,059		(314	)
Nonresidential		17,752		17,341		411
Land		5,827		5,931		(104	)

Total		43,513		43,012		501

Construction Loans
One-to four-family residential		4,937		7,547		(2,610	)
Multifamily and nonresidential		—		—		—

Total		4,937		7,547		(2,610	)

Consumer Loans
Home Equity		8,874		7,959		915
Auto		37		44		(7	)
Boat		188		190		(2	)
Recreational vehicle		1,000		592		408
Other		7		—		7

Total		10,106		8,785		1,321

Commercial Loans
Secured		1,345		1,635		(290	)
Unsecured		712		38		674

Total		2,057		1,673		384

Total Impaired Loans	$	60,613	$	61,017	$	(404	)

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

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

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

•

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

•

Reduction of the stated interest rate for the remaining original life of the loan;

•

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

•

Reduction of the face amount or maturity amount of the loan as stated in the instrument or other agreement; or

•

Reduction of accrued interest.

•

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

•

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

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

•

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

•

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

•

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

•

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

The change in TDRs for the three months ended March 31, 2013 is as follows:

Troubled Debt Restructurings


	March 31, 2013		December 31, 2012		Change
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family	$	15,744	$	15,299	$	445
Multifamily residential		—		—		—
Nonresidential		921		946		(25	)
Land		—		105		(105	)

Total		16,665		16,350		315

Construction Loans
One-to four-family residential		119		576		(457	)
Multifamily and nonresidential		—		—		—

Total		119		576		(457	)

Consumer Loans
Home Equity		8,740		7,253		1,487
Auto		13		13		—
Marine		—		—		—
Recreational vehicle		755		—		755
Other		7		7		—

Total		9,515		7,273		2,242

Commercial Loans
Secured		1,129		1,212		(83	)
Unsecured		—		25		(25	)

Total		1,129		1,237		(108	)

Total Restructured Loans	$	27,428	$	25,436	$	1,992

The increase in the level of TDR loans during the three months ended March 31, 2013 was attributable primarily to focused modification efforts within the home equity portfolio.

Once a restructured loan has fallen into nonaccrual status, the restructured loan will remain on nonaccrual status for a period of at least six months until the borrower has demonstrated a willingness and ability to make the restructured loan payments. TDR loans that were on nonaccrual status aggregated $3.6 million and $4.4 million at March 31, 2013 and December 31, 2012, respectively. Such loans are considered nonperforming loans. TDR loans that were accruing according to their terms aggregated $23.8 million and $21.0 million at March 31, 2013 and December 31, 2012, respectively.

Nonperforming loans consist of nonaccrual loans and loans past due 90 days and still accruing. Nonperforming loans were $44.7 million, or 4.32% of net loans, at March 31, 2013, compared to $47.8 million, or 4.48% of net loans, at December 31, 2012.

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

Nonperforming Loans

(Dollars in thousands)


	March 31, 2013		December 31, 2012		Change
Real Estate Loans
Permanent
One-to four-family residential	$	5,978	$	5,437	$	541
Multifamily residential		1,727		2,027		(300	)
Nonresidential		21,021		20,743		278
Land		5,957		6,047		(90	)

Total		34,683		34,254		429

Construction Loans
One-to four-family residential		4,931		7,465		(2,534	)
Multifamily and nonresidential		—		—		—

Total		4,931		7,465		(2,534	)

Consumer Loans
Home Equity		2,994		3,298		(304	)
Auto		91		105		(14	)
Marine		176		176		—
Recreational vehicle		340		1,259		(919	)
Other		7		5		2

Total		3,608		4,843		(1,235	)

Commercial Loans
Secured		891		1,194		(303	)
Unsecured		601		31		570

Total		1,492		1,225		267

Total Nonperforming Loans	$	44,714	$	47,787	$	(3,073	)

Loans held for sale decreased $3.8 million, or 28.9%, to $9.3 million at March 31, 2013, compared to $13.0 million at December 31, 2012. The change was primarily attributable to the timing of sales during the period. Home Savings continues to sell a portion of newly originated mortgage loans into the secondary market as part of its risk management strategy and anticipates continuing to do so in the future.

