Edgar Filing: UNITED COMMUNITY FINANCIAL CORP

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

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 September 30, 2013

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

For the transition period from to

UNITED COMMUNITY FINANCIAL CORP.

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

OHIO

000-024399

34-1856319

(State or other jurisdiction

of incorporation)

(Commission

File No.)

(IRS Employer

I.D. No.)

275 West Federal Street, Youngstown, Ohio 44503-1203

(Address of principal executive offices) (Zip Code)

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

Not Applicable

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 50,229,212 common shares as of October 31, 2013.

TABLE OF CONTENTS


	PAGE
Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Statements of Financial Condition as of September 30, 2013 (Unaudited) and December 31, 2012		1

Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2013 and 2012 (Unaudited)		2

Consolidated Statement of Shareholders’ Equity for the Nine Months ended September 30, 2013 and 2012 (Unaudited)		4

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012 (Unaudited)		5

Notes to Consolidated Financial Statements (Unaudited)		6-53

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		54-68

Item 3. Quantitative and Qualitative Disclosures About Market Risk		69

Item 4. Controls and Procedures		70

Part II. OTHER INFORMATION

Item 1. Legal Proceedings		71

Item 1A. Risk Factors		71

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		71

Item 3. Defaults Upon Senior Securities (None)

Item 4. Mine Safety Disclosures (None)

Item 5. Other Information (None)

Item 6. Exhibits		71

Signatures		72

Exhibits		73

PART I—FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)


	September 30,			December 31,
	2013			2012
	(Dollars in thousands)
Assets:
Cash and deposits with banks	$	22,918		$	26,041
Federal funds sold		63,212			16,572

Total cash and cash equivalents		86,130			42,613
Securities:
Available for sale, at fair value		542,811			574,562
Loans held for sale		2,894			13,031
Loans, net of allowance for loan losses of $21,032 and $21,130		1,009,029			1,066,240
Federal Home Loan Bank stock, at cost		26,464			26,464
Premises and equipment, net		20,938			21,549
Accrued interest receivable		5,200			6,238
Real estate owned and other repossessed assets, net		9,315			18,440
Core deposit intangible		172			238
Cash surrender value of life insurance		44,603			28,881
Other assets		8,646			10,109

Total assets	$	1,756,202		$	1,808,365

Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Interest bearing	$	1,243,443		$	1,302,307
Non-interest bearing		167,167			159,767

Total deposits		1,410,610			1,462,074
Borrowed funds:
Federal Home Loan Bank advances		50,000			50,000
Repurchase agreements and other		90,583			90,598

Total borrowed funds		140,583			140,598
Advance payments by borrowers for taxes and insurance		12,126			23,590
Accrued interest payable		592			563
Accrued expenses and other liabilities		8,969			10,780

Total liabilities		1,572,880			1,637,605

Shareholders’ Equity:
Preferred stock-no par value; 1,000,000 shares authorized and no shares issued and outstanding		—			—
Common stock-no par value; 499,000,000 shares authorized; 54,138,910 and 37,804,457 shares, respectively, issued and 50,225,367 and 33,027,886 shares, respectively, outstanding		175,282			128,026
Retained earnings		80,460			86,345
Accumulated other comprehensive income (loss)		(31,324	)		6,682
Treasury stock, at cost, 3,913,543 and 4,776,571 shares, respectively		(41,096	)		(50,293	)

Total shareholders’ equity		183,322			170,760

Total liabilities and shareholders’ equity	$	1,756,202		$	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						For the Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
	(Dollars in thousands, except per share data)
Interest income
Loans	$	12,233		$	14,567		$	37,067		$	49,182
Loans held for sale		80			101			247			305
Available for sale securities		3,364			3,219			10,176			10,253
Federal Home Loan Bank stock dividends		280			279			840			859
Other interest earning assets		52			25			102			48

Total interest income		16,009			18,191			48,432			60,647
Interest expense
Deposits		1,847			2,600			5,843			9,574
Federal Home Loan Bank advances		529			535			1,576			1,880
Repurchase agreements and other		929			928			2,756			2,766

Total interest expense		3,305			4,063			10,175			14,220

Net interest income		12,704			14,128			38,257			46,427
Provision for loan losses		657			30,279			3,834			37,223

Net interest income after provision for loan losses		12,047			(16,151	)		34,423			9,204

Non-interest income
Non-deposit investment income		275			478			1,189			1,525
Service fees and other charges		1,734			793			5,207			4,011
Net gains (losses):
Securities available for sale (includes $0, $1,192, $2,578, and $5,161 respectively, accumulated other comprehensive income reclassifications for unrealized net gains on available for sale securities)		—			1,192			2,578			5,161
Mortgage banking income		895			2,110			3,927			5,308
Real estate owned and other repossessed assets		(395	)		(1,795	)		(1,966	)		(3,447	)
Other income		1,039			974			4,690			3,234

Total non-interest income		3,548			3,752			15,625			15,792

Non-interest expense
Salaries and employee benefits		7,379			8,634			22,539			25,651
Occupancy		811			845			2,484			2,495
Equipment and data processing		1,698			1,665			5,240			5,074
Franchise tax		385			521			1,216			1,396
Advertising		226			134			646			486
Amortization of core deposit intangible		20			26			66			83
Prepayment penalty		—			65			—			803
Deposit insurance premiums		598			1,012			1,755			3,176
Professional fees		761			2,219			2,043			4,138
Real estate owned and other repossessed asset expenses		354			383			1,140			1,504
Other expenses		1,296			1,826			4,631			6,061

Total non-interest expenses		13,528			17,330			41,760			50,867

Income (loss) before income taxes		2,067			(29,729	)		8,288			(25,871	)
Income tax expense (benefit) (includes $0 income tax expense from reclassification items)		350			(2,838	)		500			(2,838	)

Net income (loss)		1,717			(26,891	)		7,788			(23,033	)
Amortization of discount on preferred stock		—			—			(6,751	)		—

Earnings (loss) available to common shareholders	$	1,717		$	(26,891	)	$	1,037		$	(23,033	)

(Continued)

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)


	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Net income (loss)	$	1,717		$	(26,891	)	$	7,788		$	(23,033	)
Other comprehensive income (loss)
Unrealized gains (losses) on securities, net of tax		(2,121	)		2,729			(38,006	)		5,271

Total other comprehensive income (loss)	$	(2,121	)	$	2,729		$	(38,006	)	$	5,271

Comprehensive loss	$	(404	)	$	(24,162	)	$	(30,218	)	$	(17,762	)

Earnings (loss) per common share
Basic	$	0.03		$	(0.82	)	$	0.02		$	(0.70	)
Diluted		0.03			(0.82	)		0.02			(0.70	)

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Unaudited)


	Preferred Shares Outstanding			Common Shares Outstanding		Preferred Stock			Common Stock		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
	(Dollars thousands, except share data)
Balance December 31, 2011		—			32,597,762	$	—		$	128,031	$	110,681		$	5,032		$	(54,999	)	$	188,745
Net income												(23,033	)								(23,033	)
Comprehensive income															5,271						5,271
Stock option expenses										8											8
Restricted stock awards		—			293,733					189		(2,870	)					3,270			589

Balance September 30, 2012		—			32,891,495	$	—		$	128,228	$	84,778		$	10,303		$	(51,729	)	$	171,580

Balance December 31, 2012		—			33,027,886	$	—		$	128,026	$	86,345		$	6,682		$	(50,293	)	$	170,760
Net income												7,788									7,788
Other comprehensive loss															(38,006	)					(38,006	)
Stock option exercises					104,142							(1,051	)					1,206			155
Stock option expenses										15											15
Restricted stock awards					3,066					218		9						33			260
Issuance of common stock, net of issuance costs of $4,649					9,148,273					18,431		(5,880	)					7,958			20,509
Issuance preferred stock		7,942					15,090			6,751											21,841
Amortization of preferred stock discount							6,751					(6,751	)								—
Conversion of preferred stock to common stock		(7,942	)		7,942,000		(21,841	)		21,841											—

Balance September 30, 2013		—			50,225,367	$	—		$	175,282	$	80,460		$	(31,324	)	$	(41,096	)	$	183,322

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30,
	2013			2012
	(Dollars in thousands)
Cash Flows from Operating Activities
Net income (loss)	$	7,788		$	(23,033	)
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		3,834			37,223
Mortgage banking income		(3,927	)		(5,308	)
Net losses on real estate owned and other repossessed assets sold		1,966			3,447
Net gain on available for sale securities sold		(2,578	)		(5,161	)
Net gain on other assets sold		(10	)		—
Amortization of premiums and accretion of discounts		2,394			1,016
Depreciation and amortization		1,406			1,183
Net change in interest receivable		1,038			1,081
Net change in interest payable		29			18
Net change in prepaid and other assets		2,371			254
Net change in other liabilities		(1,811	)		554
Stock based compensation		275			597
Net principal disbursed on loans originated for sale		(188,167	)		(226,708	)
Proceeds from sale of loans held for sale		202,231			235,667
Death benefit from bank owned life insurance		—			1,115
Net change in interest rate caps		(463	)		1,423

Net cash from operating activities		26,376			23,368
Cash Flows from Investing Activities
Proceeds from principal repayments and maturities of:
Securities available for sale		41,057			56,123
Proceeds from sale of:
Securities available for sale		97,127			286,926
Real estate owned and other repossessed assets		8,627			13,830
Loans held for investment		13,709			81,451
Premises and equipment		20			—
Purchases of:
Securities available for sale		(144,992	)		(424,932	)
Bank owned life insurance		(15,000	)		—
Principal repaid on loans, net of disbursements		37,861			154,499
Loans purchased		(50	)		(289	)
Purchases of premises and equipment		(780	)		(1,593	)

Net cash from investing activities		37,579			166,015
Cash Flows from Financing Activities
Net increase in checking, savings and money market accounts		(2,332	)		76,079
Net decrease in certificates of deposit		(49,132	)		(173,934	)
Net decrease in advance payments by borrowers for taxes and insurance		(11,464	)		(9,161	)
Net change in Federal Home Loan Bank advances		—			(78,155	)
Prepayment penalty on Federal Home Loan Bank advances		—			(803	)
Net change in repurchase agreements and other borrowed funds		(15	)		(15	)
Proceeds from the exercise of stock options		155			—
Issuance of preferred stock, net of issuance costs		20,509			—
Issuance of common stock, net of issuance costs		21,841			—

Net cash used by financing activities		(20,387	)		(185,989	)

Change in cash and cash equivalents		43,517			3,394
Cash and cash equivalents, beginning of period		42,613			54,136

Cash and cash equivalents, end of period	$	86,130		$	57,530

See Notes to Consolidated Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

BASIS OF PRESENTATION

United Community Financial Corp. (United Community or the Company) was incorporated 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 U.S. generally accepted accounting principles (U.S. GAAP) for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair statement of results for the interim periods.

The results of operations for the three and nine months ended September 30, 2013, are not necessarily indicative of the results to be expected for the year ending December 31, 2013. The consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2012, contained in United Community’s Form 10-K for the year ended December 31, 2012.

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

REGULATORY ENFORCEMENT ACTION

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

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

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

On January 31, 2013, the Consent Order was terminated and Home Savings entered into a MOU with the FDIC and Ohio Division. The MOU requires Home Savings to submit certain plans and reports to the FDIC and the Ohio Division, to seek the FDIC’s and Ohio Division’s prior consent before issuing any dividends to United Community, and to maintain its Tier 1 Leverage Capital Ratio at 8.50% and its Total Risk Based Capital Ratio at 12.0%. Management believes Home Savings is in compliance with capital requirements of the MOU. As of September 30, 2013, Home Savings Tier 1 Leverage Capital Ratio was 10.26% and its Total Risk Based Capital Ratio was 19.78%.

