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.

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).

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 49,688,619 common shares as of October 31, 2014.

	September 30,			December 31,
	2014			2013
	(Dollars in thousands)
Assets:
Cash and deposits with banks	$	20,059		$	20,937
Federal funds sold		9,531			56,394
Total cash and cash equivalents		29,590			77,331
Securities:
Available for sale, at fair value		507,125			511,006
Loans held for sale		10,567			4,838
Loans, net of allowance for loan losses of $18,132 and $21,116		1,119,955			1,029,192
Federal Home Loan Bank stock, at cost		18,068			26,464
Premises and equipment, net		20,138			20,924
Accrued interest receivable		5,256			5,694
Real estate owned and other repossessed assets, net		4,487			6,341
Core deposit intangible		100			152
Cash surrender value of life insurance		46,048			44,972
Other assets		40,206			10,936
Total assets	$	1,801,540		$	1,737,850
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Interest bearing	$	1,164,745		$	1,221,162
Non-interest bearing		181,632			170,590
Total deposits		1,346,377			1,391,752
Borrowed funds:
Federal Home Loan Bank advances		138,000			50,000
Repurchase agreements and other		60,563			90,578
Total borrowed funds		198,563			140,578
Advance payments by borrowers for taxes and insurance		13,350			20,060
Accrued interest payable		380			550
Accrued expenses and other liabilities		9,164			9,836
Total liabilities		1,567,834			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 49,682,291 and 50,339,886 shares, respectively, outstanding		174,283			174,719
Retained earnings		126,229			81,515
Accumulated other comprehensive income (loss)		(26,310	)		(41,665	)
Treasury stock, at cost, 4,456,619 and 3,799,821 shares, respectively		(40,496	)		(39,495	)
Total shareholders’ equity		233,706			175,074
Total liabilities and shareholders’ equity	$	1,801,540		$	1,737,850

	For the Three Months Ended
	September 30,
	2014			2013
	(Dollars in thousands,
	except per share data)
Interest income
Loans	$	12,436		$	12,233
Loans held for sale		114			80
Securities available for sale		3,002			3,364
Federal Home Loan Bank stock dividends		180			280
Other interest earning assets		4			52
Total interest income		15,736			16,009
Interest expense
Deposits		1,548			1,847
Federal Home Loan Bank advances		537			529
Repurchase agreements and other		926			929
Total interest expense		3,011			3,305
Net interest income		12,725			12,704
Provision for loan losses		116			657
Net interest income after provision for loan losses		12,609			12,047
Non-interest income
Non-deposit investment income		408			275
Mortgage servicing fees		678			702
Deposit related fees		1,321			1,471
Mortgage servicing rights valuation		2			30
Mortgage servicing rights amortization		(435	)		(482	)
Other service fees		3			13
Net gains (losses):
Securities available for sale (includes $328 and $0, respectively, accumulated other comprehensive income reclassifications for unrealized net gains on available for sale securities)		328			—
Mortgage banking income		676			895
Real estate owned and other repossessed assets charges, net		(203	)		(395	)
Card fees		837			821
Other income		559			218
Total non-interest income		4,174			3,548
Non-interest expense
Salaries and employee benefits		7,001			7,379
Occupancy		874			811
Equipment and data processing		1,791			1,698
Franchise tax		198			385
Advertising		181			226
Amortization of core deposit intangible		17			20
FDIC insurance premiums		295			598
Other insurance premiums		138			174
Legal and consulting fees		184			368
Other professional fees		555			393
Debt prepayment penalty		1,396			—
Real estate owned and other repossessed asset expenses		189			354
Other expenses		1,433			1,122
Total non-interest expenses		14,252			13,528
Income before income taxes		2,531			2,067
Income tax (benefit) expense (includes $115 and $0 income tax expense from reclassification items)		(369	)		350
Net income		2,900			1,717
Amortization of discount on preferred stock		—			—
Earnings available to common shareholders	$	2,900		$	1,717

