UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2014

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

For the transition period from                      to                     

UNITED COMMUNITY FINANCIAL CORP.

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

OHIO	000-024399	34-1856319
(State or other jurisdiction of incorporation)	(Commission File No.)	(IRS Employer I.D. No.)

275 West Federal Street, Youngstown, Ohio 44503-1203

(Address of principal executive offices) (Zip Code)

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

Not Applicable

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

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

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

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

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller reporting company	¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 50,594,281 common shares as of April 30, 2014.

TABLE OF CONTENTS

		PAGE
Part I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Financial Condition as of March 31, 2014 (Unaudited) and December 31, 2013	1
	Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2014 and 2013 (Unaudited)	2-3
	Consolidated Statement of Shareholders’ Equity for the Three Months ended March 31, 2014 and 2013 (Unaudited)	4
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 (Unaudited)	5
	Notes to Consolidated Financial Statements (Unaudited)	6-48
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	49-60
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	61
Item 4.	Controls and Procedures	62
Part II. OTHER INFORMATION
Item 1.	Legal Proceedings	63
Item 1A.	Risk Factors	63
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63
Item 3.	Defaults Upon Senior Securities (None)
Item 4.	Mine Safety Disclosures (None)
Item 5.	Other Information (None)
Item 6.	Exhibits	63
Signatures		64
Exhibits		65

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

	March 31,			December 31,
	2014			2013
	(Dollars in thousands)
Assets:
Cash and deposits with banks	$	21,762		$	20,937
Federal funds sold		40,473			56,394
Total cash and cash equivalents		62,235			77,331
Securities:
Available for sale, at fair value		517,388			511,006
Loans held for sale		4,230			4,838
Loans, net of allowance for loan losses of $20,554 and $21,116		1,060,901			1,029,192
Federal Home Loan Bank stock, at cost		18,068			26,464
Premises and equipment, net		20,602			20,924
Accrued interest receivable		5,161			5,694
Real estate owned and other repossessed assets, net		4,700			6,341
Core deposit intangible		133			152
Cash surrender value of life insurance		45,322			44,972
Other assets		10,404			10,936
Total assets	$	1,749,144		$	1,737,850
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Interest bearing	$	1,212,447		$	1,221,162
Non-interest bearing		185,620			170,590
Total deposits		1,398,067			1,391,752
Borrowed funds:
Federal Home Loan Bank advances		50,000			50,000
Repurchase agreements and other		90,572			90,578
Total borrowed funds		140,572			140,578
Advance payments by borrowers for taxes and insurance		12,246			20,060
Accrued interest payable		585			550
Accrued expenses and other liabilities		7,845			9,836
Total liabilities		1,559,315			1,562,776
Shareholders’ Equity:
Preferred stock-no par value; 1,000,000 shares authorized and no shares issued and outstanding		—			—
Common stock-no par value; 499,000,000 shares authorized; 54,138,910 shares issued and 50,422,161 and 50,339,089 shares, respectively, outstanding		174,522			174,719
Retained earnings		82,847			81,515
Accumulated other comprehensive loss		(29,097	)		(41,665	)
Treasury stock, at cost, 3,716,749 and 3,799,821 shares, respectively		(38,443	)		(39,495	)
Total shareholders’ equity		189,829			175,074
Total liabilities and shareholders’ equity	$	1,749,144		$	1,737,850

See Notes to Consolidated Financial Statements.

1

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	For the Three Months Ended March 31,
	2014			2013
	(Dollars in thousands, except per share data)
Interest income
Loans	$	12,122		$	12,627
Loans held for sale		49			89
Securities:
Available for sale		3,241			3,428
Federal Home Loan Bank stock dividends		267			283
Other interest earning assets		26			9
Total interest income		15,705			16,436
Interest expense
Deposits		1,677			2,087
Federal Home Loan Bank advances		518			523
Repurchase agreements and other		908			909
Total interest expense		3,103			3,519
Net interest income		12,602			12,917
Provision for loan losses		33			2,064
Net interest income after provision for loan losses		12,569			10,853
Non-interest income
Non-deposit investment income		341			541
Mortgage servicing fees		689			704
Deposit related fees		1,198			1,260
Mortgage servicing rights valuation		(1	)		435
Mortgage servicing rights amortization		(392	)		(660	)
Other service fees		—			43
Net gains (losses):
Securities available for sale (includes $3 and $721, respectively, accumulated other comprehensive income reclassifications for unrealized net gains on available for sale securities)		3			721
Mortgage banking income		612			1,643
Real estate owned and other repossessed assets charges, net		(383	)		(431	)
Card fees		772			734
Other income		385			703
Total non-interest income		3,224			5,693
Non-interest expense
Salaries and employee benefits		7,580			6,873
Occupancy		933			822
Equipment and data processing		1,798			1,760
Franchise tax		198			431
Advertising		189			139
Amortization of core deposit intangible		19			23
Deposit insurance premiums		253			554
Other insurance premiums		137			176
Legal and consulting fees		161			192
Other professional fees		392			216
Real estate owned and other repossessed asset expenses		213			493
Other expenses		1,670			2,185
Total non-interest expenses		13,543			13,864
Income before income taxes		2,250			2,682
Income tax expense (includes $0 and $0 income tax expense from reclassification items)		156			—
Net income		2,094			2,682
Amortization of discount on preferred stock		—			821
Earnings available to common shareholders	$	2,094		$	1,861

(Continued)

2

(Continued)

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	For the Three Months Ended March 31,
	2014		2013
	(Dollars in thousands, except per share data)
Net income	$	2,094	$	2,682
Other comprehensive income
Unrealized gains (losses) on securities, net of tax		12,568		(2,963	)
Total other comprehensive income (loss)	$	12,568	$	(2,963	)
Comprehensive income (loss)	$	14,662	$	(281	)
Earnings per share
Basic	$	0.04	$	0.06
Diluted		0.04		0.05

See Notes to Consolidated Financial Statements.

3

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Unaudited)

	Preferred Shares Outstanding		Common Shares Outstanding			Preferred Stock		Common Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
	(Dollars thousands, except per share data)
Balance December 31, 2013		—		50,339,089		$	—	$	174,719		$	81,515		$	(41,665	)	$	(39,495	)	$	175,074
Comprehensive income:
Net income												2,094									2,094
Comprehensive income															12,568						12,568
Stock option exercises				4,000								(33	)					41			8
Stock option expenses									6												6
Restricted stock grants				109,849					(394	)		(748	)					1,142			—
Restricted stock forfeitures				(30,777	)				12			19						(131	)		(100	)
Restricted stock amortization									179												179
Balance March 31, 2014		—		50,422,161		$	—	$	174,522		$	82,847		$	(29,097	)	$	(38,443	)	$	189,829
Balance December 31, 2012		—		33,027,886		$	—	$	128,026		$	86,345		$	6,682		$	(50,293	)	$	170,760
Comprehensive income:
Net income												2,682									2,682
Other comprehensive loss															(2,963	)					(2,963	)
Stock option exercises, net				2,600								(22	)					27			5
Stock option expenses, net									4												4
Restricted stock awards				1,828					65			7						19			91
Issuance of common stock, net of issuance costs of $3,988				6,574,272					14,091												14,091
Issuance of preferred stock		7,942					15,090		6,751												21,841
Amortization of preferred stock discount							821					(821	)								—
Balance March 31, 2013		7,942		39,606,586		$	15,911	$	148,937		$	88,191		$	3,719		$	(50,247	)	$	206,511

See Notes to Consolidated Financial Statements.

4

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended March 31,
	2014			2013
	(Dollars in thousands)
Cash Flows from Operating Activities
Net income	$	2,094		$	2,682
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		33			2,064
Mortgage banking income		(612	)		(1,643	)
Net losses on real estate owned and other repossessed assets sold		383			431
Net gain on available for sale securities sold		(3	)		(721	)
Net losses on other assets		7			—
Amortization of premiums and accretion of discounts		311			1,127
Depreciation and amortization		491			454
Decrease in interest receivable		533			651
Increase in interest payable		35			34
Increase in cash surrender value of bank-owned life insurance		(350	)		(225	)
Decrease in prepaid and other assets		834			1,040
Decrease in other liabilities		(1,991	)		(1,923	)
Stock based compensation		85			95
Net principal disbursed on loans originated for sale		(26,861	)		(73,171	)
Proceeds from sale of loans held for sale		28,081			78,577
Net change in interest rate caps		127			(8	)
Net cash from operating activities		3,197			9,464
Cash Flows from Investing Activities
Proceeds from principal repayments and maturities of:
Securities available for sale		5,503			18,386
Proceeds from sale of:
Securities available for sale		4			27,912
Real estate owned and other repossessed assets		1,491			2,891
Premises and equipment		30			—
Loans held for investment		—			510
Purchases of:
Securities available for sale		—			(77,353	)
Net (increase) decrease in loans		(32,033	)		28,522
Loans purchased		—			(50	)
Purchases of premises and equipment		(198	)		(297	)
Redemption of Federal Home Loan Bank stock		8,396			—
Net cash from investing activities		(16,807	)		521
Cash Flows from Financing Activities
Net increase in checking, savings and money market accounts		30,239			20,189
Net decrease in certificates of deposit		(23,913	)		(21,303	)
Net decrease in advance payments by borrowers for taxes and insurance		(7,814	)		(9,332	)
Proceeds from Federal Home Loan Bank advances		—			142,000
Repayment of Federal Home Loan Bank advances		—			(142,000	)
Net change in repurchase agreements and other borrowings		(6	)		(5	)
Proceeds from the exercise of stock options		8			5
Issuance of preferred stock		—			21,841
Issuance of common stock, net of issuance costs		—			14,091
Net cash from financing activities		(1,486	)		25,486
Change in cash and cash equivalents		(15,096	)		35,471
Cash and cash equivalents, beginning of period		77,331			42,613
Cash and cash equivalents, end of period	$	62,235		$	78,084

See Notes to Consolidated Financial Statements

5

UNITED COMMUNITY FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

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

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

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

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

2. REGULATORY ENFORCEMENT ACTION

United Community is a unitary thrift holding company regulated by the Board of Governors of the Federal Reserve System (FRB). The Holding Company MOU was terminated on January 8, 2014 and both United Community and Home Savings are free of all regulatory enforcement actions. On August 8, 2008, the board of directors of United Community approved a Stipulation and Consent to the Issuance of an Order with the Office of Thrift Supervision (OTS), the predecessor regulator of United Community (the Holding Company Order). The Holding Company Order required United Community to obtain FRB approval prior to: (i) incurring or increasing its debt position; (ii) repurchasing any United Community stock; or (iii) paying any dividends. The Holding Company Order also required United Community to develop a debt reduction plan and submit the plan to the OTS for approval. The Holding Company Order 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 submitted to the OTS in December 2010. 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 United Community agreed not to pay dividends, repurchase shares, or take on debt without the FRB’s prior approval.