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

Real estate owned and other repossessed assets decreased $2.7 million, or 14.4%, during the three months ended March 31, 2013. The following table summarizes the activity in real estate owned and other repossessed assets during the period:


	Real Estate Owned			Repossessed Assets			Total
Balance at Beginning of period	$	18,075		$	365		$	18,440
Acquisitions		359			305			664
Sales, net of gains		(2,780	)		(237	)		(3,017	)
Change in valuation allowance		(305	)		—			(305	)

Balance at End of period	$	15,349		$	433		$	15,782

The following table depicts the type of property secured in the satisfaction of loans and the valuation allowance associated with each type as of March 31, 2013:


	Balance		Valuation Allowance			Net Balance
	(In thousands)
Real estate owned
One-to four-family	$	6,582	$	(676	)	$	5,906
Multifamily residential		—		—			—
Nonresidential		757		(95	)		662
One-to four-family residential construction		13,392		(5,359	)		8,033
Land		825		(77	)		748

Total real estate owned		21,556		(6,207	)		15,349
Repossessed assets
Auto		3		—			3
Marine		146		—			146
Recreational vehicle		284		—			284

Total repossessed assets		433		—			433

Total real estate owned and other repossessed assets	$	21,989	$	(6,207	)	$	15,782

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

Total deposits decreased $1.1 million to $1.5 billion at March 31, 2013, compared to December 31, 2012. The primary cause for the decrease in deposits was due to the decline in certificates of deposit. As certificates of deposit matured, the Company was able to retain most of these deposits in other interest-bearing non-time deposit accounts at substantially lower rates. As of March 31, 2013, Home Savings had no brokered deposits.

Advance payments by borrowers for taxes and insurance decreased $9.3 million during the first three months of 2013. Remittance of real estate taxes and property insurance made on behalf of customers of Home Savings accounted for $2.0 million of the decrease. In addition, funds held for payments received on loans sold where servicing was retained by Home Savings decreased $7.3 million.

During the first three months of 2013, Home Savings received requests for reimbursements from Freddie Mac and Fannie Mae for the purpose of making them whole on certain loans sold in the secondary market. These loans have certain identified weakness such that, in the opinion of management, a settlement to the investor is most appropriate. For the three months ended March 31, 2013, Home Savings incurred expenses of $570,000 associated with such repurchases. Home Savings has included in other liabilities a reserve for future make-whole settlements aggregating $706,000 at March 31, 2013. Management believes this reserve is appropriate given the historical losses incurred to date and the probability future losses will be deemed certain.

Shareholders’ equity increased $35.8 million to $206.5 million at March 31, 2013, from $170.7 million at December 31, 2012. The change occurred primarily due to the successful completion of the private placement portion of the capital raise and net income recognized during the period, offset by the adjustment to other comprehensive income for the change in the valuation of available for sale securities during the period.

On January 11, 2013, United Community entered into securities purchase agreements with 28 accredited investors, pursuant to which the Investors agreed to invest an aggregate of approximately $39.9 million in United Community for 6,574,272 newly issued common shares of United Community at a purchase price of $2.75 per share, and 7,942 newly created and issued perpetual mandatorily convertible non-cumulative preferred shares of United Community at a purchase price of $2,750 per share. On March 22, 2013, United Community received $39.9 million from the completion of this portion of the private placement of the capital raise. Legal, investment banking and other consulting expenses incurred by United Community to complete this portion of the capital raise aggregated $4.0 million. The increase in equity from this private placement was reduced by these expenses.

Upon United Community shareholder approval, each of the preferred shares will automatically convert into 1,000 United Community common shares. However, there can be no assurance that United Community will receive such shareholder approval. The preferred shares will initially not pay any dividends, but if they are not converted into common shares prior to June 30, 2013, semi-annual non-cumulative cash dividends will take effect at an annual rate of 12.00%, payment of which is subject to regulatory approval. The preferred shares can be redeemed by United Community at any time upon prior receipt of applicable regulatory approvals.

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

The Board considered at great lengths the merits of a capital raise and the amount to be raised, including, but not limited to: the requirements of the current regulatory orders and previous regulatory directives regarding capital levels; higher regulatory capital requirements that might apply to United Community in the near future from the implementation of proposed Basel III capital requirements; the need to maintain a capital cushion above regulatory capital minimums to absorb any potential losses that might still arise in the loan portfolio (given our asset quality metrics which, while improved, remain elevated as compared to our capital levels and compared to peer levels); and United Community’s liquidity requirements and its need to act as a source of strength to Home Savings. The Board also took into account possible strategic opportunities for deploying the increased capital, and the improved likelihood of successfully doing so if capital levels were sufficient to allow United Community to pursue such strategies without financing contingencies.