	For the Nine Months Ended
	September 30,
	2014			2013
	(Dollars in thousands,
	except per share data)
Interest income
Loans	$	36,919		$	37,067
Loans held for sale		237			247
Securities available for sale		9,368			10,176
Federal Home Loan Bank stock dividends		677			840
Other interest earning assets		51			102
Total interest income		47,252			48,432
Interest expense
Deposits		4,852			5,843
Federal Home Loan Bank advances		1,579			1,576
Repurchase agreements and other		2,753			2,756
Total interest expense		9,184			10,175
Net interest income		38,068			38,257
Provision for loan losses		(1,465	)		3,834
Net interest income after provision for loan losses		39,533			34,423
Non-interest income
Non-deposit investment income		1,156			1,189
Mortgage servicing fees		2,053			2,104
Deposit related fees		3,850			4,065
Mortgage servicing rights valuation		(4	)		676
Mortgage servicing rights amortization		(1,259	)		(1,712	)
Other service fees		3			74
Net gains (losses):
Securities available for sale (includes $362 and $2,578, respectively, accumulated other comprehensive income reclassifications for unrealized net gains on available for sale securities)		362			2,578
Mortgage banking income		1,600			3,927
Real estate owned and other repossessed assets charges, net		(628	)		(1,966	)
Card fees		2,461			2,734
Other income		1,242			1,956
Total non-interest income		10,836			15,625
Non-interest expense
Salaries and employee benefits		22,863			22,539
Occupancy		2,622			2,484
Equipment and data processing		5,552			5,240
Franchise tax		594			1,216
Advertising		617			646
Amortization of core deposit intangible		52			66
FDIC insurance premiums		875			1,755
Other insurance premiums		410			525
Legal and consulting fees		522			567
Other professional fees		1,564			1,476
Debt prepayment penalty		1,396			—
Real estate owned and other repossessed asset expenses		539			1,140
Other expenses		4,415			4,106
Total non-interest expenses		42,021			41,760
Income before income taxes		8,348			8,288
Income tax (benefit) expense (includes $127 and $0 income tax expense from reclassification items)		(39,050	)		500
Net income		47,398			7,788
Amortization of discount on preferred stock		—			(6,751	)
Earnings available to common shareholders	$	47,398		$	1,037

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
		2014			2013			2014		2013
	(Dollars in thousands, except per share data)
Net income	$	2,900		$	1,717		$	47,398	$	7,788
Other comprehensive income (loss)
Unrealized gains (losses) on securities, net of tax		(409	)		(2,121	)		15,355		(38,006	)
Total other comprehensive income (loss)	$	(409	)	$	(2,121	)	$	15,355	$	(38,006	)
Comprehensive income (loss)	$	2,491		$	(404	)	$	62,753	$	(30,218	)
Earnings per share
Basic	$	0.06		$	0.03		$	0.94	$	0.02
Diluted		0.06			0.03			0.94		0.02

																Accumulated
	Preferred			Common												Other
	Shares			Shares			Preferred			Common			Retained			Comprehensive			Treasury
	Outstanding			Outstanding			Stock			Stock			Earnings			Income (Loss)			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
Net income														47,398									47,398
Comprehensive income																	15,355						15,355
Stock option exercises					85,000									(700	)					873			173
Stock option expenses											19												19
Restricted stock grants					248,213						(958	)		(1,613	)					2,571			—
Restricted stock forfeitures					(54,611	)					147			133						(381	)		(101	)
Restricted stock amortization											356												356
Dividend payments														(504	)								(504	)
Treasury stock purchases					(935,400	)														(4,064	)		(4,064	)
Balance September 30, 2014		—			49,682,291		$	—		$	174,283		$	126,229		$	(26,310	)	$	(40,496	)	$	233,706
Balance December 31, 2012		—			33,027,886		$	—		$	128,026		$	86,345		$	6,682		$	(50,293	)	$	170,760
Net income														7,788									7,788
Comprehensive loss																	(38,006	)					(38,006	)
Stock option exercises					104,142									(1,051	)					1,206			155
Stock option expenses											15												15
Restricted stock awards					3,066						218			9						33			260
Issuance of common stock, net of issuance costs of $4,649					9,148,273						18,431			(5,880	)					7,958			20,509
Issuance of preferred stock		7,942						15,090			6,751												21,841
Amortization of preferred stock discount								6,751						(6,751	)								—
Conversion of preferred stock to common stock		(7,942	)		7,942,000			(21,841	)		21,841												—
Balance September 30, 2013		—			50,225,367		$	—		$	175,282		$	80,460		$	(31,324	)	$	(41,096	)	$	183,322