3. RECENT ACCOUNTING DEVELOPMENTS

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

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

6

4. STOCK COMPENSATION

Stock Options:

On April 26, 2007, shareholders approved the United Community Financial Corp. 2007 Long-Term Incentive Plan (as amended, the 2007 Plan). The purpose of the 2007 Plan is to promote and advance the interests of United Community and its shareholders by enabling United Community to attract, retain and reward directors, directors emeritus, managerial and other key employees of United Community, including Home Savings, by facilitating their purchase of an ownership interest in United Community. The 2007 Plan provides for the issuance of up to 2,000,000 shares that are to be used for awards of restricted stock, stock options, performance awards, stock appreciation rights (SARs), or other forms of stock-based incentive awards. There were 1,794 stock options granted in 2014 and there were 17,787 stock options granted in 2013 under the 2007 Plan. The options must be exercised within 10 years from the date of grant.

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

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

Expenses related to stock option grants are included with salaries and employee benefits. The Company recognized $6,354 in stock option expenses for the three months ended March 31, 2014. The Company recognized $3,749 in stock option expenses for the three months ended March 31, 2013. The Company expects to recognize additional expense of $15,780 for the remainder of 2014, and $13,912 in 2015.

A summary of activity in the plans is as follows:

	For the three months ended March 31, 2014
	Shares			Weighted average exercise price		Aggregate intrinsic value (in thousands)
Outstanding at beginning of year		948,690		$	5.44
Granted		1,794			3.52
Exercised		(4,000	)		1.90
Forfeited and expired		(284,864	)		12.38
Outstanding at end of period		661,620		$	2.47	$	1,113
Options exercisable at end of period		639,771		$	2.44	$	1,100

Information related to the stock option plans for the three months ended March 31, 2014 follows:

	March 31, 2014
Intrinsic value of options exercised	$	7,720
Cash received from option exercises		7,600
Tax benefit realized from option exercises		—
Weighted average fair value of options granted, per share	$	1.93

As of March 31, 2014, there was approximately $30,000 of total unrecognized compensation cost related to nonvested stock options granted under the 2007 Plan. The cost is expected to be recognized over a weighted-average period of 2.0 years.

7

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

	January 2, 2014
Risk-free interest rate		1.72	%
Expected term (years)		5
Expected stock volatility		71.47	%
Dividend yield		—	%

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

Restricted Stock Awards:

The 2007 Plan permits the issuance of restricted stock awards to employees and nonemployee directors. Nonvested shares at March 31, 2014 aggregated 228,528, of which 155,943 will vest during 2014, 52,401 will vest in 2015 and 20,184 will vest in 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 $178,638 in restricted stock award expenses for the three months ended March 31, 2014. The Company recognized $90,718 in restricted stock award expenses for the three months ended March 31, 2013. The Company expects to recognize additional expenses of approximately $215,619 in 2014, $197,018 in 2015, $123,177 in 2016 and $24,900 in 2017.

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

	Shares			Weighted average grant date fair value
Nonvested shares at January 1, 2014		192,937		$	3.49
Granted		109,849			3.58
Vested		(43,481	)		3.48
Forfeited		(30,777	)		3.62
Nonvested shares at March 31, 2014		228,528		$	3.52

8

5. SECURITIES

Components of the available for sale portfolio are as follows:

	March 31, 2014
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(Dollars in thousands)
Available for Sale
U.S. Treasury and government sponsored entities’ securities	$	247,596	$	1	$	(16,881	)	$	230,716
Equity securities		100		358		—			458
Mortgage-backed GSE securities: residential		297,517		34		(11,337	)		286,214
Total	$	545,213	$	393	$	(28,218	)	$	517,388
	December 31, 2013
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(Dollars in thousands)
Available for Sale
U.S. Treasury and government sponsored entities’ securities	$	247,863	$	—	$	(25,570	)	$	222,293
Equity securities		101		344		—			445
Mortgage-backed GSE securities: residential		303,435		31		(15,198	)		288,268
Total	$	551,399	$	375	$	(40,768	)	$	511,006

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

	March 31, 2014
	(Dollars in thousands)
	Amortized		Fair
	Cost		Value
Due in one year or less	$	—	$	—
Due after one year through five years		—		—
Due after five years through ten years		186,149		174,498
Due after ten years through fifteen years		61,447		56,218
Mortgage-backed GSE securities: residential		297,517		286,214
Total	$	545,113	$	516,930

Since equity securities do not have a contractual maturity, they are excluded from the table above.

There was no tax provision related to net unrealized gains or losses for each of the periods presented due to the full valuation allowance recorded on the net deferred tax asset of the Company.

The Company had no securities pledged for the Company’s participation in the VISA payment processing program at March 31, 2014 and December 31, 2013. Securities pledged for participation in the Ohio Linked Deposit Program were approximately $390,000 at March 31, 2014 and $382,000 at December 31, 2013.

9

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

	March 31, 2014
	(Dollars in thousands)
	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
U.S. Treasury and government sponsored entities’ securities	$	200,991	$	(13,899	)	$	29,224	$	(2,982	)	$	230,215	$	(16,881	)
Mortgage-backed GSE securities: residential		238,033		(7,655	)		47,433		(3,682	)		285,466		(11,337	)
Total	$	439,024	$	(21,554	)	$	76,657	$	(6,664	)	$	515,681	$	(28,218	)
	December 31, 2013
	(Dollars in thousands)
	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
U.S. Treasury and government sponsored entities’ securities	$	193,746	$	(21,360	)	$	28,046	$	(4,210	)	$	221,792	$	(25,570	)
Mortgage-backed GSE securities: residential		240,201		(10,680	)		47,319		(4,518	)		287,520		(15,198	)
Total	$	433,947	$	(32,040	)	$	75,365	$	(8,728	)	$	509,312	$	(40,768	)

All of the U.S. Treasury and government sponsored entities (GSE) and mortgage-backed securities that were temporarily impaired at March 31, 2014 and December 31, 2013, were impaired due to the level of interest rates at that time. Unrealized losses on U.S. Treasury and government sponsored entities and mortgage-backed securities have not been recognized into income as of March 31, 2014 and December 31, 2013 because the issuer’s securities are of high credit quality (rated AA or higher), management does not intend to sell, and it is likely that management will not be required to sell, the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The primary reason for the change in fair value in the first quarter was the decline in longer term interest rates experienced in the first quarter. From April 30, 2013 to March 31, 2014 the 10 year treasury yield rose from 1.70% to 2.73%. The duration of the securities portfolio is approximately 6.7 years at March 31, 2014. There is risk that longer term rates could rise further resulting in greater unrealized losses. Management continues to allow the portfolio to decline as no new investment purchases are being considered. In addition, the Company can look for opportunities to sell securities to reduce the portfolio or change the duration characteristics. All of the securities are GSE issued debt or mortgage-backed securities and carry the same rating as the U.S. Government.

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

Proceeds from sales of securities available for sale were $4,000 and $27.9 million for the three months ended March 31, 2014 and 2013, respectively. Gross gains of $3,000 and $721,000 were realized on these sales during the first quarter of 2014 and 2013, respectively.

10

6. LOANS

Portfolio loans consist of the following:

	March 31,			December 31,
	2014			2013
	(Dollars in thousands)
Real Estate:
One-to four-family residential	$	610,879		$	585,025
Multi-family residential		54,233			54,485
Nonresidential		125,796			131,251
Land		9,829			9,683
Construction:
One-to four-family residential and land development		55,082			53,349
Multi-family and nonresidential		207			—
Total real estate		856,026			833,793
Consumer
Home equity		156,478			159,795
Auto		5,219			5,669
Marine		4,217			4,308
Recreational vehicles		16,523			17,347
Other		1,972			2,112
Total consumer		184,409			189,231
Commercial
Secured		39,883			25,714
Unsecured		130			427
Total commercial		40,013			26,141
Total loans		1,080,448			1,049,165
Less:
Allowance for loan losses		20,554			21,116
Deferred loan costs, net		(1,007	)		(1,143	)
Total		19,547			19,973
Loans, net	$	1,060,901		$	1,029,192

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

11

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

Allowance For Loan Losses
(Dollars in thousands)
	Permanent Real Estate Loans			Construction Loans			Consumer Loans			Commercial Loans			Total
For the three months ended March 31, 2014
Beginning balance (12/31/13)	$	13,794		$	2,281		$	4,302		$	739		$	21,116
Provision		252			(175	)		(174	)		130			33
Chargeoffs		(612	)		(100	)		(407	)		(45	)		(1,164	)
Recoveries		192			21			174			182			569
Ending balance (03/31/14)	$	13,626		$	2,027		$	3,895		$	1,006		$	20,554
March 31, 2014
Period-end amount allocated to:
Loans individually evaluated for impairment	$	2,520		$	677		$	1,140		$	3		$	4,340
Loans collectively evaluated for impairment		10,869			1,515			2,802			1,028			16,214
Ending balance	$	13,389		$	2,192		$	3,942		$	1,031		$	20,554
Period-end balances:
Loans individually evaluated for impairment	$	27,667		$	2,882		$	13,500		$	4,035		$	48,084
Loans collectively evaluated for impairment		773,070			52,407			170,909			35,978			1,032,364
Ending balance	$	800,737		$	55,289		$	184,409		$	40,013		$	1,080,448

12

Allowance For Loan Losses
(Dollars in thousands)
	Permanent Real Estate Loans			Construction Loans			Consumer Loans			Commercial Loans			Total
For the three months ended March 31, 2013
Beginning balance (12/31/12)	$	13,819		$	1,404		$	4,459		$	1,448		$	21,130
Provision		2,029			(18	)		238			(185	)		2,064
Chargeoffs		(1,206	)		(226	)		(600	)		(128	)		(2,160	)
Recoveries		265			283			157			88			793
Ending balance (03/31/13)	$	14,907		$	1,443		$	4,254		$	1,223		$	21,827
December 31, 2013
Period-end amount allocated to:
Loans individually evaluated for impairment	$	1,786		$	680		$	859		$	—		$	3,325
Loans collectively evaluated for impairment		12,008			1,601			3,443			739			17,791
Ending balance	$	13,794		$	2,281		$	4,302		$	739		$	21,116
Period-end balances:
Loans individually evaluated for impairment	$	27,224		$	3,092		$	13,821		$	4,044		$	48,181
Loans collectively evaluated for impairment		753,220			50,257			175,410			22,097			1,000,984
Ending balance	$	780,444		$	53,349		$	189,231		$	26,141		$	1,049,165

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

13

The following table presents loans individually evaluated for impairment by class of loans as of and for the three months ended March 31, 2014:

Impaired Loans
(Dollars in thousands)
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With no specific allowance recorded
Permanent real estate
One-to four-family residential	$	5,807	$	4,431	$	—	$	11,424	$	—	$	39
Multifamily residential		90		90		—		490		—		—
Nonresidential		5,514		3,920		—		4,943		2		11
Land		3,913		487		—		487		—		—
Total		15,324		8,928		—		17,344		2		50
Construction loans
One-to four-family residential		1,350		641		—		1,160		—		—
Multifamily and nonresidential		—		—		—		—		—		—
Total		1,350		641		—		1,160		—		—
Consumer loans
Home Equity		2,259		1,751		—		6,623		26		45
Auto		72		51		—		49		—		3
Marine		157		157		—		166		—		3
Recreational vehicle		188		66		—		452		—		4
Other		1		1		—		1		—		—
Total		2,677		2,026		—		7,291		26		55
Commercial loans
Secured		4,073		3,711		—		4,149		—		1
Unsecured		3,945		—		—		1		—		43
Total		8,018		3,711		—		4,150		—		44
Total	$	27,369	$	15,306	$	—	$	29,945	$	28	$	149