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

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

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

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. GAAP the ASU requires an entity to report the effect of these reclassifications out of AOCI on the respective line items of net income either on the face of the statement that reports net income or in the financial statement notes. For AOCI items that that are not reclassified to net income in their entirety, presentation in the financial statement notes is required. The ASU does not change the current requirements for reporting net income or AOCI in the financial statements. This ASU is effective for public companies for fiscal years and interim periods within those years beginning after December 15, 2012. The ASU should be applied prospectively for all companies. Early application is permitted. The adoption of this ASU did not have a material effect on United Community’s financial statements.

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 12,317 stock options granted in 2013 and there were 10,898 stock options granted in 2012 under the 2007 Plan. The options must be exercised within 10 years from the date of grant.

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

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

Expenses related to stock option grants are included with salaries and employee benefits. The Company recognized $5,500 in stock option expenses for the three months ended September 30, 2013 compared to $4,816 for the three months ended September 30, 2012. The Company recognized $14,970 in stock option expenses for the nine months ended September 30, 2013 compared to $13,042 for the nine months ended September 30, 2012. With respect to options currently outstanding, the Company expects to recognize additional expense of $5,344 in 2013, $16,690 in 2014, and $9,192 in 2015.

A summary of activity in the plans is as follows:


	For the nine months ended September 30, 2013
	Shares			Weighted average exercise price		Aggregate intrinsic value (in thousands)
Outstanding at beginning of year		1,309,942		$	5.77	$	640
Granted		12,317			3.54		—
Exercised		(123,600	)		2.01		—
Forfeited		(241,729	)		8.82		—

Outstanding at end of period		956,930		$	5.46	$	1,102

Options exercisable at end of period		929,028		$	5.54	$	1,065

Information related to the stock option plans for the nine months ended September 30, 2013 follows:


	September 30, 2013
Intrinsic value of options exercised	$	304,056
Cash received from option exercises		155,320
Tax benefit realized from option exercises		—
Weighted average fair value of options granted, per share	$	2.38

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 third quarter 2013 was determined using the following weighted-average assumptions as of the grant date.


	July 3, 2013
Risk-free interest rate		0.84	%
Expected term (years)		5
Expected stock volatility		86.20	%
Dividend yield		—	%

Outstanding stock options have a weighted average remaining life of 4.42 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 September 30, 2013 aggregated 106,070, of which 32,685 will vest during 2013, 42,665 will vest during 2014, 29,883 will vest during 2015 and 837 will vest during 2016. 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 $68,000 in restricted stock award expenses for the three months ended September 30, 2013 and approximately $260,000 in restricted stock award expenses for the nine months ended September 30, 2013. The Company recognized approximately $103,000 in restricted stock award expenses for the three months ended September 30, 2012 and approximately $604,000 in restricted stock award expenses for the nine months ended September 30, 2012. Based upon past awards of restricted stock, the Company expects to recognize additional expenses of approximately $68,000 for the remainder of 2013, $184,000 in 2014, and $76,000 in 2015.

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


	Shares			Weighted average grant date fair value
Nonvested shares at January 1, 2013		129,321		$	2.86
Granted		17,226			3.82
Vested		(26,317	)		2.09
Forfeited		(14,160	)		3.06

Nonvested shares at September 30, 2013		106,070		$	3.18

SECURITIES

Components of the available for sale portfolio are as follows:


	September 30, 2013
	(Dollars in thousands)
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for Sale
U.S. Treasury and government sponsored entities’ securities	$	250,268	$	1	$	(20,506	)	$	229,763
Equity securities		101		295		—			396
Mortgage-backed GSE securities: residential		322,395		651		(10,394	)		312,652

Total	$	572,764	$	947	$	(30,900	)	$	542,811


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

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

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


	September 30, 2013
	(Dollars in thousands)
	Amortized		Fair
	Cost		Value
Due in one year or less	$	—	$	—
Due after one year through five years		500		501
Due after five years through ten years		161,153		149,827
Due after ten years through fifteen years		88,615		79,435
Mortgage-related securities		322,394		312,652

Total	$	572,662	$	542,415

Home Savings had no securities pledged for the Company’s participation in the VISA payment processing program as of September 30, 2013 and had pledged approximately $5.8 million as of December 31, 2012. The requirement for Home Savings to pledge securities for participation in the VISA payment processing program was rescinded due to the termination of the Consent Order, as previously disclosed. Securities pledged for participation in the Ohio Linked Deposit Program were approximately $389,000 and $417,000 as of September 30, 2013 and December 31, 2012, respectively.

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


	September 30, 2013
	(Dollars in thousands)
	Less Than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Treasury and government sponsored entities’ securities	$	229,262	$	(20,506	)	$	—	$	—		$	229,262	$	(20,506	)
Mortgage-related securities		264,019		(10,136	)		8,704		(257	)		272,723		(10,393	)

Total	$	493,281	$	(30,642	)	$	8,704	$	(257	)	$	501,985	$	(30,899	)


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

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

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

Proceeds from sales of securities available for sale were $97.1 million and $286.9 million for the nine months ended September 30, 2013 and 2012, respectively. Gross gains of $0 and $1.2 million were realized on these sales during the third quarter of 2013 and 2012, respectively. Gross gains of $2.6 million and $5.2 million were realized on these sales during the first nine months of 2013 and 2012, respectively.

LOANS

Portfolio loans consist of the following:


	September 30,			December 31,
	2013			2012
	(Dollars in thousands)
Real Estate:
One-to four-family residential	$	575,791		$	577,249
Multi-family residential		55,696			80,923
Nonresidential		127,699			138,188
Land		9,546			15,808
Construction:
One-to four-family residential and land development		38,932			28,318
Multi-family and nonresidential		—			4,534

Total real estate		807,664			845,020
Consumer
Home equity		163,866			177,230
Auto		5,943			7,648
Marine		4,432			4,942
Recreational vehicles		17,939			22,250
Other		2,203			2,523

Total consumer		194,383			214,593
Commercial
Secured		26,113			24,243
Unsecured		775			2,300

Total commercial		26,888			26,543

Total loans		1,028,935			1,086,156

Less:
Allowance for loan losses		21,032			21,130
Deferred loan costs, net		(1,126	)		(1,214	)

Total		19,906			19,916

Loans, net	$	1,009,029		$	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 September 30, 2013 and December 31, 2012 and activity for the three and nine months ended September 30, 2013 and 2012. In accordance with GAAP, the net losses associated with loans sold as part of the bulk asset sale in the third quarter of 2012 were recorded as net chargeoffs of $38.2 million through the allowance for loan losses.


Allowance For Loan Losses
(Dollars in thousands)
	Permanent Real Estate Loans			Construction Loans			Consumer Loans			Commercial Loans			Total
For the three months ended September 30, 2013
Beginning balance (06/30/13)	$	12,129		$	1,803		$	4,202		$	903		$	19,037
Provision		2,286			(1,800	)		394			(223	)		657
Chargeoffs		(651	)		(37	)		(400	)		(16	)		(1,104	)
Recoveries		92			1,913			257			180			2,442

Ending balance (09/30/13)	$	13,856		$	1,879		$	4,453		$	844		$	21,032

For the nine months ended September 30, 2013
Beginning balance (12/31/12)	$	13,819		$	1,404		$	4,459		$	1,448		$	21,130
Provision		5,064			(1,354	)		967			(843	)		3,834
Chargeoffs		(5,794	)		(402	)		(1,514	)		(144	)		(7,854	)
Recoveries		767			2,231			541			383			3,922

Ending balance (09/30/13)	$	13,856		$	1,879		$	4,453		$	844		$	21,032

September 30, 2013
Period-end amount allocated to:
Loans individually evaluated for impairment	$	1,222		$	677		$	524		$	—		$	2,423
Loans collectively evaluated for impairment		12,634			1,202			3,929			844			18,609

Ending balance	$	13,856		$	1,879		$	4,453		$	844		$	21,032

Period-end balances:
Loans individually evaluated for impairment	$	26,259		$	3,333		$	12,407		$	4,328		$	46,327
Loans collectively evaluated for impairment		742,473			35,599			181,976			22,560			982,608

Ending balance	$	768,732		$	38,932		$	194,383		$	26,888		$	1,028,935

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 historic loan loss experience.


Allowance For Loan Losses
(Dollars in thousands)
	Permanent Real Estate Loans			Construction Loans			Consumer Loans			Commercial Loans			Total
For the three months ended September 30, 2012
Beginning balance (06/30/12)	$	22,121		$	2,490		$	4,805		$	1,517		$	30,933
Provision		27,905			1,678			1,288			(592	)		30,279
Chargeoffs		(2,267	)		(543	)		(839	)		(233	)		(3,882	)
Recoveries		468			139			125			144			876
Net (chargeoffs) recovery from asset sale		(35,744	)		(2,134	)		(822	)		542			(38,158	)

Ending balance (09/30/12)	$	12,483		$	1,630		$	4,557		$	1,378		$	20,048

For the nine months ended September 30, 2012
Beginning balance (12/31/11)	$	31,323		$	4,493		$	4,576		$	1,879		$	42,271
Provision		32,539			2,293			2,422			(31	)		37,223
Chargeoffs		(16,328	)		(3,213	)		(2,198	)		(1,207	)		(22,946	)
Recoveries		693			191			579			195			1,658
Net (chargeoffs) recovery from asset sale		(35,744	)		(2,134	)		(822	)		542			(38,158	)

Ending balance (09/30/12)	$	12,483		$	1,630		$	4,557		$	1,378		$	20,048

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 nine months ended September 30, 2013:


Impaired Loans
(Dollars in thousands)
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With no specific allowance recorded
Permanent real estate
One-to four-family residential	$	14,687	$	12,469	$	—	$	16,088	$	333	$	385
Multifamily residential		737		643		—		766		2		9
Nonresidential		6,380		5,227		—		7,209		12		44
Land		3,913		487		—		2,120		—		—

Total		25,717		18,826		—		26,183		347		438
Construction loans
One-to four-family residential		1,501		1,092		—		2,070		—		2
Multifamily and nonresidential		—		—		—		—		—		—

Total		1,501		1,092		—		2,070		—		2
Consumer loans
Home Equity		9,073		8,511		—		8,942		300		328
Auto		50		33		—		40		1		3
Marine		162		162		—		182		—		7
Recreational vehicle		270		245		—		737		9		12
Other		—		—		—		2		—		—

Total		9,555		8,951		—		9,903		310		350
Commercial loans
Secured		4,701		4,328		—		2,798		—		41
Unsecured		4,197		—		—		188		1		56

Total		8,898		4,328		—		2,986		1		97

Total	$	45,671	$	33,197	$	—	$	41,142	$	658	$	887

(Continued)


Impaired Loans
(Dollars in thousands)
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With a specific allowance recorded
Permanent real estate
One-to four-family residential	$	6,670	$	6,665	$	1,092	$	2,036	$	192	$	193
Multifamily residential		185		85		25		554		—		—
Nonresidential		950		683		105		4,869		—		8
Land		—		—		—		1,064		—		—

Total		7,805		7,433		1,222		8,523		192		201
Construction loans
One-to four-family residential		3,829		2,241		677		2,984		—		—
Multifamily and nonresidential		—		—		—		—		—		—

Total		3,829		2,241		677		2,984		—		—
Consumer loans
Home Equity		2,728		2,728		365		683		69		72
Auto		—		—		—		—		—		—
Marine		—		—		—		—		—		—
Recreational vehicle		756		728		159		182		14		14
Other		—		—		—		—		—		—

Total		3,484		3,456		524		865		83		86
Commercial loans
Secured		—		—		—		208		—		—
Unsecured		—		—		—		—		—		—

Total		—		—		—		208		—		—

Total	$	15,118	$	13,130	$	2,423	$	12,580	$	275	$	287

Total	$	60,789	$	46,327	$	2,423	$	53,722	$	933	$	1,174

The following tables present loans individually evaluated for impairment by class of loans as of and for the nine months ended September 30, 2012:


Impaired Loans
(Dollars in thousands)
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With no specific allowance recorded
Permanent real estate
One-to four-family residential	$	17,027	$	15,594	$	—	$	25,431	$	424	$	461
Multifamily residential		610		515		—		3,363		—		9
Nonresidential		11,308		11,145		—		23,348		22		62
Land		4,584		3,811		—		5,789		—		3

Total		33,529		31,065		—		57,931		446		535
Construction loans
One-to four-family residential		6,465		2,553		—		8,289		9		21
Multifamily and nonresidential		587		—		—		—		—		—

Total		7,052		2,553		—		8,289		9		21
Consumer loans
Home Equity		5,921		4,956		—		4,365		133		163
Auto		72		52		—		56		—		4
Marine		170		170		—		220		—		9
Recreational vehicle		912		637		—		514		—		37
Other		7		7		—		7		—		1

Total		7,082		5,822		—		5,162		133		214
Commercial loans
Secured		2,298		1,378		—		1,948		18		97
Unsecured		3,066		43		—		344		1		12

Total		5,364		1,421		—		2,292		19		109

Total	$	53,027	$	40,861	$	—	$	73,674	$	607	$	879


Impaired Loans
(Dollars in thousands)
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With a specific allowance recorded
Permanent real estate
One-to four-family residential	$	—	$	—	$	—	$	1,489	$	—	$	—
Multifamily residential		1,026		1,011		57		2,742		—		17
Nonresidential		8,168		7,115		956		25,788		55		74
Land		4,588		2,371		268		3,226		—		12

Total		13,782		10,497		1,281		33,245		55		103
Construction loans
One-to four-family residential		21,648		7,427		664		13,032		15		27
Multifamily and nonresidential		—		—		—		—		—		—

Total		21,648		7,427		664		13,032		15		27
Consumer loans
Home Equity		—		—		—		—		—		—
Auto		—		—		—		—		—		—
Marine		—		—		—		121		—		—
Recreational vehicle		88		36		18		36		—		—
Other		—		—		—		—		—		—

Total		88		36		18		157		—		—
Commercial loans
Secured		798		423		166		488		—		3
Unsecured		—		—		—		19		—		—

Total		798		423		166		507		—		3

Total	$	36,316	$	18,383	$	2,129	$	46,941	$	70	$	133

Total	$	89,343	$	59,244	$	2,129	$	120,615	$	677	$	1,012

The following tables present loans individually evaluated for impairment by class of loans as of and for the three months ended September 30, 2013:


Impaired Loans
(Dollars in thousands)
	Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With no specific allowance recorded
Permanent real estate
One-to four-family residential	$	14,977	$	128	$	165
Multifamily residential		652		—		4
Nonresidential		5,270		2		20
Land		487		—		—

Total		21,386		130		189
Construction loans
One-to four-family residential		1,587		—		—
Multifamily and nonresidential		—		—		—

Total		1,587		—		—
Consumer loans
Home Equity		9,467		109		116
Auto		39		—		1
Marine		174		—		2
Recreational vehicle		677		4		6
Other		—		—		—

Total		10,357		113		125
Commercial loans
Secured		4,420		—		8
Unsecured		1		—		28

Total		4,421		—		36

Total	$	37,751	$	243	$	350


Impaired Loans
(Dollars in thousands)
	Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With a specific allowance recorded
Permanent real estate
One-to four-family residential	$	3,338	$	98	$	98
Multifamily residential		85		—		—
Nonresidential		1,339		—		1
Land		—		—		—

Total		4,762		98		99
Construction loans
One-to four-family residential		2,279		—		—
Multifamily and nonresidential		—		—		—

Total		2,279		—		—
Consumer loans
Home Equity		1,364		38		38
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		364		5		5
Other		—		—		—

Total		1,728		43		43
Commercial loans
Secured		102		—		—
Unsecured		—		—		—

Total		102		—		—

Total	$	8,871	$	141	$	142

Total	$	46,622	$	384	$	492

The following tables present loans individually evaluated for impairment by class of loans as of and for the three months ended September 30, 2012:


Impaired Loans
(Dollars in thousands)
	Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With no specific allowance recorded
Permanent real estate
One-to four-family residential	$	22,316	$	194	$	205
Multifamily residential		2,688		—		1
Nonresidential		17,943		9		22
Land		4,804		—		—

Total		47,751		203		228
Construction loans
One-to four-family residential		5,157		3		7
Multifamily and nonresidential		—		—		—

Total		5,157		3		7
Consumer loans
Home Equity		4,953		50		64
Auto		55		—		1
Marine		262		—		4
Recreational vehicle		648		—		16
Other		7		—		—

Total		5,925		50		85
Commercial loans
Secured		1,438		6		28
Unsecured		125		—		3

Total		1,563		6		31

Total	$	60,396	$	262	$	351


Impaired Loans
(Dollars in thousands)
	Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With a specific allowance recorded
Permanent real estate
One-to four-family residential	$	1,802	$	—	$	—
Multifamily residential		3,102		—		—
Nonresidential		15,467		18		22
Land		2,755		—		—

Total		23,126		18		22
Construction loans
One-to four-family residential		9,913		5		8
Multifamily and nonresidential		—		—		—

Total		9,913		5		8
Consumer loans
Home Equity		—		—		—
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		36		—		—
Other		—		—		—

Total		36		—		—
Commercial loans
Secured		504		—		—
Unsecured		—		—		—

Total		504		—		—

Total	$	33,579	$	23	$	30

Total	$	93,975	$	285	$	381

The following tables present 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 table presents the recorded investment in nonaccrual and loans past due over 90 days and still on accrual by class of loans as of September 30, 2013:


Nonaccrual Loans and Loans Past Due Over 90 Days and Still Accruing
As of September 30, 2013
(Dollars in thousands)
	Nonaccrual		Loans past due over 90 days and still accruing
Real Estate Loans
Permanent
One-to four-family residential	$	6,127	$	—
Multifamily residential		705		—
Nonresidential		5,839		3,125
Land		628		—

Total		13,299		3,125

Construction Loans
One-to four-family residential		3,320		—
Multifamily and nonresidential		—		—

Total		3,320		—

Consumer Loans
Home Equity		3,134		—
Auto		100		—
Marine		140		—
Recreational vehicle		184		—
Other		5		—

Total		3,563		—

Commercial Loans
Secured		4,036		—
Unsecured		141		—

Total		4,177		—

Total	$	24,359	$	3,125

The following table presents the recorded investment in nonaccrual and loans past due over 90 days and still on accrual by class of loans as of December 31, 2012:


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 table presents an age analysis of past-due loans, segregated by class of loans as of September 30, 2013:


Past Due Loans
(Dollars in thousands)
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current Loans		Total Loans
Real Estate Loans
Permanent
One-to four-family residential	$	1,292	$	405	$	4,471	$	6,168	$	569,623	$	575,791
Multifamily residential		112		—		240		352		55,344		55,696
Nonresidential		133		18		8,826		8,977		118,722		127,699
Land		—		44		627		671		8,875		9,546

Total		1,537		467		14,164		16,168		752,564		768,732

Construction Loans
One-to four-family residential		—		49		3,320		3,369		30,411		33,780
Multifamily and nonresidential		—		—		—		—		5,152		5,152

Total		—		49		3,320		3,369		35,563		38,932

Consumer Loans
Home Equity		517		427		2,587		3,531		160,335		163,866
Auto		16		—		53		69		5,874		5,943
Marine		—		41		—		41		4,391		4,432
Recreational vehicle		342		129		76		547		17,392		17,939
Other		22		1		2		25		2,178		2,203

Total		897		598		2,718		4,213		190,170		194,383

Commercial Loans
Secured		—		—		4,016		4,016		22,097		26,113
Unsecured		—		—		141		141		634		775

Total		—		—		4,157		4,157		22,731		26,888

Total	$	2,434	$	1,114	$	24,359	$	27,907	$	1,001,028	$	1,028,935

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 September 30, 2013:


	Number of loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Recorded Investment
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family		14	$	1,316	$	1,363
Multifamily residential		—		—		—
Nonresidential		—		—		—
Land		—		—		—

Total		14		1,316		1,363

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

Total		—		—		—

Consumer Loans
Home Equity		31		1,437		1,349
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—

Total		31		1,437		1,349

Commercial Loans
Secured		—		—		—
Unsecured		—		—		—

Total		—		—		—

Total Restructured Loans		45	$	2,753	$	2,712

The troubled debt restructurings described above increased the allowance for loan losses by $206,000, but did not result in any chargeoffs during the three months ended September 30, 2013.

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


	Number of loans		Pre-Modification Outstanding Recorded Investment		Post- Modification Recorded Investment
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family		36	$	3,158	$	2,969
Multifamily residential		1		469		469
Nonresidential		1		41		41
Land		2		2,127		487

Total		40		5,795		3,966

Construction Loans
One-to four-family residential		1		942		823
Multifamily and nonresidential		—		—		—

Total		1		942		823

Consumer Loans
Home Equity		94		3,963		3,886
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		4		791		804
Other		—		—		—

Total		98		4,754		4,690

Commercial Loans
Secured		—		—		—
Unsecured		—		—		—

Total		—		—		—

Total Restructured Loans		139	$	11,491	$	9,479

The troubled debt restructurings described above increased the allowance for loan losses by $778,000, and increased chargeoffs by $1.8 million during the nine months ended September 30, 2013.

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


	Number of loans		Pre-Modification Outstanding Recorded Investment		Post- Modification Recorded Investment
Real Estate Loans
Permanent
One-to four-family		17	$	537	$	537
Multifamily residential		—		—		—
Nonresidential		—		—		—
Land		—		—		—

Total		17		537		537

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

Total		—		—		—

Consumer Loans
Home Equity		19		2,711		2,792
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—

Total		19		2,711		2,792

Commercial Loans
Secured		—		—		—
Unsecured		—		—		—

Total		—		—		—

Total Restructured Loans		36	$	3,248	$	3,329

The troubled debt restructurings described above increased the allowance for loan losses by $367,000, but did not result in any chargeoffs during the three months ended September 30, 2012.

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


	Number of loans		Pre-Modification Outstanding Recorded Investment		Post- Modification Recorded Investment
Real Estate Loans
Permanent
One-to four-family		38	$	2,843	$	2,801
Multifamily residential		6		1,439		1,438
Nonresidential		1		424		424
Land		—		—		—

Total		45		4,706		4,663

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

Total		3		853		830

Consumer Loans
Home Equity		61		4,494		4,544
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—

Total		61		4,494		4,544

Commercial Loans
Secured		—		—		—
Unsecured		1		446		446

Total		1		446		446

Total Restructured Loans		110	$	10,499	$	10,483

The troubled debt restructurings described above increased the allowance for loan losses by $367,000, but did not result in any chargeoffs during the nine months ended September 30, 2012.

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within a twelve month cycle following the modification as of September 30, 2013:


	Number of loans		Recorded Investment
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family		8	$	861
Multifamily residential		1		467
Nonresidential		—		—
Land		2		487

Total		11		1,815

Construction Loans
One-to four-family residential		1		823
Multifamily and nonresidential		—		—

Total		1		823

Consumer Loans
Home Equity		8		250
Auto		—		—
Marine		—		—
Recreational vehicle		2		187
Other		—		—

Total		10		437

Commercial Loans
Secured		—		—
Unsecured		—		—

Total		—		—

Total Restructured Loans		22	$	3,075


	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.

Troubled debt restructurings increased during the nine month period ended September 30, 2013 due primarily to extensive efforts taken by the Company to refinance home equity lines of credit.