Comparison of Operating Results for the Three Months Ended

March 31, 2013 and March 31, 2012

Net Income. United Community recognized net income for the three months ended March 31, 2013, of $2.7 million. Compared with the first quarter of 2012, net interest income decreased $3.0 million, the provision for loan losses increased $1.4 million, non-interest income increased $602,000 and noninterest expense decreased $2.6 million. United Community’s annualized return on average assets and return on average equity were 0.59% and 6.14%, respectively, for the three months ended March 31, 2013. The annualized return on average assets and return on average equity for the comparable period in 2012 were 0.74% and 7.89%, respectively.

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

Net Interest Income. Net interest income for the three months ended March 31, 2013 and March 31, 2012, was $12.9 million and $15.9 million, respectively. Total interest income decreased $5.1 million in the first quarter of 2013 compared to the first quarter of 2012, primarily as a result of a decrease of $311.2 million in the average balance of outstanding loans. United Community also experienced a decrease in the yield on net loans of 38 basis points. Home Savings’ construction and segments of its commercial real estate loan portfolios declined as a result of executing its strategic objective of reducing specific concentrations in these portfolios.

Total interest expense decreased $2.2 million for the quarter ended March 31, 2013, as compared to the same quarter last year. The change was due primarily to reductions of $1.9 million in interest paid on deposits. The overall decrease in interest expense was attributable to a shift in deposit balances from certificates of deposit to relatively less expensive non-time deposits. Between March 31, 2012, and March 31, 2013, the average outstanding balance of certificates of deposit declined by $172.7 million, while non-time deposits increased by $49.1 million. Also contributing to the decrease was a reduction of 69 basis points in the cost of certificates of deposit, as well as a decrease in the cost of non-time deposits of 12 basis points.

The following table shows the impact of interest rate and outstanding balance (volume) changes compared to the first quarter of last year. The interest rate spread for the three months ended March 31, 2013, decreased to 2.86% compared to 3.12% for the quarter ended March 31, 2012. The net interest margin decreased 29 basis points to 3.01% for the three months ended March 31, 2013 compared to 3.30% for the same quarter in 2012.


	For the Three Months Ended March 31,
	2013 vs. 2012
	Increase (decrease) due to						Total increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	(1,208	)	$	(3,821	)	$	(5,029	)
Loans held for sale		(167	)		156			(11	)
Investment securities:
Available for sale		569			(635	)		(66	)
FHLB stock		(17	)		—			(17	)
Other interest-earning assets		—			(3	)		(3	)

Total interest-earning assets	$	(823	)	$	(4,303	)	$	(5,126	)

Interest-bearing liabilities:
Savings accounts		(4	)		8			4
NOW and money market accounts		(202	)		27			(175	)
Certificates of deposit		(1,058	)		(716	)		(1,774	)
Federal Home Loan Bank advances		(1,048	)		839			(209	)
Repurchase agreements and other		(10	)		—			(10	)

Total interest-bearing liabilities	$	(2,322	)	$	158			(2,164	)

Change in net interest income							$	(2,962	)

Provision for Loan Losses. A provision for loan losses is charged to income to bring the total allowance for loan losses to a level considered by management to be adequate, based on management’s evaluation of such factors as the delinquency status of loans, current economic conditions, the net realizable value of the underlying collateral, changes in the composition of the loan portfolio and prior loan loss experience. The provision for loan losses increased to $2.1 million in the first quarter of 2013, compared to $680,000 in the first quarter of 2012. This $1.4 million increase in the provision for loan losses is primarily a result of chargeoffs of $560,000 associated with one commercial lending relationship that was settled in the first quarter of 2013. In addition, a $382,000 specific reserve was established on another commercial relationship to adjust the net book value to an anticipated resolution balance. These two transactions caused the provision in the first quarter of 2013 to exceed the provision for loan losses for the same time period in 2012.