14

(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	$	16,487	$	16,231	$	2,224	$	7,951	$	171	$	177
Multifamily residential		1,185		1,085		206		335		11		16
Nonresidential		1,914		1,423		90		1,167		1		4
Land		—		—		—		—		—		—
Total		19,586		18,739		2,520		9,453		183		197
Construction loans
One-to four-family residential		3,829		2,241		677		2,266		—		—
Multifamily and nonresidential		—		—		—		—		—		—
Total		3,829		2,241		677		2,266		—		—
Consumer loans
Home Equity		10,668		10,638		999		5,028		153		160
Auto		9		9		—		2		—		—
Marine		—		—		—		—		—		—
Recreational vehicle		856		827		141		553		5		5
Other		—		—		—		—		—		—
Total		11,533		11,474		1,140		5,583		158		165
Commercial loans
Secured		324		324		3		132		—		—
Unsecured		—		—		—		—		—		—
Total		324		324		3		132		—		—
Total	$	35,272	$	32,778	$	4,340	$	17,434	$	341	$	362
Total	$	62,641	$	48,084	$	4,340	$	47,379	$	369	$	511

15

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

Impaired Loans
(Dollars in thousands)
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With no specific allowance recorded
Permanent real estate
One-to four-family residential	$	19,294	$	17,454	$	—	$	19,759	$	155	$	164
Multifamily residential		775		681		—		1,784		—		1
Nonresidential		6,255		5,657		—		13,545		9		35
Land		3,700		3,700		—		4,278		—		—
Total		30,024		27,492		—		39,366		164		200
Construction loans
One-to four-family residential		12,493		1,526		—		3,855		—		3
Multifamily and nonresidential		—		—		—		—		—		—
Total		12,493		1,526		—		3,855		—		3
Consumer loans
Home Equity		9,463		8,874		—		6,685		108		116
Auto		58		37		—		48		—		1
Marine		188		188		—		226		—		2
Recreational vehicle		1,131		1,000		—		722		5		6
Other		7		7		—		5		—		—
Total		10,847		10,106		—		7,686		113		125
Commercial loans
Secured		2,046		1,141		—		1,307		—		18
Unsecured		3,291		712		—		250		15		11
Total		5,337		1,853		—		1,557		15		29
Total	$	58,701	$	40,977	$	—	$	52,464	$	292	$	357

16

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	$	735	$	735	$	260	$	1,269	$	—	$	—
Multifamily residential		1,120		1,064		281		2,062		2		2
Nonresidential		12,610		12,095		1,840		11,933		5		15
Land		3,913		2,127		727		2,441		—		—
Total		18,378		16,021		3,108		17,705		7		17
Construction loans
One-to four-family residential		5,306		3,411		318		6,801		—		—
Multifamily and nonresidential		—		—		—		—		—		—
Total		5,306		3,411		318		6,801		—		—
Consumer loans
Home Equity		—		—		—		—		—		—
Auto		—		—		—		—		—		—
Marine		—		—		—		—		—		—
Recreational vehicle		—		—		—		18		—		—
Other		—		—		—		—		—		—
Total		—		—		—		18		—		—
Commercial loans
Secured		571		204		10		409		—		3
Unsecured		—		—		—		—		—		—
Total		571		204		10		409		—		3
Total		24,255		19,636		3,436		24,933		7		20
Total	$	82,956	$	60,613	$	3,436	$	77,397	$	299	$	377

17

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

Impaired Loans
(Dollars in thousands)
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no specific allowance recorded
Permanent real estate
One-to four-family residential	$	13,321	$	11,309	$	—
Multifamily residential		662		567		—
Nonresidential		6,451		5,311		—
Land		3,913		487		—
Total		24,347		17,674		—
Construction loans
One-to four-family residential		1,433		825		—
Multifamily and nonresidential		—		—		—
Total		1,433		825		—
Consumer loans
Home Equity		6,458		5,808		—
Auto		83		66		—
Marine		160		160		—
Recreational vehicle		429		386		—
Other		2		2		—
Total		7,132		6,422		—
Commercial loans
Secured		4,414		4,044		—
Unsecured		4,067		—		—
Total		8,481		4,044		—
Total	$	41,393	$	28,965	$	—

18

(Continued)

Impaired Loans
(Dollars in thousands)
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With a specific allowance recorded
Permanent real estate
One-to four-family residential	$	8,897	$	8,897	$	1,675
Multifamily residential		185		85		25
Nonresidential		908		568		86
Land		—		—		—
Total		9,990		9,550		1,786
Construction loans
One-to four-family residential		3,895		2,267		680
Multifamily and nonresidential		—		—		—
Total		3,895		2,267		680
Consumer loans
Home Equity		6,743		6,743		719
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		656		656		140
Other		—		—		—
Total		7,399		7,399		859
Commercial loans
Secured		—		—		—
Unsecured		—		—		—
Total		—		—		—
Total	$	21,284	$	19,216	$	3,325
Total	$	62,677	$	48,181	$	3,325

19

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 March 31, 2014:

Nonaccrual Loans and Loans Past Due Over 90 Days and Still Accruing
As of March 31, 2014
(Dollars in thousands)
	Nonaccrual		Loans past due over 90 days and still accruing
Real Estate Loans
Permanent
One-to four-family residential	$	6,133	$	—
Multifamily residential		1,158		—
Nonresidential		5,033		—
Land		532		—
Total		12,856		—
Construction Loans
One-to four-family residential		2,884		—
Multifamily and nonresidential		—		—
Total		2,884		—
Consumer Loans
Home Equity		2,724		—
Auto		80		—
Marine		130		—
Recreational vehicle		147		—
Other		8		—
Total		3,089		—
Commercial Loans
Secured		4,026		—
Unsecured		129		—
Total		4,155		—
Total	$	22,984	$	—

20

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

Nonaccrual Loans and Loans Past Due Over 90 Days and Still Accruing
As of December 31, 2013
(Dollars in thousands)
	Nonaccrual		Loans past due over 90 days and still accruing
Real Estate Loans
Permanent
One-to four-family residential	$	6,356	$	—
Multifamily residential		641		—
Nonresidential		5,560		—
Land		496		—
Total		13,053		—
Construction Loans
One-to four-family residential		3,084		—
Multifamily and nonresidential		—		—
Total		3,084		—
Consumer Loans
Home Equity		2,726		45
Auto		110		—
Marine		136		—
Recreational vehicle		263		—
Other		13		—
Total		3,248		45
Commercial Loans
Secured		4,028		—
Unsecured		130		—
Total		4,158		—
Total	$	23,543	$	45

21

The following table presents an age analysis of past-due loans, segregated by class of loans as of March 31, 2014:

Past Due Loans
(Dollars in thousands)
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current Loans			Total Loans
Real Estate Loans
Permanent
One-to four-family residential	$	765	$	401	$	4,105	$	5,271	$	605,608		$	610,879
Multifamily residential		460		—		159		619		53,614			54,233
Nonresidential		10		—		4,962		4,972		120,824			125,796
Land		—		—		532		532		9,297			9,829
Total		1,235		401		9,758		11,394		789,343			800,737
Construction Loans
One-to four-family residential		—		—		2,884		2,884		52,198			55,082
Multifamily and nonresidential		—		—		—		—		207			207
Total		—		—		2,884		2,884		52,405			55,289
Consumer Loans
Home Equity		375		143		1,829		2,347		154,131			156,478
Auto		—		—		33		33		5,186			5,219
Marine		61		—		—		61		4,156			4,217
Recreational vehicle		849		170		54		1,073		15,450			16,523
Other		5		9		7		21		1,951			1,972
Total		1,290		322		1,923		3,535		180,874			184,409
Commercial Loans
Secured		—		10		4,015		4,025		35,858			39,883
Unsecured		24		—		129		153		(23	)		130
Total		24		10		4,144		4,178		35,835			40,013
Total	$	2,549	$	733	$	18,709	$	21,991	$	1,058,457		$	1,080,448

22

The following table presents an age analysis of past-due loans, segregated by class of loans as of December 31, 2013:

Past Due Loans
(Dollars in thousands)
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current Loans		Total Loans
Real Estate Loans
Permanent
One-to four-family residential	$	1,482	$	379	$	4,687	$	6,548	$	578,477	$	585,025
Multifamily residential		359		—		190		549		53,936		54,485
Nonresidential		13		—		5,456		5,469		125,782		131,251
Land		—		36		496		532		9,151		9,683
Total		1,854		415		10,829		13,098		767,346		780,444
Construction Loans
One-to four-family residential		—		—		3,084		3,084		50,265		53,349
Multifamily and nonresidential		—		—		—		—		—		—
Total		—		—		3,084		3,084		50,265		53,349
Consumer Loans
Home Equity		541		452		2,111		3,104		156,691		159,795
Auto		5		—		49		54		5,615		5,669
Marine		—		—		—		—		4,308		4,308
Recreational vehicle		117		199		3		319		17,028		17,347
Other		1		7		10		18		2,094		2,112
Total		664		658		2,173		3,495		185,736		189,231
Commercial Loans
Secured		—		11		4,017		4,028		21,686		25,714
Unsecured		—		—		130		130		297		427
Total		—		11		4,147		4,158		21,983		26,141
Total	$	2,518	$	1,084	$	20,233	$	23,835	$	1,025,330	$	1,049,165

23

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended March 31, 2014:

	Number of loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Recorded Investment
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family		9	$	569	$	576
Multifamily residential		—		—		—
Nonresidential		1		120		120
Land		—		—		—
Total		10		689		696
Construction Loans
One-to four-family residential		—		—		—
Multifamily and nonresidential		—		—		—
Total		—		—		—
Consumer Loans
Home Equity		10		552		559
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—
Total		10		552		559
Commercial Loans
Secured		—		—		—
Unsecured		—		—		—
Total		—		—		—
Total Restructured Loans		20	$	1,241	$	1,255

The troubled debt restructurings described above increased the allowance for loan losses by $56,000, but did not result in any chargeoffs during the three months ended March 31, 2014.