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 September 30, 2013, but they did not meet the definition of a troubled debt restructuring. These loans have a total recorded investment as of September 30, 2013 of $15.9 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 not 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 September 30, 2013 and December 31, 2012, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:


	Loans September 30, 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	$	566,765	$	1,166	$	7,860	$	—	$	—	$	7,860	$	575,791
Multifamily residential		49,860		2,989		2,847		—		—		2,847		55,696
Nonresidential		86,074		11,302		30,323		—		—		30,323		127,699
Land		8,905		154		487		—		—		487		9,546

Total		711,604		15,611		41,517		—		—		41,517		768,732

Construction Loans
One-to four-family residential		30,310		137		3,333		—		—		3,333		33,780
Multifamily and nonresidential		5,152		—		—		—		—		—		5,152

Total		35,462		137		3,333		—		—		3,333		38,932

Consumer Loans
Home Equity		160,501		—		3,365		—		—		3,365		163,866
Auto		5,792		46		105		—		—		105		5,943
Marine		4,265		5		162		—		—		162		4,432
Recreational vehicle		17,741		—		198		—		—		198		17,939
Other		2,198		—		5		—		—		5		2,203

Total		190,497		51		3,835		—		—		3,835		194,383

Commercial Loans
Secured		19,682		194		6,237		—		—		6,237		26,113
Unsecured		294		41		440		—		—		440		775

Total		19,976		235		6,677		—		—		6,677		26,888

Total	$	957,539	$	16,034	$	55,362	$	—	$	—	$	55,362	$	1,028,935


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

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

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

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

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

MORTGAGE BANKING ACTIVITIES

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

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


	September 30, 2013		December 31, 2012
Mortgage loan portfolios serviced for:
FHLMC	$	830,295	$	817,108
FNMA		291,015		316,142

Escrow balances are maintained at the Federal Home Loan Bank in connection with serviced loans totaling $1.1 million and $1.7 million at September 30, 2013 and December 31, 2012, respectively.

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


	Nine Months Ended September 30, 2013			Nine Months Ended September 30, 2012
	(Dollars in thousands)
Balance, beginning of year	$	5,506		$	6,375
Originations		2,228			1,738
Amortized to expense		(1,712	)		(1,923	)

Balance, end of period		6,022			6,190
Less valuation allowance		(4	)		(2,016	)

Net balance	$	6,018		$	4,174

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


	Nine Months Ended September 30, 2013			Nine Months Ended September 30, 2012
	(Dollars in thousands)
Balance, beginning of year	$	(680	)	$	(1,785	)
Impairment charges		—			(1,179	)
Recoveries		676			948

Balance, end of period	$	(4	)	$	(2,016	)

The fair value of mortgage servicing rights as of September 30, 2013, was approximately $9.9 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 September 30, 2013, and December 31, 2012, were as follows:


	September 30, 2013			December 31, 2012
Weighted average prepayment rate		232 PSA			401 PSA
Weighted average life (in years)		3.99			3.93
Weighted average discount rate		8.00	%		8.00	%

OTHER REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS

Real estate owned and other repossessed assets at September 30, 2013 and December 31, 2012 were as follows:


	September 30,			December 31,
	2013			2012
	(Dollars in thousands)
Real estate owned and other repossessed assets	$	15,989		$	25,236
Valuation allowance		(6,674	)		(6,796	)

End of period	$	9,315		$	18,440

Activity in the valuation allowance was as follows:


	September 30,			September 30,
	2013			2012
	(Dollars in thousands)
Beginning of year	$	6,796		$	8,764
Additions charged to expense		1,801			1,805
Direct write-downs		(1,923	)		(3,690	)

End of period	$	6,674		$	6,879

Expenses related to foreclosed and repossessed assets include:


	Three Months Ended			Three Months Ended
	September 30,			September 30,
	2013			2012
	(Dollars in thousands)
Net loss on sales	$	(69	)	$	210
Net loss on sales from bulk asset transaction		—			413
Provision for unrealized losses, net		464			1,172
Operating expenses, net of rental income		354			383

Total expenses	$	749		$	2,178


	Nine Months Ended			Nine Months Ended
	September 30,			September 30,
	2013			2012
	(Dollars in thousands)
Net loss on sales	$	165		$	1,229
Net loss on sales from bulk asset transaction		—			413
Provision for unrealized losses, net		1,801			1,805
Operating expenses, net of rental income		1,140			1,504

Total expenses	$	3,106		$	4,951

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 September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(Dollars in thousands)
Service cost	$	—		$	—		$	—		$	—
Interest cost		13			19			39			57
Expected return on plan assets		—			—			—			—
Net amortization of prior service cost		(19	)		(20	)		(57	)		(59	)
Recognized net actuarial gain		(28	)		(23	)		(84	)		(69	)

Net periodic benefit cost/(gain)	$	(34	)	$	(24	)	$	(102	)	$	(71	)

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

10.

FAIR VALUE MEASUREMENT

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

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

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

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

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

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

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

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 developed externally and compared to available third party market quotes for reasonableness (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 September 30, 2013 Using:
	September 30,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2013		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Available for sale securities
US Treasury and government sponsored entities’ securities	$	229,763	$	—	$	229,763	$	—
Equity securities		396		396		—		—
Mortgage-backed GSE securities: residential		312,652		—		312,652		—
Interest rate caps		594		—		—		594


			Fair Value Measurements at December 31, 2012 Using:
	December 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (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 nine months ended September 30, 2013 and 2012:


	Interest Rate Caps
	Nine Months Ended September 30, 2013			Nine Months Ended September 30, 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		547			(1,077	)
Included in other comprehensive income		—			—
Purchases		—			—
Amortization		(389	)		(346	)
Sales		—			—

Balance of recurring Level 3 assets at end of period	$	594		$	510

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 September 30, 2013:


	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range
	(Dollars in thousands)
Interest rate caps	$	594	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 September 30, 2013 Using:
	September 30, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Assets:
Impaired loans:
Permanent real estate loans	$	637	$	—	$	—	$	637
Construction loans		1,564		—		—		1,564
Mortgage servicing assets		387		—		387		—
Other real estate owned, net:
Permanent real estate		2,315		—		—		2,315
Construction		4,125		—		—		4,125

			Fair Value Measurements at December 31, 2012 Using:
	December 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (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		3,172		—		—		3,172
Construction		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 $2.2 million at September 30, 2013, which includes a specific valuation allowance of $808,000. This resulted in an increase in the provision for loan losses of $307,000 during the three months ended September 30, 2013 and an increase in the provision for loan losses of $2.6 million during the nine months ended September 30, 2013. Impaired loans with specific allocations of the allowance for loan losses, carried at fair value, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $57.1 million at September 30, 2012, with a specific valuation allowance of $2.1 million. This resulted in a decrease of the provision for loan losses of $2.3 million during the three months ended September 30, 2012 and a decrease of the provision for loan losses of $794,000 during the nine months ended September 30, 2012. Impaired loans with specific allocations of the allowance for loan losses, carried at fair value, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a net carrying amount of $9.9 million at December 31, 2012, which includes a specific valuation allowance of $3.0 million. This resulted in an increase of the provision for loan losses of $27,000 during the twelve months ended December 31, 2012.

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 September 30, 2013, mortgage servicing rights, carried at fair value, totaled $387,000, which is made up of the outstanding balance of $391,000, net of a valuation allowance of $4,000. At September 30, 2012, mortgage servicing rights, carried at fair value, totaled $4.2 million, which is made up of the outstanding balance of $6.2 million, net of a valuation allowance of $2.0 million. At December 31, 2012, mortgage servicing rights, carried at fair value, totaled $4.9 million, which is made up of the outstanding balance of $5.6 million, net of a valuation allowance of $680,000, resulting in a net recovery of $1.1 million for the year ended December 31, 2012. Mortgage servicing rights are valued by an independent third party that is active in purchasing and selling these instruments. The value reflects the characteristics of the underlying loans discounted at a market multiple.

At September 30, 2013, other real estate owned, carried at fair value, which is measured for impairment using the fair value of the property less estimated selling costs, had a net carrying amount of $6.4 million with a valuation allowance of $6.7 million. This resulted in additional expenses of $464,000 during the three months ended September 30, 2013 and additional expenses of $1.8 million during the nine months ended September 30, 2013. At September 30, 2012, other real estate owned had a net carrying amount of $18.5 million, with a valuation allowance of $6.9 million. This resulted in additional expenses of $1.3 million during the three months ended September 30, 2012, and additional expenses of $2.0 million during the nine months ended September 30, 2012. At December 31, 2012, other real estate owned had a net carrying amount of $10.1 million with a valuation allowance of $6.8 million. This resulted in additional expenses of $2.2 million during the twelve months ended December 31, 2012.

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


	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Average)
			(Dollars in thousands)
Impaired loans:
Permanent real estate loans	$	637	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-56.90% (11.78%)

			Income approach	Adjustment for differences in net operating income Capitalization rate	3.95%-14.62% (9.41%)

Construction loans		1,564	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-25.00% (11.90%)
Foreclosed assets:

Permanent real estate		2,315	Sales comparison approach	Adjustment for differences between comparable sales	6.00%-46.53% (17.76%)

Construction		4,125	Sales comparison approach	Adjustment for differences between comparable sales	6.54%-26.63% (9.24%)

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	Adjustment for differences between comparable sales	12.07%-45.44% (28.75%)

			Income approach	Adjustment for differences in net operating income Capitalization rate	7.52%-10.73% (9.49%)

Construction loans		3,489	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-25.00% (9.83%)

			Income approach	Adjustment for differences in net operating income Capitalization rate	10.00%

Commercial loans		257	Sales comparison approach	Adjustment for differences between comparable sales	1.6%-24.18% (11.15%)

			Income approach	Adjustment for differences in net operating income Capitalization rate	8.5%-10% (9.25%)
Foreclosed assets:

Permanent real estate		3,172	Sales comparison approach	Adjustment for differences between comparable sales	3.60%-16.47% (10.20%)

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

In accordance with U.S. GAAP, the carrying value and estimated fair values of financial instruments at September 30, 2013 and December 31, 2012, were as follows:


				Fair Value Measurements at September 30, 2013 Using:
	September 30, 2013 Carrying Value			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	86,130		$	86,130		$	—		$	—
Available for sale securities		542,811			396			542,415			—
Loans held for sale		2,894			—			2,947			—
Loans, net		1,009,029			—			—			1,021,206
FHLB stock		26,464			n/a			n/a			n/a
Accrued interest receivable		5,200			—			2,081			3,119
Interest rate caps		594			—			—			594
Liabilities:
Deposits:
Checking, savings and money market accounts		(900,444	)		(900,444	)		—			—
Certificates of deposit		(510,166	)		—			(519,632	)		—
FHLB advances		(50,000	)		—			(55,808	)		—
Repurchase agreements and other		(90,583	)		—			(99,292	)		—
Advance payments by borrowers for taxes and insurance		(12,126	)		—			(12,126	)		—
Accrued interest payable		(592	)		—			(592	)		—


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

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

(a) Cash and Cash Equivalents

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

(b) FHLB Stock

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

(c) Loans

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

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

(d) Deposits

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

(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.


	Nine Months Ended September 30, 2013		Nine Months Ended September 30, 2012
	(Dollars in thousands)
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest on deposits and borrowings	$	10,146	$	14,202
Income taxes		500		—
Supplemental schedule of noncash activities:
Loans transferred from portfolio to held for sale		—		1,214
Transfers from loans to real estate owned and other repossessed assets		1,468		5,743
Transfers from real estate owned to premises and equipment		—		1,746
Amortization of preferred stock discount		6,751		—
Conversion of preferred stock to common stock		21,841		—

12.

EARNINGS PER SHARE

The Company has granted stock compensation awards with nonforfeitable dividend rights which are considered participating securities. As such, earnings per share is computed using the two-class method as required by ASC 206-10-45. Basic earnings per common share is computed by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during the period which excludes the participating securities. Diluted earnings per common share includes the dilutive effect of additional potential common shares from stock compensation awards, but also excludes awards considered participating securities. Stock options for 685,272 shares were anti-dilutive for the three months ended September 30, 2013 and stock options for 681,962 shares were anti-dilutive for the nine months ended September 30, 2013. Stock options for 1,658,390 shares were anti-dilutive for the three and nine months ended September 30, 2012.