	Nine Months Ended September 30,
	2014			2013
	(Dollars in thousands)
Cash Flows from Operating Activities
Net income	$	47,398		$	7,788
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		(1,465	)		3,834
Mortgage banking income		(1,600	)		(3,927	)
Net losses on real estate owned and other repossessed assets sold		628			1,966
Net gain on available for sale securities sold		(362	)		(2,578	)
Net loss (gain) on other assets sold		7			(10	)
Amortization of premiums and accretion of discounts		662			2,394
Depreciation and amortization		1,484			1,406
Net change in interest receivable		438			1,038
Net change in interest payable		(170	)		29
Net change in prepaid and other assets		2,379			2,371
Net change in other liabilities		(451	)		(1,811	)
Stock based compensation		274			275
Net principal disbursed on loans originated for sale		(111,149	)		(188,167	)
Proceeds from sale of loans held for sale		107,020			202,231
Net change in deferred tax assets		(39,050	)		—
Cash surrender value of life insurance		(1,076	)		—
Net change in interest rate caps		278			(463	)
Net cash from operating activities		5,245			26,376
Cash Flows from Investing Activities
Proceeds from the principal repayments and maturities of securities available for sale		20,193			41,057
Proceeds from the sale of securities available for sale		5,470			97,127
Proceeds from the sale of real estate owned and other repossessed assets		2,742			8,627
Proceeds from the sale of loans held for investment		38			13,709
Proceeds from the sale of premises and equipment		30			20
Purchases of securities available for sale		—			(144,992	)
Purchase of bank-owned life insurance		—			(15,000	)
Principal disbursed on loans, net of repayments		(90,650	)		37,861
Loans purchased		—			(50	)
Redemption of FHLB stock		8,396			—
Purchases of premises and equipment		(710	)		(780	)
Net cash from investing activities		(54,491	)		37,579
Cash Flows from Financing Activities
Net increase in checking, savings and money market accounts		122			(2,332	)
Net decrease in certificates of deposit		(45,497	)		(49,132	)
Net decrease in advance payments by borrowers for taxes and insurance		(6,710	)		(11,464	)
Net change in overnight Federal Home Loan Bank advances		88,000			—
Net change in repurchase agreements and other borrowed funds		(30,015	)		(15	)
Proceeds from the exercise of stock options		173			155
Dividend payments		(504	)		—
Purchase of treasury stock		(4,064	)		—
Issuance of preferred stock, net of issuance costs		—			20,509
Issuance of common stock, net of issuance costs		—			21,841
Net cash from financing activities		1,505			(20,438	)
Change in cash and cash equivalents		(47,741	)		43,517
Cash and cash equivalents, beginning of period		77,331			42,613
Cash and cash equivalents, end of period	$	29,590		$	86,130

United Community Financial Corp. (United Community or the Company) was incorporated under Ohio law in February 1998 by The Home Savings and Loan Company of Youngstown, Ohio (Home Savings) in connection with the conversion of Home Savings from an Ohio mutual savings and loan association to an Ohio capital stock savings association (the Conversion). Upon consummation of the Conversion on July 8, 1998, United Community became the unitary thrift holding company for Home Savings. Home Savings, a state-chartered savings bank, conducts business from its main office located in Youngstown, Ohio, 32 full-service branches and nine loan production offices located throughout Ohio and western Pennsylvania.

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

The results of operations for the three and nine months ended September 30, 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.

United Community is a unitary thrift holding company regulated by the Board of Governors of the Federal Reserve System (FRB). On August 8, 2008, the board of directors of United Community approved a Stipulation and Consent to the Issuance of an Order with the Office of Thrift Supervision (OTS), the 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, as subsequently amended 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.

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.

In May 2014, FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2016. Early adoption is not permitted. Management is currently evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements.

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 5,443 stock options granted in 2014 and there were 12,317 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 $6,197 in stock option expenses for the three months ended September 30, 2014. The Company recognized $18,748 in stock option expenses for the nine months ended September 30, 2014. The Company recognized $5,344 in stock option expenses for the three months ended September 30, 2013. The Company recognized $14,814 in stock option expenses for the nine months ended September 30, 2013. The Company expects to recognize additional expense of $5,729 for the remainder of 2014, $17,661 in 2015 and $1,406 in 2016.

Information related to the stock option plans for the nine months ended September 30, 2014 follows:

As of September 30, 2014, the cost of nonvested stockoptions is expected to be recognized over a weighted-average period of 2.0 years.

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

Outstanding stock options have a weighted average remaining life of 5.22 years and may be exercised in the range of $1.20 to $5.89.