24

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

	Number of loans		Pre-Modification Outstanding Recorded Investment		Post- Modification Recorded Investment
Real Estate Loans
Permanent
One-to four-family		13	$	743	$	762
Multifamily residential		—		—		—
Nonresidential		—		—		—
Land		—		—		—
Total		13		743		762
Construction Loans
One-to four-family residential		—		—		—
Multifamily and nonresidential		—		—		—
Total		—		—		—
Consumer Loans
Home Equity		26		871		877
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		4		791		804
Other		—		—		—
Total		30		1,662		1,681
Commercial Loans
Secured		—		—		—
Unsecured		—		—		—
Total		—		—		—
Total Restructured Loans		43	$	2,405	$	2,443

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

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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 March 31, 2014:

	Number of loans		Recorded Investment
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family		3	$	550
Multifamily residential		1		460
Nonresidential		—		—
Land		2		487
Total		6		1,497
Construction Loans
One-to four-family residential		1		488
Multifamily and nonresidential		—		—
Total		1		488
Consumer Loans
Home Equity		6		230
Auto		—		—
Marine		—		—
Recreational vehicle		—		—
Other		—		—
Total		6		230
Commercial Loans
Secured		—		—
Unsecured		—		—
Total		—		—
Total Restructured Loans		13	$	2,215

The troubled debt restructurings that subsequently defaulted described above resulted in no charge-offs during the three months ended March 31, 2014, and had no effect on the provision for loan losses.

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

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

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

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

The terms of certain other loans were modified during the periods ended March 31, 2014 and December 31, 2013, but they did not meet the definition of a troubled debt restructuring. These loans have a total recorded investment as of March 31, 2014 of $15.2 million and at December 31, 2013 of $66.4 million. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

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

Credit Quality Indicators:

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

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

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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.

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

Loans
March 31, 2014
(Dollars in thousands)
	Unclassified				Classified
	Unclassified		Special Mention		Substandard		Doubtful		Loss		Total Classified		Total Loans
Real Estate Loans
Permanent
One-to four-family residential	$	601,575	$	1,465	$	7,839	$	—	$	—	$	7,839	$	610,879
Multifamily residential		47,764		4,266		2,203		—		—		2,203		54,233
Nonresidential		87,295		8,278		30,223		—		—		30,223		125,796
Land		9,220		122		487		—		—		487		9,829
Total		745,854		14,131		40,752		—		—		40,752		800,737
Construction Loans
One-to four-family residential		52,200		—		2,882		—		—		2,882		55,082
Multifamily and nonresidential		207		—		—		—		—		—		207
Total		52,407		—		2,882		—		—		2,882		55,289
Consumer Loans
Home Equity		153,458		—		3,020		—		—		3,020		156,478
Auto		5,129		—		90		—		—		90		5,219
Marine		4,056		4		157		—		—		157		4,217
Recreational vehicle		16,352		—		171		—		—		171		16,523
Other		1,955		—		17		—		—		17		1,972
Total		180,950		4		3,455		—		—		3,455		184,409
Commercial Loans
Secured		34,084		225		5,574		—		—		5,574		39,883
Unsecured		10		—		120		—		—		120		130
Total		34,094		225		5,694		—		—		5,694		40,013
Total	$	1,013,305	$	14,360	$	52,783	$	—	$	—	$	52,783	$	1,080,448

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Loans
December 31, 2013
(Dollars in thousands)
	Unclassified				Classified
	Unclassified		Special Mention		Substandard		Doubtful		Loss		Total Classified		Total Loans
Real Estate Loans
Permanent
One-to four-family residential	$	575,903	$	404	$	8,718	$	—	$	—	$	8,718	$	585,025
Multifamily
Residential		48,918		2,962		2,605		—		—		2,605		54,485
Nonresidential		90,115		12,222		28,914		—		—		28,914		131,251
Land		9,069		127		487		—		—		487		9,683
Total		724,005		15,715		40,724		—		—		40,724		780,444
Construction Loans
One-to four-family
Residential		50,257		—		3,092		—		—		3,092		53,349
Multifamily and
Nonresidential		—		—		—		—		—		—		—
Total		50,257		—		3,092		—		—		3,092		53,349
Consumer Loans
Home Equity		156,841		46		2,954		—		—		2,954		159,841
Auto		5,507		5		116		—		—		116		5,628
Marine		4,143		—		160		—		—		160		4,303
Recreational vehicle		17,066		—		281		—		—		281		17,347
Other		2,099		—		13		—		—		13		2,112
Total		185,656		51		3,524		—		—		3,524		189,231
Commercial Loans
Secured		19,714		190		5,810		—		—		5,810		25,714
Unsecured		68		—		359		—		—		359		427
Total		19,782		190		6,169		—		—		6,169		26,141
Total	$	979,700	$	15,956	$	53,509	$	—	$	—	$	53,509	$	1,049,165

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7. MORTGAGE BANKING ACTIVITIES

Mortgage loans serviced for others, which are not reported in United Community’s assets, totaled $1.1 billion as of March 31, 2014 and December 31, 2013. Mortgage banking income is comprised of gains recognized on the sale of loans and changes in fair value of mortgage banking derivatives.

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

	March 31, 2014		December 31, 2013
	(Dollars in thousands)
Mortgage loan portfolios serviced for:
FHLMC	$	824,060	$	827,146
FNMA		277,211		283,340

Escrow balances are maintained at the Federal Home Loan Bank (FHLB) in connection with serviced loans totaling $1.1 million and $1.7 million at March 31, 2014 and December 31, 2013, respectively.

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

	Three Months Ended March 31, 2014			Three Months Ended March 31, 2013
	(Dollars in thousands)
Balance, beginning of year	$	5,941		$	5,506
Originations		254			1,282
Amortized to expense		(392	)		(660	)
Balance, end of period		5,803			6,128
Less valuation allowance		(1	)		(245	)
Net balance	$	5,802		$	5,883

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

	Three Months Ended March 31, 2014			Three Months Ended March 31, 2013
	(Dollars in thousands)
Balance, beginning of year	$	—		$	(680	)
Impairment charges		(1	)		—
Recoveries		—			435
Balance, end of period	$	(1	)	$	(245	)

The fair value of mortgage servicing rights as of March 31, 2014, was approximately $9.9 million and at December 31, 2013, the fair value was approximately $10.2 million.

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

	March 31, 2014	December 31, 2013
Weighted average prepayment rate	189 PSA	182 PSA
Weighted average life (in years)	3.83	3.94
Weighted average discount rate	8.00%	8.00%

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8. OTHER REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS

Real estate owned and other repossessed assets at March 31, 2014 and December 31, 2013 were as follows:

	March 31, 2014			December 31, 2013
	(Dollars in thousands)
Real estate owned and other repossessed assets	$	8,288		$	10,400
Valuation allowance		(3,588	)		(4,059	)
End of period	$	4,700		$	6,341

Activity in the valuation allowance was as follows:

	March 31, 2014			March 31, 2013
	(Dollars in thousands)
Beginning of year	$	4,059		$	6,796
Additions charged to expense		292			323
Reductions due to sales		(763	)		(912	)
End of period	$	3,588		$	6,207

Expenses related to foreclosed and repossessed assets include:

	Three Months Ended March 31, 2014		Three Months Ended March 31, 2013
	(Dollars in thousands)
Net loss on sales	$	91	$	108
Provision for unrealized losses, net		292		323
Operating expenses, net of rental income		213		493
Total expenses	$	596	$	924

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9. OTHER POSTRETIREMENT BENEFIT PLANS

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

Components of net periodic benefit cost are as follows:

	Three Months Ended March 31,
	2014			2013
	(Dollars in thousands)
Service cost	$	—		$	—
Interest cost		14			13
Expected return on plan assets		—			—
Net amortization of prior service cost		(19	)		(19	)
Recognized net actuarial gain		(36	)		(28	)
Net periodic benefit cost/(gain)	$	(41	)	$	(34	)
Assumptions used in the valuations were as follows:
Weighted average discount rate		3.95	%		3.00	%

10. FAIR VALUE MEASUREMENT

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

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

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

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

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

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

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

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

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by Home Savings. Once received, a member of the Special Assets Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with the independent data sources such as recent market data or industry-wide statistics. On an annual basis, Home Savings compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value. At the time a property is acquired and classified as real estate owned, the fair value is determined utilizing the most appropriate method. A fair value in excess of $250,000 will be supported by an appraisal. After determination of fair value, each property will be recorded at the lower of cost (i.e., recorded investment in the loan) or the estimated net realizable value on the date of transfer to real estate owned. In determining net realizable value, reductions to fair market value may be taken for estimated costs of sale, conditions that must be remedied immediately upon acquisition, and other factors that negatively impact the marketability and prompt sale of the property.

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

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

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

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

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

			Fair Value Measurements at March 31, 2014 Using:
	March 31,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2014		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Available for sale securities
US Treasury and government sponsored entities’ securities	$	230,716	$	—	$	230,716	$	—
Equity securities		458		458		—		—
Mortgage-backed GSE securities: residential		286,214		—		286,214		—
Mortgage servicing assets		103		—		103		—
Interest rate caps		419		—		—		419
Purchased certificate of deposit option		267		—		267		—
Liabilities
Written certificate of deposit option		267		—		267		—

			Fair Value Measurements at December 31, 2013 Using:
	December 31,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2013		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Available for sale securities
US Treasury and government sponsored entities’ securities	$	222,293	$	—	$	222,293	$	—
Equity securities		445		445		—		—
Mortgage-backed GSE securities: residential		288,268		—		288,268		—
Interest rate caps		546		—		—		546
Purchased certificate of deposit option		155		—		155		—
Liabilities
Written certificate of deposit option		155		—		155		—

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

35

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2014 and 2013:

	Interest Rate Caps
	Three Months Ended March 31, 2014			Three Months Ended March 31, 2013
	(Dollars in thousands)
Balance of recurring Level 3 assets at beginning of period	$	546		$	436
Total gains (losses) for the period
Included in other income		2			138
Included in other comprehensive income		—			—
Purchases		—			—
Amortization		(129	)		(130	)
Sales		—			—
Balance of recurring Level 3 assets at end of period	$	419		$	444

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

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

	Fair Value		Valuation Technique(s)		Unobservable Input(s)		Range
	(Dollars in thousands)
Interest rate caps	$	419		Discounted cash flow		Discount rate		0.35%-1.5%

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

	Fair Value		Valuation Technique(s)		Unobservable Input(s)		Range
	(Dollars in thousands)
Interest rate caps	$	546		Discounted cash flow		Discount rate		0.35%-1.5%

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.

36

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

			Fair Value Measurements at March 31, 2014 Using:
	March 31, 2014		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	$	1,171	$	—	$	—	$	1,171
Construction loans		1,564		—		—		1,564
Other real estate owned, net:
Permanent real estate		1,435		—		—		1,435
Construction		1,988		—		—		1,988
			Fair Value Measurements at December 31, 2013 Using:
	December 31, 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	$	2,219	$	—	$	—	$	2,219
Construction loans		1,587		—		—		1,587
Consumer loans		339		—		—		339
Other real estate owned, net:
Permanent real estate loans		1,939		—		—		1,939
Construction loans		2,310		—		—		2,310

Impaired loans with specific allocations of the allowance for loan losses, carried at fair value, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a net carrying amount of $2.7 million at March 31, 2014, that includes a specific valuation allowance of $959,000. This resulted in an increase of the provision for loan losses of $469,000 during the three months ended March 31, 2014. Impaired loans with specific allocations of the allowance for loan losses, carried at fair value, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a net carrying amount of $16.2 million at March 31, 2013, which includes a specific valuation allowance of $3.4 million. This resulted in an increase in the provision for loan losses of $2.9 million during the three months ended March 31, 2013. Impaired loans with specific allocations of the allowance for loan losses, carried at fair value, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a net carrying amount of $4.1 million at December 31, 2013, that includes a specific valuation allowance of $792,000. This resulted in an increase of the provision for loan losses of $1.5 million during the twelve months ended December 31, 2013.