	Three months ended			Three months ended
	September 30,			September 30,
	2013			2012
	(Dollars in thousands, except per share data)
Net income (loss) per consolidated statements of income	$	1,717		$	(26,891	)
Net (income) loss allocated to participating securities		(4	)		73
Amortization of discount on preferred stock		—			—

Net income (loss) allocated to common stock	$	1,713		$	(26,818	)

Basic earnings per common share computation:
Distributed earnings allocated to common stock	$	—		$	—
Undistributed earnings (loss) allocated to common stock		1,713			(26,818	)

Net income (loss) allocated to common stock	$	1,713		$	(26,818	)

Weighted average common shares outstanding, including shares considered participating securities		50,219			32,847
Less: Average participating securities		(109	)		(96	)

Weighted average shares		50,110			32,751

Basic earnings (loss) per common share	$	0.03		$	(0.82	)

Diluted earnings per common share computation:
Net income (loss) allocated to common stock	$	1,713		$	(26,818	)

Weighted average common shares outstanding for basic earnings per common share		50,110			32,751
Add: Dilutive effects of assumed exercises of stock options		272			—

Weighted average shares and dilutive potential common shares		50,382			32,751

Diluted earnings (loss) per common share	$	0.03		$	(0.82	)


	Nine months ended			Nine months ended
	September 30,			September 30,
	2013			2012
	(Dollars in thousands, except per share data)
Net income (loss) per consolidated statements of income	$	7,788		$	(23,033	)
Net (income) loss allocated to participating securities		(22	)		43
Amortization of discount on preferred stock		(6,751	)		—

Net income (loss) allocated to common stock	$	1,015		$	(22,990	)

Basic earnings per common share computation:
Distributed earnings allocated to common stock	$	—		$	—
Undistributed earnings (loss) allocated to common stock		1,015			(22,990	)

Net income (loss) allocated to common stock	$	1,015		$	(22,990	)

Weighted average common shares outstanding, including shares considered participating securities		42,455			32,781
Less: Average participating securities		(118	)		(66	)

Weighted average shares		42,337			32,715

Basic earnings (loss) per common share	$	0.02		$	(0.70	)

Diluted earnings per common share computation:
Net income (loss) allocated to common stock	$	1,015		$	(22,990	)

Weighted average common shares outstanding for basic earnings per common share		42,337			32,715
Add: Dilutive effects of assumed exercises of stock options		275			—

Weighted average shares and dilutive potential common shares		42,612			32,715

Diluted earnings (loss) per common share	$	0.02		$	(0.70	)

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. GAAP, United Community recorded a beneficial conversion feature (“BCF”) related to the issuance of these preferred shares because they contain a conversion feature at a fixed rate that was in-the-money when issued. A BCF is “in-the-money” when the investor is deemed to be able to obtain the underlying common shares at a below-market price upon conversion of the preferred shares. The BCF was recognized in United Community’s Shareholders’ Equity and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The effective purchase price of the common shares into which the preferred shares were convertible was deemed to be $2.75, which was used to compute the intrinsic value. The intrinsic value was calculated as the difference between the deemed purchase price of the common shares ($2.75 per share) and the market value ($3.60 per share) on the date the preferred shares were issued (March 22, 2013), multiplied by the number of shares into which the preferred shares were convertible. The BCF resulting from the issuance of the preferred shares of United Community is calculated as follows:


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

Beneficial conversion feature	$	6,750,700

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

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 no reclassification of gains on sales of securities and no impairment charges for the three months ended September 30, 2013, and gains on sales of securities of $1.2 million and no impairment charges for the three months ended September 30, 2012. The change includes reclassification of gains on sales of securities of $2.6 million and no impairment charges for the nine months September 30, 2013, and gains on sales of securities of $5.2 million and no impairment charges for the nine months ended September 30, 2012.

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


	Three months ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012
	(Dollars in thousands)
Unrealized holding gain (loss) on securities available for sale	$	(2,121	)	$	6,759		$	(35,428	)	$	13,270
Unrealized holding gain (loss) on postretirement benefits		—			—			—			—
Reclassification adjustment for gains realized in income		—			(1,192	)		(2,578	)		(5,161	)

Net unrealized gains (losses)		(2,121	)		5,567			(38,006	)		8,109
Tax effect		—			(2,838	)		—			(2,838	)

Net of tax amount	$	(2,121	)	$	2,729		$	(38,006	)	$	5,271

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 September 30, 2013
	(Dollars in thousands)
Unrealized gains (losses) on securities available for sale	$	5,082	$	(38,006	)	$	(32,924	)
Unrealized gains (losses) on post-retirement benefits		1,600		—			1,600

Total	$	6,682	$	(38,006	)	$	(31,324	)

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


	Unrealized gains/losses on Available for Sale Securities			Postretirement Benefits		Total
	(Dollars in thousands)
Beginning balance (06/30/2013)	$	(30,803	)	$	1,600	$	(29,203	)
Other comprehensive loss before reclassification		(2,121	)		—		(2,121	)
Amounts reclassified from accumulated other compressive loss		—			—		—

Net current period other comprehensive loss		(2,121	)		—		(2,121	)

Ending balance (09/30/2013)	$	(32,924	)	$	1,600	$	(31,324	)


	Unrealized gains/losses on Available for Sale Securities			Postretirement Benefits		Total
	(Dollars in thousands)
Beginning balance (12/31/12)	$	5,082		$	1,600	$	6,682
Other comprehensive loss before reclassification		(35,428	)		—		(35,428	)
Amounts reclassified from accumulated other compressive loss		(2,578	)		—		(2,578	)

Net current period other comprehensive loss		(38,006	)		—		(38,006	)

Ending balance (09/30/2013)	$	(32,924	)	$	1,600	$	(31,324	)

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 September 30, 2013
	Actual					Minimum Capital Requirements Per Memorandum of Understanding
	Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total risk-based capital to risk-weighted assets	$	197,975		19.78	%	$	120,090		12.00	%
Tier 1 capital to risk-weighted assets		185,360		18.52	%		*		*
Tier 1 capital to average total assets**		185,360		10.26	%		162,536		8.50	%

	As of September 30, 2013
	Minimum Capital Requirements Per Regulation					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total risk-based capital to risk-weighted assets	$	80,060		8.00	%	$	100,075		10.00	%
Tier 1 capital to risk-weighted assets		*		*			60,045		6.00	%
Tier 1 capital to average total assets**		72,239		4.00	%		90,298		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

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 is 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 transaction 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.

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

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

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

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

15.

CAPITAL RAISE

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

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

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

Legal, investment banking and other consulting expenses incurred by United Community to complete the capital raise were approximately $4.6 million in the aggregate. The increase in equity from the capital raise was reduced by these expenses.

16.

INCOME TAXES

As of September 30, 2013 the net deferred tax asset (prior to any valuation allowance) was $39.7 million, and as of December 31, 2012, the net deferred tax asset (prior to any valuation allowance) was $28.8 million. The value of the net deferred tax asset (prior to any valuation allowance) on September 30, 2013 and December 31, 2012, includes the tax effect of unrealized gains or losses on available for sale securities. The deferred tax asset attributable to unrealized losses at September 30, 2013 was $10.5 million. The deferred tax liability attributable to unrealized gains at December 31, 2012 was $2.8 million. Management recorded a valuation allowance against the net deferred tax assets at September 30, 2013 and December 31, 2012 based on its estimate of future reversal and utilization. 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 for all periods presented. At September 30, 2013, net operating loss carryforwards totaled $72.9 million and a December 31, 2012, net operating loss carryforwards totaled $81.2 million.

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

The Company’s taxes payable for the period ended September 30, 2013 are the result of the application of the alternative minimum tax.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNITED COMMUNITY FINANCIAL CORP.


	At or For the Three						At or For the Nine
	Months Ended						Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Selected financial ratios and other data: (1)
Performance ratios:
Return on average assets (2)		0.39	%		-5.67	%		0.58	%		-1.56	%
Return on average equity (3)		3.75	%		-53.53	%		5.49	%		-15.56	%
Interest rate spread (4)		2.89	%		3.00	%		2.84	%		3.15	%
Net interest margin (5)		3.04	%		3.17	%		2.99	%		3.34	%
Noninterest expense to average assets		3.06	%		3.66	%		3.09	%		3.45	%
Efficiency ratio (6)		81.14	%		93.62	%		78.27	%		82.61	%
Average interest-earning assets to average interest-bearing liabilities		119.56	%		118.34	%		119.87	%		116.54	%
Capital ratios:
Average equity to average assets		10.34	%		10.60	%		10.49	%		10.02	%
Equity to assets, end of period		10.44	%		9.37	%		10.44	%		9.37	%
Tangible common equity to tangible common assets (13)		10.43	%		9.36	%		10.43	%		9.36	%
Tier 1 leverage ratio		10.26	%		8.27	%		10.26	%		8.27	%
Tier 1 risk-based capital ratio		18.52	%		14.59	%		18.52	%		14.59	%
Total risk-based capital ratio		19.78	%		15.85	%		19.78	%		15.85	%
Asset quality ratio:
Nonperforming loans to net loans at end of period (7)		2.72	%		4.16	%		2.72	%		4.16	%
Nonperforming assets to average assets (8)		2.08	%		3.52	%		2.04	%		3.39	%
Nonperforming assets to total assets at end of period		2.10	%		3.65	%		2.10	%		3.65	%
Allowance for loan losses as a percent of loans		2.04	%		1.79	%		2.04	%		1.79	%
Allowance for loan losses as a percent of nonperforming loans (7)		76.52	%		43.06	%		76.52	%		43.06	%
Texas ratio (9)		18.02	%		34.89	%		18.02	%		34.89	%
Total classified assets as a percent of Tier 1 Capital		34.89	%		37.02	%		34.89	%		37.02	%
Total classified loans as a percent of Tier 1 Capital and ALLL		26.82	%		32.85	%		26.82	%		32.85	%
Total classified assets as a percent of Tier 1 Capital and ALLL		31.34	%		44.21	%		31.34	%		44.21	%
Net chargeoffs as a percent of average loans		-0.53	%		3.752	%		0.51	%		6.15	%
Total 90+ days past due as a percent of net loans		2.41	%		7.59	%		2.41	%		3.70	%
Office data:
Number of full service banking offices		33			34			33			34
Number of loan production offices		9			8			9			8
Per share data:
Basic earnings (loss) per common share (10)	$	0.03		$	(0.82	)	$	0.02		$	(0.70	)
Diluted earnings (loss) per common share (10)		0.03			(0.82	)		0.02			(0.70	)
Book value per common share (11)		3.65			5.22			3.65			5.22
Tangible book value per common share (12)		3.65			5.21			3.65			5.21

Notes:

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

2.	Net income divided by average total assets

3.	Net income divided by average total equity

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

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

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

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

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

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

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

11.	Shareholders’ equity divided by number of shares outstanding

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

13.

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


	At or For the Three						At or For the Nine
	Months Ended						Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
	(Dollars in thousands)
Total assets	$	1,756,202		$	1,830,944		$	1,756,202		$	1,830,944
Less: Core deposit intangible		172			263			172			263
Tangible assets (Non-GAAP)	$	1,756,030		$	1,830,681		$	1,756,030		$	1,830,681
Total common equity	$	183,322		$	171,580		$	183,322		$	171,580
Less: Core deposit intangible		172			263			172			263
Tangible common equity (Non-GAAP)	$	183,150		$	171,317		$	183,150		$	171,317
Total equity/Total assets		10.44	%		9.37	%		10.44	%		9.37	%
Tangible common equity/Tangible assets (non-GAAP)		10.43	%		9.36	%		10.43	%		9.36	%

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 September 30, 2013 and December 31, 2012

Total assets decreased $52.2 million to $1.8 billion at September 30, 2013, compared to December 31, 2012. Contributing to the change were decreases in available for sale securities of $31.8 million, net loans of $57.2 million, net loans held for sale of $10.1 million and a decrease in real estate owned and other repossessed assets of $9.1 million, offset by an increase in cash and cash equivalents of $43.5 million and cash surrender value of life insurance of $15.7 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 nine months of 2013 as a result of the increase in balances maintained at the FRB due to United Community’s capital raise. On March 22, 2013, United Community received $39.9 from the private placement portion of a capital raise. On May 28, 2013, United Community received an additional $2.1 million from the insider placement portion of the capital raise. Finally, on June 7, 2013, United Community received an additional $5.0 million in the rights offering portion of the capital raise.