Noninterest Income. Noninterest income increased in the first quarter of 2013 to $5.7 million, as compared to noninterest income for the first quarter of 2012 of $5.1 million. Increased noninterest income was a result of higher gains recognized on the sale of securities available for sale, fewer losses recognized on the valuation and disposal of real estate owned and other repossessed assets and increased mortgage banking income recognized in the first quarter of 2013 as compared to the same quarter in 2012. The increase in mortgage banking income was due to an overall increase in the volume of loans originated for sale in the current quarter. In the first quarter of 2013, Home Savings sold approximately $76.9 million of loans and subsequently recognized a $1.6 million gain. Further impacting the comparison, Home Savings recognized lower losses on the disposal of real estate owned and other repossessed assets in the first quarter of 2013, as compared to the first quarter of 2012. These positive changes were offset by lower service fees and other charges recognized, compared to the first quarter of 2012. This change was a result of a lower valuation adjustment recognized on deferred mortgage servicing rights in the first quarter of 2013 as compared to the same period in 2012.

Noninterest Expense. Noninterest expense was $13.9 million in the first quarter of 2013, compared to $16.5 million in the first quarter of 2012. In the first quarter of 2013, salaries and employee benefits were down because of the recognition of expenses associated with a restricted stock grant that occurred in the first quarter of 2012. A similar award was not granted in 2013. Deposit insurance premiums were lower in the first quarter of 2013 due to the Bank being able to avail itself of more favorable insurance rates and a lower average asset base used in the calculation of insurance premiums. Professional fees were $472,000 lower during the quarter ended March 31, 2013 as compared to the same quarter last year. The improvement in asset quality has reduced the need to engage legal and other consultants to assist in the resolution of problem assets. Other expenses were lower in the first quarter of 2013, as compared to the same quarter in 2012. This positive variance is the result of lower expenses incurred for real estate taxes and other expenses paid prior to loans going into foreclosure.

UNITED COMMUNITY FINANCIAL CORP.

AVERAGE BALANCE SHEETS

The following table presents the total dollar amounts of interest income and interest expense on the indicated amounts of average interest-earning assets or interest-bearing liabilities, together with the weighted average interest rates for the three month periods ended March 31, 2013 and 2012. Average balance calculations were based on daily balances.


	Three Months Ended March 31,
	2013							2012
	Average		Interest					Average		Interest
	Outstanding		Earned/		Yield/			Outstanding		Earned/		Yield/
	Balance		Paid		Cost			Balance		Paid		Cost
	(Dollars in thousands)
Interest-earning assets:
Net loans (1)	$	1,047,661	$	12,627		4.82	%	$	1,358,858	$	17,656		5.20	%
Net loans held for sale		12,372		89		2.88	%		9,595		100		4.17	%
Investment securities:
Available for sale		602,177		3,428		2.28	%		495,858		3,494		2.82	%
Federal Home Loan Bank stock		26,464		283		4.28	%		26,464		300		4.53	%
Other interest-earning assets		27,812		9		0.13	%		36,126		12		0.13	%

Total interest-earning assets		1,716,486		16,436		3.83	%		1,926,901		21,562		4.48	%
Noninterest-earning assets		104,256							118,295

Total assets	$	1,820,742						$	2,045,196

Interest-bearing liabilities:
NOW and money market accounts	$	477,041	$	292		0.24	%	$	452,345	$	467		0.41	%
Savings accounts		269,484		87		0.13	%		245,130		83		0.14	%
Certificates of deposit		546,521		1,708		1.25	%		719,197		3,482		1.94	%
Federal Home Loan Bank advances		65,567		523		3.19	%		159,176		732		1.84	%
Repurchase agreements and other		90,596		909		4.01	%		90,616		919		4.06	%

Total interest-bearing liabilities		1,449,209		3,519		0.97	%		1,666,464		5,683		1.36	%

Noninterest-bearing liabilities		196,760							186,233

Total liabilities		1,645,969							1,852,697
Equity		174,773							192,499

Total liabilities and equity	$	1,820,742						$	2,045,196

Net interest income and interest rate spread			$	12,917		2.86	%			$	15,879		3.12	%

Net interest margin						3.01	%						3.30	%

Average interest-earning assets to average interest-bearing liabilities						118.44	%						115.63	%

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

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

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

Presented below are analyses of Home Savings’ interest rate risk as measured by changes in NPV and net interest income for instantaneous and sustained parallel shifts of 100 basis point increments in market interest rates. As noted, for both the year ended December 31, 2012 and for the quarter ended March 31, 2013, the percentage changes fall within the policy limits set by the Board of Directors of Home Savings as the minimum NPV ratio and the maximum change in NPV and interest income that the Home Savings Board deems advisable in the event of various changes in interest rates. See the table below for Board-adopted policy limits.