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

At March 31, 2014, mortgage servicing rights carried at fair value was $103,000, resulting in a net valuation allowance of $1,000 for the three months ended March 31, 2014. At March 31, 2013, mortgage servicing rights, carried at fair value, totaled $5.9 million, which is made up of the outstanding balance of $6.1 million, net of a valuation allowance of $245,000. At December 31, 2013, mortgage servicing rights carried at fair value was $0, resulting in a net recovery of $680,000 for the year ended December 31, 2013. Mortgage servicing rights are valued by an independent third party that is active in purchasing and selling these instruments. The value reflects the characteristics of the underlying loans discounted at a market multiple.

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At March 31, 2014, other real estate owned, carried at fair value, which is measured for impairment using the fair value of the property less estimated selling costs and had a net carrying amount of $3.4 million, with a valuation allowance of $3.6 million. This resulted in additional expenses of $292,000 during the three months ended March 31, 2014. At March 31, 2013, other real estate owned had a net carrying amount of $8.8 million with a valuation allowance of $6.2 million. This resulted in additional expenses of $323,000 during the three months ended March 31, 2013. At December 31, 2013, other real estate owned had a net carrying amount of $4.2 million, with a valuation allowance of $4.1 million. This resulted in additional expenses of $2.0 million during the twelve months ended December 31, 2013.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at March 31, 2014:

	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Average)
			(Dollars in thousands)
Impaired loans:
Permanent real estate loans	$	1,171	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%)
Other real estate owned, net:
Permanent real estate loans		1,435	Sales comparison approach	Adjustment for differences between comparable sales	6.00%-46.53% (17.76%)
Construction loans		1,988	Sales comparison approach	Adjustment for differences between comparable sales	6.54%-26.63% (9.24%)

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The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at December 31, 2013:

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

39

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

				Fair Value Measurements at March 31, 2014 Using:
	March 31, 2014
	Carrying Value			(Level 1)			(Level 2)			(Level 3)
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	62,235		$	62,235		$	—		$	—
Available for sale securities		517,388			458			516,930			—
Loans held for sale		4,230			—			4,258			—
Loans, net		1,060,901			—			—			1,068,745
FHLB stock		18,068			n/a			n/a			n/a
Accrued interest receivable		5,161			—			1,964			3,197
Interest rate caps		419			—			—			419
Purchased certificate of deposit option		267			—			267			—
Liabilities:
Deposits:
Checking, savings and money market accounts		(929,720	)		(929,720	)		—			—
Certificates of deposit		(468,347	)		—			(476,104	)		—
FHLB advances		(50,000	)		—			(54,903	)		—
Repurchase agreements and other		(90,572	)		—			(97,200	)		—
Advance payments by borrowers for taxes and insurance		(12,246	)		—			(12,246	)		—
Accrued interest payable		(585	)		—			(585	)		—
Written certificate of deposit option		(267	)		—			(267	)		—

40

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

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

(a) Cash and Cash Equivalents

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

(b) FHLB Stock

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

(c) Loans

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

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

(d) Deposits

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

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(e) Short-term Borrowings

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

(f) Other Borrowings

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

(g) Accrued Interest Receivable/Payable

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

(h) Off-balance Sheet Instruments

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

11. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURE

Supplemental disclosures of cash flow information are summarized below.

	Three Months Ended		Three Months Ended
	March 31,		March 31,
	2014		2013
	(Dollars in thousands)
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest on deposits and borrowings	$	3,068	$	3,485
Supplemental schedule of noncash activities:
Transfers from loans to real estate owned and other repossessed assets		233		664
Amortization of preferred stock discount		—		821

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12. EARNINGS PER SHARE

The Company has granted stock compensation awards with nonforfeitable dividend rights which are considered participating securities. As such, earnings per share is computed using the two-class method as required by ASC 206-10-45. Basic earnings per common share is computed by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during the period which excludes the participating securities. Diluted earnings per common share includes the dilutive effect of additional potential common shares from stock compensation awards, but also excludes awards considered participating securities. Stock options for 407,297 shares were anti-dilutive for the three months ended March 31, 2014 and stock options for 816,342 shares were anti-dilutive for the three months ended March 31, 2013. Convertible preferred stock totaling 7,942 shares was anti-dilutive for the three months ended March 31, 2013.

	Three months ended			Three months ended
	March 31,			March 31,
	2014			2013
	(Dollars in thousands, except per share data)
Net income per consolidated statements of income	$	2,094		$	2,682
Net income allocated to participating securities		(9	)		(10	)
Amortization of discount on preferred stock		—			(821	)
Net income allocated to common stock	$	2,085		$	1,851
Basic earnings per common share computation:
Distributed earnings allocated to common stock	$	—		$	—
Undistributed earnings allocated to common stock		2,085			1,851
Net income allocated to common stock	$	2,085		$	1,851
Weighted average common shares outstanding, including shares considered participating securities		50,407			33,689
Less: Average participating securities		(211	)		(124	)
Weighted average shares		50,196			33,565
Basic earnings per common share	$	0.04		$	0.06
Diluted earnings per common share computation:
Net income allocated to common stock	$	2,085		$	1,851
Weighted average common shares outstanding for basic earnings per common share		50,196			33,565
Add: Dilutive effects of assumed exercises of stock options		254			264
Weighted average shares and dilutive potential common shares		50,450			33,829
Diluted earnings per common share	$	0.04		$	0.05

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As previously announced and described under Note 16 below, United Community sold 7,942 preferred shares to various investors. In accordance with U.S. GAAP, United Community recorded a beneficial conversion feature (“BCF”) related to the issuance of these preferred shares because they contain a conversion feature at a fixed rate that was in-the-money when issued. A BCF is “in-the-money” when the investor is deemed to be able to obtain the underlying common shares at a below-market price upon conversion of the preferred shares. The BCF was recognized in United Community’s Shareholders’ Equity and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The effective purchase price of the common shares into which the preferred shares were convertible was deemed to be $2.75, which was used to compute the intrinsic value. The intrinsic value was calculated as the difference between the deemed purchase price of the common shares ($2.75 per share) and the market value ($3.60 per share) on the date the preferred shares were issued (March 22, 2013), multiplied by the number of shares into which the preferred shares were convertible. The BCF resulting from the issuance of the preferred shares of United Community is calculated as follows:

Total common shares that may be issued upon conversion of preferred shares		7,942,000
Intrinsic value (difference between consideration allocated to preferred stock upon conversion at $2.75 per share and market price of $3.60 per share on March 22, 2013)	$	0.85
Beneficial conversion feature	$	6,750,700

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

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13. OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) included in the Consolidated Statements of Shareholders’ Equity consists of unrealized gains and losses on available for sale securities and reflects no change in unrealized gains and losses on postretirement liability. The change includes $3,000 reclassification of gains on sales of securities and no impairment charges for the three months ended March 31, 2014, and gains on sales of securities of $721,000 and no impairment charges for the three months ended March 31, 2013.

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

	Three months ended March 31,
	2014			2013
	(Dollars in thousands)
Unrealized holding gain (loss) on securities available for sale	$	12,571		$	(2,242	)
Unrealized holding gain (loss) on postretirement benefits		—			—
Reclassification adjustment for (gains) losses realized in income		(3	)		(721	)
Net unrealized gains		12,568			(2,963	)
Tax effect		—			—
Net of tax amount	$	12,568		$	(2,963	)

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

	Balance at December 31, 2013			Current Period Change		Balance at March 31, 2014
	(Dollars in thousands)
Unrealized gains (losses) on securities available for sale	$	(43,364	)	$	12,568	$	(30,796	)
Unrealized gains (losses) on post-retirement benefits		1,699			—		1,699
Total	$	(41,665	)	$	12,568	$	(29,097	)

	Balance at December 31, 2012		Current Period Change			Balance at March 31, 2013
	(Dollars in thousands)
Unrealized gains (losses) on securities available for sale	$	5,082	$	(2,963	)	$	2,119
Unrealized gains (losses) on post-retirement benefits		1,600		—			1,600
Total	$	6,682	$	(2,963	)	$	3,719

The following is a summary of each component of accumulated other comprehensive income (loss) that was reclassified into net income during the three months ended March 31, 2014:

	Unrealized gains/losses on Available for Sale Securities			Postretirement Benefits		Total
	(Dollars in thousands)
Beginning balance (12/31/2013)	$	(43,364	)	$	1,699	$	(41,665	)
Other comprehensive income before reclassification		12,571			—		12,571
Amounts reclassified from accumulated other compressive income		(3	)		—		(3	)
Net current period other comprehensive income		12,568			—		12,568
Ending balance (03/31/2014)	$	(30,796	)	$	1,699	$	(29,097	)

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The following is a summary of each component of accumulated other comprehensive income (loss) that was reclassified into net income during the three months ended March 31, 2013:

	Unrealized gains/losses on Available for Sale Securities			Postretirement Benefits		Total
Beginning balance	$	5,082		$	1,600	$	6,682
Other comprehensive loss before reclassification		(2,242	)		—		(2,242	)
Amounts reclassified from accumulated other comprehensive income		(721	)		—		(721	)
Net current period other comprehensive loss		(2,963	)		—		(2,963	)
Ending balance	$	2,119		$	1,600	$	3,719

The following are significant amounts reclassified out of each component of accumulated comprehensive income (loss) for the three months ended March 31, 2014:

Details About Accumulated Other Comprehensive Income Components	Amount Reclassified From Accumulated Other Comprehensive Income			Affected Line Item on the Statement Where Net Income is Presented
	(Dollars in thousands)
Realized net gains on the sale of available for sale securities	$	(3	)	Net gains on securities available for sale
		—		Tax expense (benefit)
		(3	)	Net of tax
Total reclassification during the period	$	(3	)

The following is significant amounts reclassified out of each component of accumulated comprehensive income (loss) for the three months ended March 31, 2013:

Details About Accumulated Other Comprehensive Income Components	Amount Reclassified From Accumulated Other Comprehensive Income			Affected Line Item on the Statement Where Net Income is Presented
	(Dollars in thousands)
Realized net gains on the sale of available for sale securities	$	(721	)	Net gains on securities available for sale
		—		Tax expense (benefit)
		(721	)	Net of tax
Total reclassification during the period	$	(721	)

14. REGULATORY CAPITAL REQUIREMENTS

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

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.

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	As of March 31, 2014
	Actual					Minimum Capital Requirements Per Regulation					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(In thousands)
Total risk-based capital to risk-weighted assets	$	203,513		19.68	%	$	82,731		8.00	%	$	103,414		10.00	%
Tier 1 capital to risk-weighted assets		190,492		18.42	%		*		*			62,048		6.00	%
Tier 1 capital to average total assets**		190,492		10.71	%		71,177		4.00	%		88,971		5.00	%

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

* Ratio is not required under regulations

** Tier 1 Leverage Capital Ratio

As of March 31, 2014 and December 31, 2013, Home Savings is considered well capitalized.