In the first nine months of 2013, the Company sold approximately $94.5 million in available for sale securities from its securities portfolio, recognizing $2.6 million in net gains on the sales. The Company also purchased securities with a book value of $145.0 million to replace the securities sold during the period. Maturities, paydowns and amortization of securities totaled $44.2 million for the period. The market value of the portfolio declined $38.0 million between December 31, 2012 and September 30, 2013. The primary reason for this decrease was the rise in longer term interest rates and the widening of interest rate spreads at the end of the second and third quarter, which negatively impacted the market value of available for sale securities. The market value decrease is entirely driven by the level of interest rates and the Company expects to recover the loss as it expects to receive all principle and interest payments contractually due and it has the ability and intent to hold the securities until maturity.

Net loans decreased $57.2 million during the first nine months of 2013. Contributing to the decrease was a combination of 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 September 30, 2013:


	Allowance For Loan Losses
	(Dollars in thousands)
	December 31, 2012		Provision			Recovery		Chargeoff			September 30, 2013
Real Estate Loans
Permanent
One-to four-family residential	$	6,958	$	2,264		$	140	($	1,465	)	$	7,897
Multifamily residential		1,223		(428	)		136		(277	)		654
Nonresidential		4,801		2,560			284		(2,412	)		5,233
Land		837		668			207		(1,640	)		72

Total		13,819		5,064			767		(5,794	)		13,856

Construction Loans
One-to four-family residential		1,267		(1,231	)		2,224		(381	)		1,879
Multifamily and nonresidential		137		(123	)		7		(21	)		0

Total		1,404		(1,354	)		2,231		(402	)		1,879

Consumer Loans
Home Equity		3,150		1,247			120		(769	)		3,748
Auto		49		(15	)		14		(10	)		38
Marine		264		(197	)		5		(34	)		38
Recreational vehicle		829		42			171		(428	)		614
Other		167		(110	)		231		(273	)		15

Total		4,459		967			541		(1,514	)		4,453

Commercial Loans
Secured		783		(12	)		71		(144	)		698
Unsecured		665		(831	)		312		0			146

Total		1,448		(843	)		383		(144	)		844

Total	$	21,130	$	3,834		$	3,922	($	7,854	)	$	21,032

The allowance for loan losses is a valuation allowance for probable incurred credit losses established through a provision for possible loan losses charged to expense. The allowance for loan losses decreased to $21.0 million at September 30, 2013, from $21.1 million at December 31, 2012. The allowance for loan losses as a percentage of loans was 2.04% at September 30, 2013, compared to 1.94% at December 31, 2012. The allowance for loan losses as a percentage of nonperforming loans was 76.52% at September 30, 2013, compared to 44.22% at December 31, 2012. Loan losses are charged against the allowance when the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are added back to the allowance. Home Savings’ allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables,” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies”. Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade applied to specific risk pools, plus specific loss allocations and adjustments for current events and conditions. Home Savings’ process for determining the appropriate level of the allowance for possible loan losses is designed to account for credit deterioration as it occurs. The provision for possible loan losses reflects loan quality trends, including the levels of and trends related to nonaccrual loans, past due loans, classified loans and net chargeoffs or recoveries, among other factors.

Chargeoffs exceeded provision for permanent real estate loans in 2013 primarily as a result of the resolution of the Bank’s largest classified relationship. This relationship consisted of eight loans. Four of these loans were sold resulting in a charge off of reserves that had been set aside in a prior period of $588,000. In addition, the four loans that remain in Home Savings’ portfolio were written down to current market value. This resulted in an additional charge of $2.0 million against reserves that had been established in a prior period. In the third quarter of 2013, the Company recognized a recovery of $1.9 million on the sale of one nonperforming loan, offset by the downgrade of one commercial relationship resulting in a provision of $1.4 million.

As the commercial loan portfolio has decreased over time, the level of reserves required has declined as well. The historical loss rates have improved and the company has experienced a lower rate of chargeoffs in this category. In addition, the company has been successful in recovering some of the commercial loan balances charged off in prior periods. These improvements have resulted in a decline of $873,000 in provision for loan losses during the current year.

A loan is considered impaired when there is a deterioration of the credit worthiness of the borrower to the extent that there is no longer reasonable assurance of the timely collection of the full amount of principal and interest. The total outstanding balance of all impaired loans was $46.3 million at September 30, 2013 as compared to $61.0 million at December 31, 2012. The schedule below summarizes impaired loans for September 30, 2013 and December 31, 2012.


Impaired Loans
(Dollars in thousands)
	September 30, 2013		December 31, 2012		Change
Real Estate Loans
Permanent
One-to four-family residential	$	19,133	$	17,681	$	1,452
Multifamily residential		728		2,059		(1,331	)
Nonresidential		5,911		17,341		(11,430	)
Land		487		5,931		(5,444	)

Total		26,259		43,012		(16,753	)

Construction Loans
One-to four-family residential		3,333		7,547		(4,214	)
Multifamily and nonresidential		—		—		—

Total		3,333		7,547		(4,214	)

Consumer Loans
Home Equity		11,239		7,959		3,280
Auto		33		44		(11	)
Boat		162		190		(28	)
Recreational vehicle		973		592		381
Other		—		—		—

Total		12,407		8,785		3,622

Commercial Loans
Secured		4,328		1,635		2,693
Unsecured		—		38		(38	)

Total		4,328		1,673		2,655

Total Impaired Loans	$	46,327	$	61,017	$	(14,690	)

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 nine months ended September 30, 2013 is as follows:


Troubled Debt Restructurings
	September 30, 2013		December 31, 2012		Change
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family	$	17,017	$	15,299	$	1,718
Multifamily residential		468		—		468
Nonresidential		859		946		(87	)
Land		487		105		382

Total		18,831		16,350		2,481

Construction Loans
One-to four-family residential		939		576		363
Multifamily and nonresidential		—		—		—

Total		939		576		363

Consumer Loans
Home Equity		10,856		7,253		3,603
Auto		11		13		(2	)
Marine		—		—		—
Recreational vehicle		851		—		851
Other		—		7		(7	)

Total		11,718		7,273		4,445

Commercial Loans
Secured		615		1,212		(597	)
Unsecured		—		25		(25	)

Total		615		1,237		(622	)

Total Restructured Loans	$	32,103	$	25,436	$	6,667

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

Once a restructured loan has fallen into nonaccrual status, the restructured loan will remain on nonaccrual status for a period of at least six months until the borrower has demonstrated a willingness and ability to make the restructured loan payments. TDR loans that were on nonaccrual status aggregated $5.5 million and $4.4 million at September 30, 2013 and December 31, 2012, respectively. Such loans are considered nonperforming loans. TDR loans that were accruing according to their terms aggregated $26.6 million and $21.0 million at September 30, 2013 and December 31, 2012, respectively.

Nonperforming loans consist of nonaccrual loans and loans past due 90 days and still accruing. Nonperforming loans were $27.5 million, or 2.72% of net loans, at September 30, 2013, compared to $47.8 million, or 4.48% of net loans, at December 31, 2012.

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


Nonperforming Loans
(Dollars in thousands)
	September 30, 2013		December 31, 2012		Change
Real Estate Loans
Permanent
One-to four-family residential	$	6,127	$	5,437	$	690
Multifamily residential		705		2,027		(1,322	)
Nonresidential		8,964		20,743		(11,779	)
Land		628		6,047		(5,419	)

Total		16,424		34,254		(17,830	)

Construction Loans
One-to four-family residential		3,320		7,465		(4,145	)
Multifamily and nonresidential		—		—		—

Total		3,320		7,465		(4,145	)

Consumer Loans
Home Equity		3,134		3,298		(164	)
Auto		100		105		(5	)
Marine		140		176		(36	)
Recreational vehicle		184		1,259		(1,075	)
Other		5		5		—

Total		3,563		4,843		(1,280	)

Commercial Loans
Secured		4,036		1,194		2,842
Unsecured		141		31		110

Total		4,177		1,225		2,952

Total Nonperforming Loans	$	27,484	$	47,787	$	(20,303	)

Loans held for sale decreased $10.1 million, or 78.8%, to $2.9 million at September 30, 2013, compared to $13.0 million at December 31, 2012. The change was primarily attributable to the timing of sales during the period. The rise in interest rates also affected the decline in origination volume. Home Savings continues to sell a portion of newly originated mortgage loans into the secondary market as part of its risk management strategy and anticipates continuing to do so in the future.

FHLB stock remained at $26.5 million for September 30, 2013 and December 31, 2012. During the first nine months of 2013, the FHLB paid a cash dividend of $840,000 in lieu of a stock dividend to its member banks.

Real estate owned and other repossessed assets decreased $9.1 million, or 49.5%, during the nine months ended September 30, 2013. The following table summarizes the activity in real estate owned and other repossessed assets during the period:


	Real Estate Owned			Repossessed Assets			Total
	(Dollars in thousands)
Balance at Beginning of period	$	18,075		$	365		$	18,440
Acquisitions		1,057			768			1,825
Sales, net of gains		(8,055	)		(1,094	)		(9,149	)
Change in valuation allowance		(1,801	)		—			(1,801	)

Balance at End of period	$	9,276		$	39		$	9,315

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


	Balance		Valuation Allowance			Net Balance
	(Dollars in thousands)
Real estate owned
One-to four-family	$	3,246	$	(548	)	$	2,698
Multifamily residential		113		—			113
Nonresidential		757		(222	)		535
One-to four-family residential construction		11,564		(5,860	)		5,704
Land		270		(44	)		226

Total real estate owned		15,950		(6,674	)		9,276
Repossessed assets
Auto		—		—			—
Marine		16		—			16
Recreational vehicle		23		—			23

Total repossessed assets		39		—			39

Total real estate owned and other repossessed assets	$	15,989	$	(6,674	)	$	9,315

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 properly reflect the asset at fair value. The increase in the valuation allowance on property acquired was due to the decline in market value of those properties.

Bank Owned Life Insurance (BOLI) is maintained on select officers and employees of Home Savings whereby Home Savings is the beneficiary. During September 2013, Home Savings purchased an additional $15.0 million in BOLI. BOLI is recorded at its cash surrender value, or the amount currently realizable. Increases in the Home Savings’ policy cash surrender value are tax exempt and death benefit proceeds received by Home Savings are tax-free. Income from these policies and changes in the cash surrender value are recorded in other income. The Company purchased BOLI to help partially defray the ever-increasing costs of employee benefit programs. There is no post-termination coverage provided to participants covered under the plan.

As of September 30, 2013 other assets included the net deferred tax asset (prior to any valuation allowance) of $39.7 million, and as of December 31, 2012, the net deferred tax asset (prior to any valuation allowance) was $28.8 million. Management recorded a valuation allowance against deferred tax assets at September 30, 2013 and December 31, 2012 based primarily on its cumulative pre-tax losses during the past three years. When determining the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded as a benefit, the Company conducts a regular assessment of all available information. This information includes, but is not limited to, taxable income in prior periods, projected future income and projected future reversals of deferred tax items. Based on these criteria, the Company determined that as of September 30, 2013, the full valuation allowance established is appropriate.