Year Ended March 31, 2013
	NPV as % of portfolio value of assets												Next 12 months net interest income
													(Dollars in thousands)
Change in rates (Basis points)	NPV Ratio			Internal policy limitations			Change in %			Internal policy limitations on NPV Change			$ Change		Internal policy limitations			% Change
400		9.77	%		6.00	%		-0.97	%		30.00	%	$	9,013		-20.00	%		17.87	%
300		10.27	%		6.00	%		-0.47	%		25.00	%		7,286		-15.00	%		14.44	%
200		10.84	%		7.00	%		0.11	%		20.00	%		5,101		-10.00	%		10.11	%
100		11.24	%		7.00	%		0.50	%		15.00	%		2,399		-5.00	%		4.76	%
Static		10.74	%		9.00	%		—	%		—	%		—		—	%		—	%


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

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

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

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

ITEM 4. Controls and Procedures

An evaluation was carried out by United Community’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of United Community’s disclosure controls and procedures (as defined in Rules 13a-15(e)/15d-15(e) of the Securities Exchange Act of 1934) as of March 31, 2013. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that United Community’s disclosure controls and procedures as of March 31, 2013 were effective in ensuring that information required to be disclosed in the reports that United Community files or submits under the Exchange Act (i) was recorded, processed, summarized and reported on a timely basis, and (ii) is accumulated and communicated to management, including United Community’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. During the quarter ended March 31, 2013, there were no changes in United Community’s internal controls over financial reporting that have materially affected or are reasonably likely to materially affect United Community’s internal controls over financial reporting.

PART II. OTHER INFORMATION

UNITED COMMUNITY FINANCIAL CORP.

ITEM 1 - Legal Proceedings

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

ITEM 1A - Risk Factors

There have been no significant changes in United Community’s risk factors as outlined in United Community’s Form 10-K for the period ended December 31, 2012. The risk factors described in the Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that management currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results. Moreover, the Company undertakes no obligation and disclaims any intention to publish revised information or updates to forward looking statements contained in such risk factors or in any other statement made at any time by the Company or any of its directors, officers, employees or other representatives, unless and until any such revisions or updates are expressly required to be disclosed by securities laws or regulations.

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

On January 23, 2013, Gregory Krontiris forfeited 2,008 common shares back to the Company at a price of $3.06 per share to satisfy the tax liability for the award granted on December 24, 2012. There were no other purchases of United Community shares during the quarter ended March 31, 2013.

ITEM 6 - Exhibits


Exhibit Number		Description

3.1		Articles of Incorporation
3.2		Amendment to Articles of Incorporation
3.3		Amended Code of Regulations
10.1		Form of Purchase Agreement
10.2		Form of Subscription Agreement
10.3		Executive Incentive Plan
31.1		Section 302 Certification by Chief Executive Officer
31.2		Section 302 Certification by Chief Financial Officer
32		Certification of Statements by Chief Executive Officer and Chief Financial Officer
101		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, formatted in XBRL (Extensible Business reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations and Comprehensive Income, (iii) the Consolidated Statements of Changes in Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Consolidated Financial Statements.

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

Date: May 10, 2013						/S/ James R. Reske
						James R. Reske, CFA Treasurer and Chief Financial Officer
						(Principal Financial Officer)

UNITED COMMUNITY FINANCIAL CORP.

Exhibit 3.1

Incorporated by reference to the Registration Statement on Form S-1 filed by United Community on March 13, 1998 with the Securities and Exchange Commission (SEC), film number 98565717, Exhibit 3.1.

Exhibit 3.2

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

Exhibit 3.3

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

Exhibit 10.1

Incorporated by reference to the Form 8-K filed by United Community on January 15, 2013 with the SEC, film number 13531112, Exhibit 10.1.

Exhibit 10.2

Incorporated by reference to the Form 8-K filed by United Community on January 15, 2013 with the SEC, film number 13531112, Exhibit 10.2.

Exhibit 10.3

Incorporated by reference to the Form 8-K filed by United Community on March 28, 2013 with the SEC, film number 13724891, Exhibit 10.1.