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15. INCOME TAXES

As of March 31, 2014, the net deferred tax asset (prior to any valuation allowance) was $37.3 million, and as of December 31, 2013, the net deferred tax asset (prior to any valuation allowance) was $42.8 million. The primary reason for the change in the net deferred tax asset (prior to any valuation allowance) was due to the change in unrealized losses on available for sale securities during the first quarter of 2014. Management recorded a valuation allowance against the net deferred tax assets at March 31, 2014 and December 31, 2013 based on consideration of, but not limited to, its cumulative pre-tax losses during the past three years, the composition of recurring and non-recurring income from operations over the past several years and the magnitude of recent taxable income as compared to net operating loss carryforwards. 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 maintain a full valuation allowance against the entire net deferred tax asset.

The Company’s taxes payable for the period ended March 31, 2014 are the result of the application of the alternative minimum tax.

16. CAPITAL RAISE

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

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

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

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

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

UNITED COMMUNITY FINANCIAL CORP.

	At or For the Three Months Ended March 31,
	2014			2013
Selected financial ratios and other data: (1)
Performance ratios:
Return on average assets (2)		0.48	%		0.59	%
Return on average equity (3)		4.52	%		6.14	%
Interest rate spread (4)		2.91	%		2.85	%
Net interest margin (5)		3.07	%		3.01	%
Noninterest expense to average assets		3.10	%		3.05	%
Efficiency ratio (6)		83.45	%		75.55	%
Average interest-earning assets to average interest-bearing liabilities		121.07	%		118.44	%
Capital ratios:
Average equity to average assets		10.63	%		9.60	%
Equity to assets, end of period		10.85	%		11.27	%
Tier 1 leverage ratio		10.71	%		9.84	%
Tier 1 risk-based capital ratio		18.42	%		17.02	%
Total risk-based capital ratio		19.68	%		18.28	%
Asset quality ratio:
Nonperforming loans to total loans at end of period (7)		2.17	%		4.32	%
Nonperforming assets to average assets (8)		1.59	%		3.32	%
Nonperforming assets to total assets at end of period		1.58	%		3.30	%
Allowance for loan losses as a percent of loans		1.90	%		2.07	%
Allowance for loan losses as a percent of nonperforming loans (7)		89.43	%		48.81	%
Texas ratio (9)		13.17	%		26.52	%
Total classified assets as a percent of Tier 1 Capital		30.18	%		40.87	%
Total classified loans as a percent of Tier 1 Capital and ALLL		25.01	%		28.60	%
Total classified assets as a percent of Tier 1 Capital and ALLL		27.24	%		36.44	%
Net chargeoffs as a percent of average loans		0.23	%		0.52	%
Delinquent loans to total loans		2.07	%		4.51	%
Total 90+ days past due as a percent of total loans		1.76	%		3.88	%
Office data:
Number of full service banking offices		33			33
Number of loan production offices		10			9
Per share data:
Basic earnings (loss) (10)	$	0.04		$	0.06
Diluted earnings (loss) (10)		0.04			0.05
Book value (11)		3.76			4.81
Tangible book value (12)		3.76			4.81

Notes:

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

2. Net income divided by average total assets

3. Net income divided by average total equity

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

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

49

6. Noninterest expense, excluding the amortization of 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, gains and losses on foreclosed assets

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

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

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

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

11. Shareholders’ equity divided by number of shares outstanding

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

13. United Community uses 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. The Company believes 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 The Company, 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 (dollars in thousands):

	At or For the Three Months Ended March 31,
	2014			2013
Total assets	$	1,749,144		$	1,831,776
Less: Core deposit intangible		133			215
Tangible assets (Non-GAAP)	$	1,749,011		$	1,831,561
Total common equity	$	189,829		$	206,511
Less: Core deposit intangible		133			215
Tangible common equity (Non-GAAP)	$	189,696		$	206,296
Total equity/Total assets		10.85	%		11.27	%
Tangible common equity/Tangible assets (non-GAAP)		10.85	%		11.26	%

Forward-Looking Statements

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

Comparison of Financial Condition at March 31, 2014 and December 31, 2013

Total assets increased $11.3 million to $1.7 billion at March 31, 2014, compared to December 31, 2013. Contributing to the change were increases in available for sale securities of $6.4 million and net loans of $31.7 million, offset by decreases in cash and cash equivalents of $15.1 million, Federal Home Loan Bank stock of $8.4 million and real estate owned and other repossessed assets of $1.6 million.

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

50

The increase in available for sale securities was the result of a positive market value adjustment of $12.6 million during the first quarter of 2014 offset by maturities, paydowns and amortization of securities totaling $6.2 million. Despite the reduction of the unrealized loss position on the available for sale securities portfolio, the balance of the unrealized loss position at March 31, 2014 was $27.8 million. The unrealized loss position is entirely driven by the level of interest rates and The Company expects to recover the loss as it expects to receive all principal and interest payments contractually due and it has the ability and intent to hold the securities until maturity. All of the securities are GSE issued debt or mortgage-backed securities and carry the same rating as the U.S. Government.

The duration of the securities portfolio was approximately 6.7 years at March 31, 2014. There is risk that longer term rates could rise further resulting in greater unrealized losses, but it is also possible that longer term rates could fall resulting in the recovery of all of the unrealized losses. Management continues to allow the portfolio to decline as no new investment purchases are being considered at this time. In addition, the Company may look for opportunities to sell securities to reduce the portfolio or change the duration characteristics of the portfolio.

Net loans increased $31.7 million during the first three months of 2014. Contributing to the increase was a combination of an increase in permanent construction and secured commercial loan demand during the period. See Note 6 to the consolidated financial statements for additional information regarding the composition of net loans.

The following table summarizes the trend in the allowance for loan losses as of March 31, 2014:

	Allowance For Loan Losses
	(Dollars in thousands)
	December 31, 2013		Provision			Recovery		Chargeoff			March 31, 2014
Real Estate Loans
Permanent
One-to four-family residential	$	8,319	$	(64	)	$	152	$	(315	)	$	8,092
Multifamily residential		610		198			—		(5	)		803
Nonresidential		4,791		114			40		(292	)		4,653
Land		74		4			—		—			78
Total		13,794		252			192		(612	)		13,626
Construction Loans
One-to four-family residential		2,281		(181	)		21		(100	)		2,021
Multifamily and nonresidential		—		6			—		—			6
Total		2,281		(175	)		21		(100	)		2,027
Consumer Loans
Home Equity		3,552		(281	)		44		(171	)		3,144
Auto		35		(2	)		3		(6	)		30
Marine		40		32			12		—			84
Recreational vehicle		661		67			38		(144	)		622
Other		14		10			77		(86	)		15
Total		4,302		(174	)		174		(407	)		3,895
Commercial Loans
Secured		686		283			16		—			985
Unsecured		53		(153	)		166		(45	)		21
Total		739		130			182		(45	)		1,006
Total	$	21,116	$	33		$	569	$	(1,164	)	$	20,554

The allowance for loan losses is a valuation allowance for probable incurred credit losses established through a provision for loan losses charged to expense. The allowance for loan losses was $20.6 million at March 31, 2014, down from $21.1 million at December 31, 2013. The allowance for loan losses as a percentage of loans was 1.90% at March 31, 2014, compared to 2.01% at December 31, 2013. The allowance for loan losses as a percentage of nonperforming loans was 89.43% at March 31, 2014, compared to 89.52% at December 31, 2013. Loan losses are charged against the allowance when the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are added back to the allowance. Home Savings’ allowance for loan loss methodology includes

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allowance allocations calculated in accordance with ASC Topic 310, “Receivables,” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies”. Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade applied to specific risk pools, plus specific loss allocations and adjustments for current events and conditions. Home Savings’ process for determining the appropriate level of the allowance for possible loan losses is designed to account for credit deterioration as it occurs. The provision for possible loan losses reflects loan quality trends, including the levels of and trends related to nonaccrual loans, past due loans, classified loans and net charge-offs or recoveries, among other factors.

Chargeoffs exceeded provision in permanent real estate, construction and consumer loans in 2014. Home Savings individually analyzed a large portion of impaired mortgage and home equity loans in the first quarter of 2014. Many of these loans were deemed to have adequate collateral to cover any potential future losses. This analysis allowed Home Savings to release a portion of the reserves that had been set aside for potential losses on these loans. Loans that did not have adequate collateral were written down to fair value.

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 $48.1 million at March 31, 2014 as compared to $48.2 million at December 31, 2013. The schedule below summarizes impaired loans for March 31, 2014 and December 31, 2013.

Impaired Loans
(Dollars in thousands)
	March 31, 2014		December 31, 2013		Change
Real Estate Loans
Permanent
One-to four-family residential	$	20,662	$	20,206	$	456
Multifamily residential		1,175		652		523
Nonresidential		5,343		5,879		(536	)
Land		487		487		—
Total		27,667		27,224		443
Construction Loans
One-to four-family residential		2,882		3,092		(210	)
Multifamily and nonresidential		—		—		—
Total		2,882		3,092		(210	)
Consumer Loans
Home Equity		12,389		12,550		(161	)
Auto		60		66		(6	)
Boat		157		160		(3	)
Recreational vehicle		893		1,043		(150	)
Other		1		2		(1	)
Total		13,500		13,821		(321	)
Commercial Loans
Secured		4,035		4,044		(9	)
Unsecured		—		—		—
Total		4,035		4,044		(9	)
Total Impaired Loans	$	48,084	$	48,181	$	(97	)

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.

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

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

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

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

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

• Reduction of accrued interest.

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

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

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

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

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

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

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

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The change in TDRs for the three months ended March 31, 2014 is as follows:

Troubled Debt Restructurings
	March 31, 2014		December 31, 2013		Change
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family	$	17,000	$	16,700	$	300
Multifamily residential		460		463		(3	)
Nonresidential		896		858		38
Land		487		487		—
Total		18,843		18,508		335
Construction Loans
One-to four-family residential		488		698		(210	)
Multifamily and nonresidential		—		—		—
Total		488		698		(210	)
Consumer Loans
Home Equity		10,846		11,133		(287	)
Auto		9		10		(1	)
Marine		—		—		—
Recreational vehicle		827		836		(9	)
Other		—		—		—
Total		11,682		11,979		(297	)
Commercial Loans
Secured		325		333		(8	)
Unsecured		—		—		—
Total		325		333		(8	)
Total Restructured Loans	$	31,338	$	31,518	$	(180	)

The decrease in the level of TDR loans during the three months ended March 31, 2014 was attributable primarily to paydowns in accordance with terms of the loans.

Once a restructured loan has fallen into nonaccrual status, the restructured loan will remain on nonaccrual status for a period of at least six months until the borrower has demonstrated a willingness and ability to make the restructured loan payments. TDR loans that were on nonaccrual status aggregated $4.7 million and $4.9 million at March 31, 2014 and December 31, 2013, respectively. Such loans are considered nonperforming loans. TDR loans that were accruing according to their terms aggregated $26.6 million at March 31, 2014 and $26.6 million at December 31, 2013.