Total deposits decreased $51.5 million to $1.4 billion at September 30, 2013, compared to December 31, 2012. The primary cause for the decrease in deposits was due to declines in certificates of deposit. Nevertheless, as certificates of deposit matured, the Company was able to retain a portion of these deposits in other interest-bearing non-time deposit accounts at substantially lower rates. As of September 30, 2013, Home Savings had no brokered deposits.

Advance payments by borrowers for taxes and insurance decreased $11.5 million during the first nine months of 2013. Remittance of real estate taxes and property insurance made on behalf of customers of Home Savings accounted for $2.5 million of the decrease. In addition, funds held for payments received on loans sold where servicing was retained by Home Savings decreased $9.0 million.

During the first nine months of 2013, Home Savings received requests for reimbursements from Freddie Mac and Fannie Mae, who in the normal course purchase loans originated by Home Savings, for the purpose of making them whole on certain loans sold in the secondary market. These loans have certain identified weaknesses such that, in the opinion of management, a settlement to the investor is required. For the nine months ended September 30, 2013, Home Savings incurred expenses of $959,000 associated with such repurchases. Home Savings has included in other liabilities a reserve for future make-whole settlements aggregating $762,000 at September 30, 2013. Management believes this reserve is appropriate given the historical losses incurred to date and the probability that future losses will be deemed certain.

Other liabilities decreased $1.8 million to $9.0 million at September 30, 2013, from $10.8 million at December 31, 2012. The change was caused by the resolution of one commercial customer. This customer was nonperforming and Home Savings was receiving assigned rents to be returned to the customer upon satisfaction of the relationship. During 2013, as part of the resolution with this customer, those assigned rents were used to partially pay-down the loan. The amount of assigned rents aggregated $1.6 million.

Shareholders’ equity increased $12.6 million to $183.3 million at September 30, 2013, from $170.8 million at December 31, 2012. The change occurred as a result of the successful completion of the capital raise and net income recognized during the period, offset by the adjustment to other comprehensive income for the decline in the valuation of available for sale securities during the period.

Other comprehensive income declined $38.0 million from December 31, 2012 to September 30, 2013. Unrealized losses on U.S. Treasury and government sponsored entities and mortgage-backed securities included in other comprehensive income have not been recognized into income at September 30, 2013 and December 31, 2012 because the issuer’s securities are of high credit quality (rated AA or higher), management does not intend to sell (and it is likely that management will not be required to sell) the securities prior to their anticipated recovery, and the decline in fair value is largely due to the rise in longer-term interest rates at the end of the second and third quarter and other market conditions. The fair value is expected to recover as the investments approach maturity.

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

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

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

Book value per common share as of September 30, 2013 was $3.65 as compared to $5.17 per common share as of December 31, 2012. Book value per share is calculated as total common equity divided by the number of common shares outstanding. Book value was impacted by the overall change in equity due to the capital raising efforts. Also, while always included in the calculation of book value, the Company’s unrealized losses that occurred on available for sale securities during the nine months ended September 30, 2013 negatively affected book value per common share.

The calculation of book value is as follows:


	As of September 30, 2013		As of December 31, 2012
	(Dollars in thousands, except per share data)
Number of common shares outstanding		50,225,367		33,027,886
Total equity	$	183,322	$	170,760
Total preferred shares		—		—

Book value per common share	$	3.65	$	5.17

Book value per share at September 30, 2013, was affected by two items that took place in the first nine months of 2013: the unrealized loss on available for sale securities and the dilutive effect of the capital raise. The impact of the $38.0 million unrealized loss on available for sale securities on book value per common share is as follows:


	(Dollars in thousands, except per share data)
Total equity exclusive of unrealized loss on available for sale securities at September 30, 2013	$	221,328
Common stock outstanding		50,225,367
Book value per common share, exclusive of loss	$	4.41
Unrealized loss on available for sale securities during the period		38,006
Total equity, as reported	$	183,322
Book value per common share, as reported	$	3.65

Independently, during 2013, the Company issued 17.1 million shares in exchange for net proceeds of $42.4 million, after expenses. The impact of this capital raise on book value per common share is as follows:


	(Dollars in thousands, except per share data)
Common shares issued in capital raise:
Private placement		6,574,272
Insider placement		755,820
Rights offering		1,818,181
Conversion of preferred shares		7,942,000

Total number of common shares issued		17,090,273

Net proceeds received from capital raise	$	42,350
Total equity exclusive of the capital raise	$	140,972
Common stock outstanding prior to the capital raise		33,135,094
Book value per common share, exclusive of the capital raise	$	4.25
Total equity exclusive of the capital raise	$	140,972
Capital raise		42,350

Total equity, as reported	$	183,322

Common stock outstanding prior to the capital raise		33,135,094
Common shares issued		17,090,273

Common stock outstanding, as reported		50,225,367

Book value per common share, as reported	$	3.65

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

Comparison of Operating Results for the Three Months Ended

September 30, 2013 and September 30, 2012

Net Income. United Community recognized net income for the three months ended September 30, 2013 of $1.7 million compared to a net loss of $26.9 million for the three months ended September 30, 2012. Included in the net loss for the three months ended September 30, 2012 was the loss associated with the bulk asset sale, discussed below. Net interest income decreased $1.4 million. The provision for loan losses decreased $29.6 million during the same period. Additionally, non-interest income decreased and noninterest expense decreased $204,000 and $3.8 million, respectively. United Community’s annualized return on average assets and return on average equity were 0.39% and 3.75%, respectively, for the three months ended September 30, 2013. The annualized return on average assets and return on average equity for the comparable period in 2012 were (5.67)% and (53.53) %, respectively.

Net Interest Income. Net interest income for the three months ended September 30, 2013 and September 30, 2012 was $12.7 million and $14.1 million, respectively.

Total interest income decreased $2.2 million in the third quarter of 2013 compared to the third quarter of 2012, primarily as a result of a decrease of $205.2 million in the average balance of outstanding loans despite experiencing an increase in the yield on net loans of 5 basis points.

Total interest expense decreased $758,000 for the quarter ended September 30, 2013, as compared to the same quarter last year. The change was due primarily to reductions of $753,000 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 September 30, 2012, and September 30, 2013, the average outstanding balance of certificates of deposit declined by $111.1 million, offset by an increase in non-time deposits of $8.3 million. Also contributing to the decrease was a reduction of 18 basis points in the cost of certificates of deposit, as well as a decrease in the cost of non-time deposits of 7 basis points.

The following table shows the impact of interest rate and outstanding balance (volume) changes compared to the third quarter of last year. The interest rate spread for the three months ended September 30, 2013, decreased to 2.89% compared to 3.00% for the quarter ended September 30, 2012. The net interest margin decreased 13 basis points to 3.04% for the three months ended September 30, 2013 compared to 3.17% for the same quarter in 2012.


	For the Three Months Ended September 30,
	2013 vs. 2012
	Increase (decrease) due to						Total increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	158		$	(2,492	)	$	(2,334	)
Loans held for sale		30			(51	)		(21	)
Investment securities:
Available for sale		(174	)		319			145
FHLB stock		1			—			1
Other interest-earning assets		2			25			27

Total interest-earning assets	$	17		$	(2,199	)	$	(2,182	)

Interest-bearing liabilities:
Savings accounts		(34	)		4			(30	)
NOW and money market accounts		(98	)		(3	)		(101	)
Certificates of deposit		(267	)		(355	)		(622	)
Federal Home Loan Bank advances		(978	)		972			(6	)
Repurchase agreements and other		1			—			1

Total interest-bearing liabilities	$	(1,376	)	$	618			(758	)

Change in net interest income							$	(1,424	)

Provision for Loan Losses. A provision for loan losses is charged to income to bring the total allowance for loan losses to a level considered by management to be adequate, based on management’s evaluation of such factors as the delinquency status of loans, current economic conditions, the net realizable value of the underlying collateral, changes in the composition of the loan portfolio and prior loan loss experience. The provision for loan losses decreased to $657,000 in the third quarter of 2013, compared to $30.3 million in the third quarter of 2012. This $29.6 million decrease in the provision for loan losses is primarily a result of the bulk asset sale that was completed on September 21, 2012. As a result of the sale, an additional provision of $30.2 million was required in September 2012. This was the result of loans charged off in excess of specific reserves on loans included in the sale. In addition, the Company recognized a recovery of $1.9 million in the third quarter of 2013 as a result of the sale of one nonperforming loan, offset by the downgrade of one commercial relationship resulting in a provision of $1.4 million.

Noninterest Income. Noninterest income decreased in the third quarter of 2013 to $3.5 million, as compared to noninterest income for the third quarter of 2012 of $3.8 million. Decreased noninterest income was a result of lower gains recognized on the sale of securities available for sale. This change was the result of no sales activity during the third quarter of 2013, as compared to the third quarter of 2012. Also affecting the comparison, Home Savings recognized lower mortgage banking income in the third quarter of 2013 as compared to the same quarter in 2012. The rise in longer term interest rates at the end of the second quarter negatively impacted the volume of loans originated for the sale in the third quarter of 2013. Lower mortgage banking income was the result of a reduction in the valuation of the mortgage banking derivative of $199,000 along with a lower volume of loans originated for sale during the quarter ended September 30, 2013 as compared to the same quarter in 2012. The reduction in noninterest income for the third quarter of 2013 as compared to the third quarter of 2012 was offset by lower losses recognized on the valuation and disposal of real estate owned and other repossessed assets and higher service fees and other charges earned due primarily to a recovery on the valuation of deferred mortgage servicing rights of $30,000 in the third quarter of 2013 as compared to a $672,000 expense recognized in the third quarter of 2012.

Noninterest Expense. Noninterest expense was $13.5 million in the third quarter of 2013, compared to $17.3 million in the third quarter of 2012. In the third quarter of 2013, salaries and employee benefits were down because of lower expenses associated with incentive payments and a lower level of salaries as a result of fewer full-time equivalent employees at September 30, 2013, as compared to September 30, 2012. Deposit insurance premiums were lower in the third 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 $1.5 million lower during the quarter ended September 30, 2013, as compared to the same quarter last year. The improvement in asset quality has reduced the need to engage legal and other consultants to assist in the resolution of problem assets. Other expenses were lower in the third 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.

Income Taxes. An income tax expense was recognized in third quarter of 2013 as a result of a tax liability for alternative minimum tax (AMT) being recognized. Despite a net operating loss carryforward (NOL), the Company is subject to AMT. The deduction for net operating loss carryforwards for AMT is limited to 90% of taxable income. The tax liability associated with this provision is assessed at a rate of 20%. Therefore, because of the AMT requirements, the Company recognized $350,000 in tax expense for the three months ended September 30, 2013. For the quarter ended September 30, 2012, the Company recognized a net loss and had unrealized gains on available for sale securities recorded in other comprehensive income for the period ending September 30, 2012, as well as a pretax operating loss. As a result, a tax benefit of $2.8 million was recognized that is equal to the 2012 year to date change in other comprehensive income multiplied by the Company’s statutory tax rate of 35%.

Comparison of Operating Results for the Nine Months Ended

September 30, 2013 and September 30, 2012

Net Income. United Community recognized net income for the nine months ended September 30, 2013, of $7.8 million compared to a net loss of $23.0 million for the nine months ended September 30, 2012. Included in the net loss for the nine months ended September 30, 2012 was the loss associated with the bulk asset sale, discussed below. Net interest income decreased $8.2 million. The provision for loan losses decreased $33.4 million during the same period. Additionally, non-interest income and noninterest expense decreased $167,000 and $9.1 million, respectively. United Community’s annualized return on average assets and return on average equity were 0.58% and 5.49%, respectively, for the nine months ended September 30, 2013. The annualized return on average assets and return on average equity for the comparable period in 2012 were (1.56)% and (15.56)%, respectively.

Net Interest Income. Net interest income for the nine months ended September 30, 2013 and September 30, 2012 was $38.3 million and $46.4 million, respectively.

Total interest income decreased $12.2 million in the first nine months of 2013 compared to the first nine months of 2012, primarily as a result of a decrease of $265.7 million in the average balance of outstanding loans. United Community also experienced a decrease in the yield on net loans of 26 basis points.