Nonperforming loans consist of nonaccrual loans and loans past due 90 days and still accruing. Nonperforming loans were $23.0 million, or 2.17% of net loans, at March 31, 2014, compared to $23.6 million, or 2.29% of net loans, at December 31, 2013.

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

Nonperforming Loans
(Dollars in thousands)
	March 31, 2014		December 31, 2013		Change
Real Estate Loans
Permanent
One-to four-family residential	$	6,133	$	6,356	$	(223	)
Multifamily residential		1,158		641		517
Nonresidential		5,033		5,560		(527	)
Land		532		496		36
Total		12,856		13,053		(197	)
Construction Loans
One-to four-family residential		2,884		3,084		(200	)
Multifamily and nonresidential		—		—		—
Total		2,884		3,084		(200	)
Consumer Loans
Home Equity		2,724		2,771		(47	)
Auto		80		110		(30	)
Marine		130		136		(6	)
Recreational vehicle		147		263		(116	)
Other		8		13		(5	)
Total		3,089		3,293		(204	)
Commercial Loans
Secured		4,026		4,028		(2	)
Unsecured		129		130		(1	)
Total		4,155		4,158		(3	)
Total Nonperforming Loans	$	22,984	$	23,588	$	(604	)

Loans held for sale decreased $608,000, or 12.6%, to $4.2 million at March 31, 2014, compared to $4.8 million at December 31, 2013. The change was primarily attributable to the timing of originations and sales during the period. Home Savings continues to sell a portion of newly originated mortgage loans into the secondary market as part of its risk management strategy and anticipates continuing to do so in the future.

FHLB stock decreased to $18.1 million at March 31, 2014 compared to $26.5 million at December 31, 2013. During the first quarter of 2014, the FHLB redeemed 83,962 shares, having a historical cost of $8.4 million (or $100 per share). Home Savings received cash for the redemption. There was no gain or loss recognized on the redemption. Also during the quarter, the FHLB paid a cash dividend of $267,000 in lieu of a stock dividend to its member banks.

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Real estate owned and other repossessed assets decreased $1.6 million, or 25.9%, during the three months ended March 31, 2014. The following table summarizes the activity in real estate owned and other repossessed assets during the period:

	Real Estate Owned			Repossessed Assets			Total
	(Dollars in thousands)
Balance at Beginning of period	$	6,318		$	23		$	6,341
Acquisitions		233			—			233
Sales, net		(1,559	)		(23	)		(1,582	)
Change in valuation allowance		(292	)		—			(292	)
Balance at End of period	$	4,700		$	—		$	4,700

The following table depicts the type of property secured in the satisfaction of loans and the valuation allowance associated with each type as of March 31, 2014:

	Balance		Valuation Allowance			Net Balance
	(Dollars in thousands)
Real estate owned
One-to four-family	$	2,571	$	(431	)	$	2,140
Multifamily residential		113		(18	)		95
Nonresidential		198		(60	)		138
One-to four-family residential construction		5,136		(3,000	)		2,136
Land		270		(79	)		191
Total real estate owned		8,288		(3,588	)		4,700
Repossessed assets
Auto		—		—			—
Marine		—		—			—
Recreational vehicle		—		—			—
Total repossessed assets		—		—			—
Total real estate owned and other repossessed assets	$	8,288	$	(3,588	)	$	4,700

Real estate owned and other repossessed assets are recorded at the lower of (a) the loan’s acquisition balance less cost to sell or (b) the fair market value of the property secured less costs to sell. Appraisals are obtained at least annually on nonresidential real estate properties that exceed $1.0 million in value and residential real estate properties that exceed $250,000 in value. Based on current appraisals, a valuation allowance may be established to properly reflect the asset at fair value. The increase in the valuation allowance on property acquired was due to the decline in market value of those properties.

Bank Owned Life Insurance (BOLI) is maintained on select officers and employees of Home Savings whereby Home Savings is the beneficiary. BOLI is recorded at its cash surrender value, or the amount currently realizable. Increases in the Home Savings’ policy cash surrender value are tax exempt and death benefit proceeds received by Home Savings are tax-free. Income from these policies and changes in the cash surrender value are recorded in other income. There is no post-termination coverage, split dollar or other encumbrance provided to participants covered by the BOLI. Home Savings recognized $350,000 and $226,000, as other non-interest income based on the change in cash value of the policies in the first quarters of 2014 and 2013, respectively.

Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. When determining the amount of net deferred tax assets that are more likely than not to be realized, United Community conducts a regular assessment of all available evidence, both positive and negative. This evidence includes, but is not limited to, taxable income in prior periods, projected future income, projected future reversals of deferred tax items and the effects of tax law changes. Based on these criteria, and in particular projected usage of its net operating loss (NOL) carryforward, United Community determined that it was necessary to maintain a full valuation allowance against the deferred tax asset at March 31, 2014 and December 31, 2013. The determination was made in part because the Company remained in a three-year cumulative loss position, creating a rebuttable presumption that the Company cannot rely solely on projected future income in determining whether the deferred tax asset is more likely than not to be realized. Furthermore, management has evaluated the composition of recurring and non-recurring income from operations over the past several years and the magnitude of recent taxable income compared to accumulated NOL carryforwards. As of March 31, 2014, the net deferred tax asset was $37.3 million and at December 31, 2013, the net deferred tax asset was $42.8 million, against which a full valuation allowance was maintained. The primary reason for the change in the net deferred tax asset (prior to any valuation allowance) was due to the change in unrealized losses on available for sale securities during the first quarter of 2014. Management will continue to conduct a regular assessment of the need to maintain a full valuation allowance against its deferred tax asset. To that end, management will continue to apply its judgment in weighing both positive and negative evidence in forming its conclusions regarding potential reversal of the net deferred tax asset valuation allowance.

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Total deposits increased $6.3 million to $1.4 billion at March 31, 2014, compared to December 31, 2013. Savings and checking deposits both increased and were only partially offset by the decline in certificates of deposit. As of March 31, 2014, Home Savings had no brokered deposits.

Advance payments by borrowers for taxes and insurance decreased $7.8 million during the first three months of 2014. Remittance of real estate taxes and property insurance made on behalf of customers of Home Savings accounted for $1.8 million of the decrease. In addition, funds held for payments received on loans sold where servicing was retained by Home Savings decreased $6.0 million.

Home Savings receives requests for reimbursements from both Freddie Mac and Fannie Mae to make them whole on loans sold to them in the secondary market. These loans were originated by Home Savings in the normal course, but such loans have certain defined weaknesses such that a settlement to the investor is required. For the three months ended March 31, 2014, Home Savings incurred expenses of $337,000 associated with such repurchases. Home Savings has included in other liabilities a reserve for future make-whole settlements aggregating $1.3 million at March 31, 2014. 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 $2.0 million to $7.8 million at March 31, 2014, from $9.8 million at December 31, 2013. The change was the result of the disbursement of funds associated with severance payments, incentive payments, legal and other consulting services, and the remittance of funds owed to the Small Business Administration after the sale of a collateral secured on a foreclosed loan.

Shareholders’ equity increased $14.8 million to $189.8 million at March 31, 2014, from $175.1 million at December 31, 2013. The change occurred as a result of net income for the quarter along with positive adjustments to other comprehensive income for the increased value of available for sale securities during the period.

Accumulated other comprehensive income improved $12.6 million from December 31, 2013 to March 31, 2014. Unrealized losses on U.S. Treasury and government sponsored entities and mortgage-backed securities included in other comprehensive income have not been recognized into income at March 31, 2014 and December 31, 2013 because the issuer’s securities are of high credit quality (rated AA or higher), management does not intend to sell (and it is likely that management will not be required to sell) the securities prior to their anticipated recovery, and the decline in fair value is largely due to the rise in longer-term interest rates in 2013 and 2014. The fair value is expected to recover as the investments approach maturity.

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

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

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

Book value per common share as of March 31, 2014 was $3.76 as compared to $3.48 per common share as of December 31, 2013. Book value per share is calculated as total common equity divided by the number of common shares outstanding. Book value was impacted by the overall change in equity as mentioned above.

Comparison of Operating Results for the Three Months Ended

March 31, 2014 and March 31, 2013

Net Income. United Community recognized net income for the three months ended March 31, 2014, of $2.1 million, or $0.04 per diluted common share compared to net income of $2.7 million, before amortization of the discount on preferred stock for the three months ended March 31, 2013. As part of the capital raise in 2013, United Community issued preferred stock that was later converted to common stock. No dividend was declared or paid on the preferred stock. However, because the preferred stock was issued at a price below the then market price of our common stock, the difference is deemed a non-cash dividend under U.S. Generally Accepted Accounting Principles and is deducted in the calculation of net income available to common shareholders. Therefore, net income available to common shareholders as of March 31, 2013 was $1.9 million, or $0.05 per diluted share. Net interest income for the period decreased $315,000. The provision for loan losses decreased $2.0 million during the same period. Additionally, non-interest income and noninterest expense decreased $2.5 million and $321,000, respectively. United Community’s annualized return on average assets and return on average equity were 0.48% and 4.52%, respectively, for the three months ended March 31, 2014. The annualized return on average assets and return on average equity for the comparable period in 2013 were 0.59% and 6.14%, respectively.

Net Interest Income. Net interest income for the three months ended March 31, 2014 and 2013 was $12.6 million and $12.9 million, respectively. Net interest margin for the three months ended March 31, 2014 and 2013 was 3.07% and 3.01%, respectively.

Total interest income decreased $731,000 in the first quarter of 2014 compared to the first quarter of 2013, primarily as a result of a decrease of $5.4 million in the average balance of outstanding loans as well as a decrease in the yield on net loans of 17 basis points. Further impacting the comparison, the Company also recognized a decrease in the average balance of available for sale securities of $86.2 million in the first quarter of 2014 as compared to the same quarter last year, despite an increase in the yield on those assets of 23 basis points.

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Total interest expense decreased $416,000 for the quarter ended March 31, 2014, as compared to the same quarter last year. The change was due primarily to reductions of $410,000 in interest paid on deposits. The overall decrease in interest expense was partially attributable to a 9.3% growth in noninterest bearing deposits. Also contributing to the decrease between the two quarterly periods was a reduction of 8 basis points in the cost of certificates of deposit. The average outstanding balance of certificates of deposit in the first quarter of 2014 declined by $69.0 million as compared to the first quarter of 2013. Furthermore, the average balance of non-time deposits decreased $10.6 million and the cost of non-time deposits decreased 5 basis points.

The following table shows the impact of interest rate and outstanding balance (volume) changes compared to the first quarter of last year. The interest rate spread for the three months ended March 31, 2014, increased to 2.92% compared to 2.85% for the quarter ended March 31, 2013. The net interest margin increased six basis points to 3.07% for the three months ended March 31, 2014 compared to 3.01% for the same quarter in 2013.