Total interest expense decreased $4.0 million for the nine months ended September 30, 2013, as compared to the same period last year. The change was due primarily to reductions of $3.7 million in interest paid on deposits. The overall decrease in deposit interest expense was attributable to a shift in deposit balances from certificates of deposit to relatively less expensive non-time deposits. Between September 30, 2012, and September 30, 2013, the average outstanding balance of certificates of deposit declined by $138.1 million, while non-time deposits increased by $23.7 million. Also contributing to the decrease in interest expense was a reduction of 39 basis points in the cost of certificates of deposit, offset by an increase in the cost of non-time deposits of 10 basis points.

The following table shows the impact of interest rate and outstanding balance (volume) changes compared to the first half of last year. The interest rate spread for the nine months ended September 30, 2013, decreased to 2.84% compared to 3.17% for the nine months ended September 30, 2012. The net interest margin decreased 35 basis points to 2.99% for the nine months ended September 30, 2013 compared to 3.34% for the same period in 2012.


	For the Nine Months Ended September 30,
	2013 vs. 2012
	Increase (decrease) due to						Total increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	(2,394	)	$	(9,721	)	$	(12,115	)
Loans held for sale		(16	)		(42	)		(58	)
Investment securities:
Available for sale		569			(646	)		(77	)
FHLB stock		(19	)		—			(19	)
Other interest-earning assets		12			42			54

Total interest-earning assets	$	(1,848	)	$	(10,367	)	$	(12,215	)

Interest-bearing liabilities:
Savings accounts		(69	)		18			(51	)
NOW and money market accounts		(454	)		17			(437	)
Certificates of deposit		(1,758	)		(1,485	)		(3,243	)
Federal Home Loan Bank advances		(1,808	)		1,504			(304	)
Repurchase agreements and other		(9	)		(1	)		(10	)

Total interest-bearing liabilities	$	(4,098	)	$	53			(4,045	)

Change in net interest income							$	(8,170	)

Provision for Loan Losses. A provision for loan losses is charged to income to bring the total allowance for loan losses to a level considered by management to be adequate, based on management’s evaluation of such factors as the delinquency status of loans, current economic conditions, the net realizable value of the underlying collateral, changes in the composition of the loan portfolio and prior loan loss experience. The provision for loan losses decreased to $3.8 million in the first nine months of 2013, compared to $37.2 million in the first nine months of 2012. This $33.4 million decrease in the provision for loan losses is primarily a result of the bulk asset sale that was completed on September 21, 2012. As a result of the sale, an additional provision of $30.2 million was required in September 2012. This was the result of loans charged off in excess of specific reserves on loans included in the sale. Additionally, the resolution of one commercial loan relationship in the second quarter of 2012, consisting of eight loans, which represented the Company’s largest classified loan relationship at that time, included a chargeoff of $5.9 million as a part of this resolution. In addition, the Company recognized a recovery of $1.9 million in the third quarter of 2013 as a result of the sale of one nonperforming loan, offset by the downgrade of one commercial relationship resulting in a provision of $1.4 million.

Noninterest Income. Noninterest income decreased $167,000 in the first nine months of 2013 to $15.6 million, as compared to noninterest income for the first nine month of 2012 of $15.8 million. During the first nine months of 2013, service fees and other charges increased as a result of a positive valuation adjustment on deferred mortgage servicing rights of $676,000. Additionally, other income increased $1.4 million due primarily to Home Savings recognizing a positive valuation adjustment of $547,000 on interest rate caps during 2013 as compared to a negative valuation adjustment of $1.1 million during the first nine months of 2012. Increased debit card fee income of $342,000 earned during the first nine months of 2013 also contributed to the increase in noninterest income. These increases in noninterest income were offset by a decline of $1.5 million in gains on the sale of securities in the first nine months of 2013, as compared to the same period last year.

Noninterest Expense. Noninterest expense was $41.8 million in the first nine months of 2013, compared to $50.9 million in the first nine months of 2012. In the first nine months of 2013, salaries and employee benefits were down because of the recognition of expenses associated with a restricted stock grant that occurred in the first quarter of 2012. A similar award was not granted in 2013. Deposit insurance premiums were lower in the first nine months of 2013 due to the Bank being able to avail itself of more favorable insurance rates and a lower average asset base used in the calculation of insurance premiums. Professional fees were $2.1 million lower during the nine months ended September 30, 2013 as compared to the same period last year. The improvement in asset quality has reduced the need to engage legal and other consultants to assist in the resolution of problem assets. Other expenses were lower in the first nine months of 2013, as compared to the same period in 2012. This positive variance is the result of lower expenses incurred for real estate taxes and other expenses paid prior to loans going into foreclosure. Lastly, prepayment penalties incurred on the early payoff of FHLB advances in the second quarter of 2012 were not a recurring expenditure in 2013.

Income Taxes. An income tax expense was recognized for the first nine months of 2013 as a result of a tax liability for AMT being recognized. Despite an NOL, the Company is subject to AMT. The deduction for net operating loss carryforwards for AMT is limited to 90% of taxable income. The tax liability associated with this provision is assessed at a rate of 20%. Therefore, because of the AMT requirements, the Company recognized $500,000 in tax expense for the nine months ended September 30, 2013. For the nine months ended September 30, 2012, the Company recognized a net loss and had unrealized gains on available for sale securities recorded in other comprehensive income for the period ending September 30, 2012, as well as a pretax operating loss. As a result, a tax benefit of $2.8 million was recognized that is equal to the 2012 year to date change in other comprehensive income multiplied by the Company’s statutory tax rate of 35%.

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


	Three Months Ended September 30,
	2013							2012
	Average Outstanding Balance		Interest Earned/ Paid		Yield/ Cost			Average Outstanding Balance		Interest Earned/ Paid		Yield/ Cost
	(Dollars in thousands)
Interest-earning assets:
Net loans (1)	$	1,007,971	$	12,233		4.85	%	$	1,213,126	$	14,567		4.80	%
Net loans held for sale		7,159		80		4.47	%		10,853		101		3.72	%
Investment securities:
Available for sale		545,003		3,364		2.47	%		488,723		3,219		2.63	%
Federal Home Loan Bank stock		26,464		280		4.23	%		26,464		279		4.22	%
Other interest-earning assets		85,026		52		0.24	%		44,263		25		0.23	%

Total interest-earning assets		1,671,623		16,009		3.83	%		1,783,429		18,191		4.08	%
Noninterest-earning assets		99,206							112,376

Total assets	$	1,770,829						$	1,895,805

Interest-bearing liabilities:
NOW and money market accounts	$	469,372	$	243		0.21	%	$	472,860	$	344		0.29	%
Savings accounts		270,655		52		0.08	%		258,834		82		0.13	%
Certificates of deposit		517,583		1,552		1.20	%		628,671		2,174		1.38	%
Federal Home Loan Bank advances		50,000		529		4.23	%		56,097		535		3.81	%
Repurchase agreements and other		90,586		929		4.10	%		90,606		928		4.10	%

Total interest-bearing liabilities		1,398,196		3,305		0.95	%		1,507,068		4,063		1.08	%

Noninterest-bearing liabilities		189,545							187,805

Total liabilities		1,587,741							1,694,873
Equity		183,088							200,932

Total liabilities and equity	$	1,770,829						$	1,895,805

Net interest income and interest rate spread			$	12,704		2.88	%			$	14,128		3.00	%

Net interest margin						3.04	%						3.17	%

Average interest-earning assets to average interest-bearing liabilities						119.56	%						118.34	%

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

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


	Nine Months Ended September 30,
	2013							2012
	Average Outstanding Balance		Interest Earned/ Paid		Yield/ Cost			Average Outstanding Balance		Interest Earned/ Paid		Yield/ Cost
	(Dollars in thousands)
Interest-earning assets:
Net loans (1)	$	1,024,002	$	37,067		4.83	%	$	1,289,740	$	49,182		5.08	%
Net loans held for sale		9,052		247		3.64	%		10,585		305		3.84	%
Investment securities:
Available for sale		578,611		10,176		2.34	%		489,472		10,253		2.79	%
Federal Home Loan Bank stock		26,464		840		4.23	%		26,464		859		4.33	%
Other interest-earning assets		65,667		102		0.21	%		37,505		48		0.17	%

Total interest-earning assets		1,703,796		48,432		3.79	%		1,853,766		60,647		4.35	%
Noninterest-earning assets		100,885							114,720

Total assets	$	1,804,681						$	1,968,486

Interest-bearing liabilities:
NOW and money market accounts	$	472,345	$	782		0.22	%	$	465,864	$	1,219		0.35	%
Savings accounts		271,464		197		0.10	%		254,265		248		0.13	%
Certificates of deposit		531,780		4,864		1.22	%		669,921		8,107		1.61	%
Federal Home Loan Bank advances		55,132		1,576		3.81	%		102,159		1,880		2.45	%
Repurchase agreements and other		90,591		2,756		4.06	%		90,611		2,766		4.07	%

Total interest-bearing liabilities		1,421,312		10,175		0.95	%		1,582,820		14,220		1.20	%

Noninterest-bearing liabilities		194,070							188,354

Total liabilities		1,615,382							1,771,174
Equity		189,299							197,312

Total liabilities and equity	$	1,804,681						$	1,968,486

Net interest income and interest rate spread			$	38,257		2.84	%			$	46,427		3.15	%

Net interest margin						2.99	%						3.34	%

Average interest-earning assets to average interest-bearing liabilities						119.87	%						117.12	%

(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 September 30, 2013, the percentage changes fall within the policy limits set by the Board of Directors of Home Savings as the minimum NPV ratio and the maximum change in NPV and interest income that the Home Savings Board deems advisable in the event of various changes in interest rates. See the table below for Board-adopted policy limits.


Nine Months Ended September 30, 2013
NPV as % of portfolio value of assets													Next 12 months net interest income
													(Dollars in thousands)
Change in rates (Basis points)	NPV Ratio			Internal policy limitations			Change in %			Internal policy limitations on NPV Change			$ Change		Internal policy limitations			% Change
400		8.77	%		6.00	%		-2.75	%		30.00	%	$	5,583		-20.00	%		11.48	%
300		9.14	%		6.00	%		-2.38	%		25.00	%		4,163		-15.00	%		8.56	%
200		9.61	%		7.00	%		-1.91	%		20.00	%		2,666		-10.00	%		5.48	%
100		10.19	%		7.00	%		-1.33	%		15.00	%		847		-5.00	%		1.74	%
Static		11.52	%		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 September 30, 2013. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that United Community’s disclosure controls and procedures as of September 30, 2013 were effective in ensuring that information required to be disclosed in the reports that United Community files or submits under the Exchange Act (i) was recorded, processed, summarized and reported on a timely basis, and (ii) is accumulated and communicated to management, including United Community’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. During the quarter ended September 30, 2013, there were no changes in United Community’s internal controls over financial reporting that have materially affected or are reasonably likely to materially affect United Community’s internal controls over financial reporting.

PART II. OTHER INFORMATION

UNITED COMMUNITY FINANCIAL CORP.

ITEM 1. Legal Proceedings.

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

ITEM 1A. Risk Factors.

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

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

There were no purchases of United Community shares during the quarter ended September 30, 2013.

ITEM 6. Exhibits.


Exhibit Number		Description

3.1		Articles of Incorporation

3.2		Amendment to Articles of Incorporation

3.3		Amendment to Articles of Incorporation

3.4		Amended Code of Regulations

31.1		Section 302 Certification by Chief Executive Officer

31.2		Section 302 Certification by Chief Financial Officer

32		Certification of Statements by Chief Executive Officer and Chief Financial Officer

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

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.

UNITED COMMUNITY FINANCIAL CORP.

Exhibit 3.1

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

Exhibit 3.2

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

Exhibit 3.3

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

Exhibit 3.4

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