	For the Three Months Ended March 31,
	2014 vs. 2013
	Increase (decrease) due to						Total increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	(440	)	$	(65	)	$	(505	)
Loans held for sale		192			(232	)		(40	)
Investment securities:
Available for sale		486			(673	)		(187	)
FHLB stock		26			(42	)		(16	)
Other interest-earning assets		6			11			17
Total interest-earning assets	$	270		$	(1,001	)	$	(731	)
Interest-bearing liabilities:
Savings accounts		(43	)		1			(42	)
NOW and money market accounts		(54	)		(8	)		(62	)
Certificates of deposit		(99	)		(207	)		(306	)
Federal Home Loan Bank advances		(24	)		19			(5	)
Repurchase agreements and other		(1	)		—			(1	)
Total interest-bearing liabilities	$	(221	)	$	(195	)		(416	)
Change in net interest income							$	(315	)

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 $33,000 in the first quarter of 2014, compared to $2.1 million in the first quarter of 2013. The decrease in the provision for loan losses is primarily a result of chargeoffs of $560,000 previously reserved associated with one commercial lending relationship that was settled in the first quarter of 2013. In addition, a $382,000 specific reserve was established in 2013 on another commercial relationship to adjust the net book value to an anticipated resolution balance. In 2014, Home Savings individually analyzed a large portion of impaired mortgage and home equity loans. Many of these loans were deemed to have adequate collateral which allowed Home Savings to release reserves that had been set aside for potential future losses on select loans.

Noninterest Income. Noninterest income in the first quarter of 2014 was $3.2 million, as compared to noninterest income for the first quarter of 2013 of $5.7 million. The decrease in noninterest income was driven by decreases in investment advisory income, mortgage banking income, gains on the sale of available for sale securities and other income. The decrease in investment advisory income was the result of lower sales volume in the current quarter, as compared to the same quarter last year. A $50.5 million reduction in mortgage originations sold resulted in a $1.0 million decline in mortgage banking income. The change in gains recognized on the sale of available for sale securities was the result of sales made in the first quarter of 2013 that did not reoccur in the first quarter of 2014. The change in other income was the result of lower net rental income received on real estate owned in the current quarter, compared to the same quarter last year. Also, Home Savings recognized a recovery of $138,000 on interest rate caps in the first quarter of 2013.

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Noninterest Expense. Noninterest expense was $13.5 million in the first quarter of 2014, compared to $13.9 million in the first quarter of 2013; a difference of $321,000. In the first quarter of 2014, other expenses decreased primarily because of lower expenses incurred on loans sold in the secondary market. Reduced FDIC premiums of $301,000 and franchise/financial institutions tax expenses of $233,000 also contributed to the change. Reduced FDIC premiums are the result of the termination of all regulatory orders that the Bank had been operating under. The lower franchise/financial institutions tax is the result of a change on Ohio tax law. These reductions were offset by an increase of $707,000 in salaries and employee benefits, due primarily to annual wage and benefit increases, incentive accruals, and lower deferred salary expenses related to loan origination.

Income Taxes. A $156,000 income tax expense was recognized for the first quarter of 2014 as a result of incurring a tax liability for alternative minimum tax (AMT) being recognized. Whereas the Company was able to apply regular operating loss carryforwards to its taxable income, the deduction for net operating loss carryforwards for AMT is limited to 90% of AMT income. The remaining AMT tax liability is assessed at a rate of 20%.

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UNITED COMMUNITY FINANCIAL CORP.

AVERAGE BALANCE SHEETS

The following table presents the total dollar amounts of interest income and interest expense on the indicated amounts of average interest-earning assets or interest-bearing liabilities, together with the weighted average interest rates for the three month periods ended March 31, 2014 and 2013. Average balance calculations were based on daily balances.

	Three Months Ended March 31,
	2014							2013
	Average		Interest					Average		Interest
	Outstanding		Earned/		Yield/			Outstanding		Earned/		Yield/
	Balance		Paid		Cost			Balance		Paid		Cost
	(Dollars in thousands)
Interest-earning assets:
Net loans (1)	$	1,042,267	$	12,122		4.65	%	$	1,047,661	$	12,627		4.82	%
Net loans held for sale		4,453		49		4.40	%		12,372		89		2.88	%
Investment securities:
Available for sale		516,023		3,241		2.51	%		602,177		3,428		2.28	%
Federal Home Loan Bank stock		23,199		267		4.60	%		26,464		283		4.28	%
Other interest-earning assets		53,409		26		0.19	%		27,812		9		0.13	%
Total interest-earning assets		1,639,351		15,705		3.83	%		1,716,486		16,436		3.83	%
Noninterest-earning assets		105,400							104,256
Total assets	$	1,744,751						$	1,820,742
Interest-bearing liabilities:
NOW and money market accounts	$	464,083	$	230		0.20	%	$	477,041	$	292		0.24	%
Savings accounts		271,892		45		0.07	%		269,484		87		0.13	%
Certificates of deposit		477,523		1,402		1.17	%		546,521		1,708		1.25	%
Federal Home Loan Bank advances		50,000		518		4.14	%		65,567		523		3.19	%
Repurchase agreements and other		90,575		908		4.01	%		90,596		909		4.01	%
Total interest-bearing liabilities		1,354,073		3,103		0.92	%		1,449,209		3,519		0.97	%
Noninterest-bearing liabilities		205,202							196,760
Total liabilities		1,559,275							1,645,969
Equity		185,476							174,773
Total liabilities and equity	$	1,744,751						$	1,820,742
Net interest income and interest rate spread			$	12,602		2.91	%			$	12,917		2.86	%
Net interest margin						3.07	%						3.01	%
Average interest-earning assets to average interest-bearing liabilities						121.07	%						118.44	%

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

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.

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

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

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

Presented below are analyses of Home Savings’ interest rate risk as measured by changes in NPV and net interest income for instantaneous and sustained parallel shifts of 100 basis point increments in market interest rates. As noted, for the year ended December 31, 2013 and the quarter ended March 31, 2014, the percentage changes fall within the policy limits set by the Board of Directors of Home Savings as the minimum NPV ratio and the maximum change in interest income the Home Savings Board deems advisable in the event of various changes in interest rates. See the table below for Board adopted policy limits.

Three Months Ended March 31, 2014
NPV as % of portfolio value of assets													Next 12 months net interest income
													(Dollars in thousands)
Change in rates (Basis points)	NPV Ratio			Internal policy limitations			Change in %			Internal policy limitations on NPV Change			$ Change			Internal policy limitations			% Change
400		9.52	%		6.00	%		-2.06	%		30.00	%	$	2,698			-20.00	%		5.25	%
300		10.12	%		6.00	%		-1.46	%		25.00	%		1,752			-15.00	%		3.41	%
200		10.77	%		7.00	%		-0.81	%		20.00	%		797			-10.00	%		1.55	%
100		11.34	%		7.00	%		-0.24	%		15.00	%		(1	)		-5.00	%		—	%
Static		11.58	%		9.00	%		—	%		—	%		—			—	%		—	%

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Year Ended December 31, 2013
NPV as % of portfolio value of assets													Next 12 months net interest income
													(Dollars in thousands)
Change in rates (Basis points)	NPV Ratio			Internal policy limitations			Change in %			Internal policy limitations on NPV Change			$ Change		Internal policy limitations			% Change
400		9.27	%		6.00	%		-2.20	%		30.00	%	$	3,761		-20.00	%		7.70	%
300		9.85	%		6.00	%		-1.62	%		25.00	%		2,796		-15.00	%		5.72	%
200		10.52	%		7.00	%		-0.95	%		20.00	%		1,638		-10.00	%		3.35	%
100		11.11	%		7.00	%		-0.36	%		15.00	%		409		-5.00	%		0.84	%
Static		11.47	%		9.00	%		—	%		—	%		—		—	%		—	%

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

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

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

ITEM 4. Controls and Procedures.

An evaluation was carried out by United Community’s management, including the Chief Executive Officer and Principal Accounting Officer, of the effectiveness of United Community’s disclosure controls and procedures (as defined in Rules 13a-15(e)/15d-15(e) of the Securities Exchange Act of 1934) as of March 31, 2014. Based on their evaluation, the Chief Executive Officer and Principal Accounting Officer have concluded that United Community’s disclosure controls and procedures as of March 31, 2014, were effective in ensuring that information required to be disclosed in the reports that United Community files or submits under the Exchange Act (i) was recorded, processed, summarized and reported on a timely basis, and (ii) is accumulated and communicated to management, including United Community’s Chief Executive Officer and Principal Accounting Officer, to allow timely decisions regarding required disclosure. During the quarter ended March 31, 2014, there were no changes in United Community’s internal controls over financial reporting that have materially affected or are reasonably likely to materially affect United Community’s internal controls over financial reporting.

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PART II. OTHER INFORMATION

UNITED COMMUNITY FINANCIAL CORP.

ITEM 1. Legal Proceedings.

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

ITEM 1A. Risk Factors.

There have been no significant changes in United Community’s risk factors as outlined in United Community’s Form 10-K for the period ended December 31, 2013. The risk factors described in the Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that management currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results. Moreover, the Company undertakes no obligation and disclaims any intention to publish revised information or updates to forward-looking statements contained in such risk factors or in any other statement made at any time by the Company or any of its directors, officers, employees or other representatives, unless and until any such revisions or updates are expressly required to be disclosed by securities laws or regulations.

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

There were no purchases of United Community shares during the quarter ended March 31, 2014.

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
10.1	Executive Incentive Plan
10.2	Long-Term Incentive Plan
10.3	Consulting Agreement with Patrick W. Bevack
10.4	Employment Agreement with Gary M. Small
31.1	Section 302 Certification by Chief Executive Officer
31.2	Section 302 Certification by Chief Financial Officer
32	Certification of Statements by Chief Executive Officer and Chief Financial Officer
101	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) the Consolidated Statements of Changes in Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Consolidated Financial Statements.

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UNITED COMMUNITY FINANCIAL CORP.

SIGNATURES

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

	UNITED COMMUNITY FINANCIAL CORP.
Date: May 8, 2014	/S/ Gary M. Small
	Gary M. Small President and Chief Executive Officer
	(Principal Executive Officer)

Date: May 8, 2014	/S/ Timothy W. Esson
	Timothy W. Esson Principal Accounting Officer
	(Principal Financial Officer)

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UNITED COMMUNITY FINANCIAL CORP.

Exhibit 3.1

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

Exhibit 3.2

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

Exhibit 3.3

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

Exhibit 3.4

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

Exhibit 10.1

Incorporated by reference to the form 8-K filed by United Community on January 27, 2014 with the SEC, film number 14549383, Exhibit 10.1.

Exhibit 10.2

Incorporated by reference to the form 8-K filed by United Community on January 27, 2014 with the SEC, film number 14549383, Exhibit 10.2.

Exhibit 10.3

Incorporated by reference to the form 8-K filed by United Community on March 21, 2014 with the SEC, film number 14709682, Exhibit 10.1.

Exhibit 10.4

Incorporated by reference to the form 8-K filed by United Community on March 21, 2014 with the SEC, film number 14709682, Exhibit 10.2.

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