The 2007 Plan permits the issuance of restricted stock awards to employees and nonemployee directors. Nonvested shares at September 30, 2014 aggregated 333,588, of which 113,801 will vest during 2014, 93,958 will vest in 2015, 60,615 will vest in 2016 and 65,214 will vest in 2017. Expenses related to restricted stock awards are charged to salaries and employee benefits and are recognized over the vesting period of the awards based on the market value of the shares at the grant date. The Company recognized approximately $120,000 in restricted stock award expenses for the three months ended September 30, 2014. The Company recognized approximately $356,000 in restricted stock award expenses for the nine months ended September 30, 2014. The Company recognized approximately $68,000 in restricted stock award expenses for the three months ended September 30, 2013 and approximately $260,000 in restricted stock award expenses for the nine months ended September 30, 2013. The Company expects to recognize additional expenses of approximately $117,000 in 2014, $379,000 in 2015, $299,000 in 2016 and $86,000 in 2017.

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

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

Securities pledged for participation in the Ohio Linked Deposit Program were approximately $398,000 at September 30, 2014 and $382,000 at December 31, 2013.

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:

All of the U.S. Treasury and government sponsored entities (GSE) and mortgage-backed securities that were temporarily impaired at September 30, 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 September 30, 2014 and December 31, 2013 because the issuer’s securities are of high credit quality (rated AA or higher), it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. From April 30, 2013 to December 31, 2013, the 10-year treasury yield rose from 1.70% to 3.04% which caused the securities portfolio to lose value. Since December 31, 2013, the 10-year treasury yield has fallen to 2.52% resulting in an increase in the value of the portfolio. The duration of the securities portfolio was approximately 6.3 years at September 30, 2014. There is risk that longer term rates could rise further resulting in greater unrealized losses. 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. The Company expects to realize all interest and principal on these securities and has no intent ot sell and more than lilely will not be required to sell these securities until maturity.

At September 30, 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 September 30, 2014 and December 31, 2013. The Company expects to realize all interest and principal on these securities.

Proceeds from sales of equity securities available for sale were $470,000 and $0 for the three months ended September 30, 2014 and 2013, respectively. Gross gains of $328,000 and $0 were realized on these sales during the third quarter of 2014 and 2013, respectively.

Proceeds from sales of equity and other securities available for sale were $5.5 million and $97.1 million for the nine months ended September 30, 2014 and 2013, respectively. Gross gains of $362,000 and $2.6 million were realized on these sales during the first nine months of 2014 and 2013, respectively.

	September 30,		December 31,
	2014		2013
	(Dollars in thousands)
Real Estate:
One-to four-family residential	$	669,270	$	585,025
Multi-family residential		56,445		54,485
Nonresidential		123,260		131,251
Land		9,487		9,683
Construction:
One-to four-family residential and land development		52,735		53,349
Multi-family and nonresidential		4,667		—
Total real estate		915,864		833,793
Consumer:
Home equity		154,936		159,795
Auto		5,300		5,669
Marine		4,003		4,308
Recreational vehicles		15,249		17,347
Other		1,986		2,112
Total consumer		181,474		189,231
Commercial:
Secured		39,685		25,714
Unsecured		168		427
Total commercial		39,853		26,141
Total loans		1,137,191		1,049,165
Less:
Allowance for loan losses		18,132		21,116
Deferred loan costs, net		(896)		(1,143	)
Total		17,236		19,973
Loans, net	$	1,119,955	$	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, but can be extended up to 36 months. Commitments generally have fixed expiration dates or other termination clauses, may require payment of a fee and may expire unused. Commitments to extend credit at fixed rates expose Home Savings to some degree of interest rate risk. Home Savings evaluates each customer’s creditworthiness on a case-by-case basis. The type or amount of collateral obtained varies and is based on management’s credit evaluation of the potential borrower. Home Savings normally has a number of outstanding commitments to extend credit.

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and are based on impairment method as of September 30, 2014 and December 31, 2013 and activity for the three and nine months ended September 30, 2014 and 2013.

	Permanent Real Estate Loans			Construction Loans			Consumer Loans			Commercial Loans			Total
For the three months ended September 30, 2014
Beginning balance (06/30/14)	$	12,353		$	1,164		$	3,790		$	957		$	18,264
Provision (recovery)		409			(143	)		(41	)		(109	)		116
Chargeoffs		(338	)		(100	)		(229	)		—			(667	)
Recoveries		51			10			200			158			419
Ending balance (09/30/14)	$	12,475		$	931		$	3,720		$	1,006		$	18,132
For the nine months ended September 30, 2014
Beginning balance (12/31/13)	$	13,794		$	2,281		$	4,302		$	739		$	21,116
Provision (recovery)		(352)			(851)			(16)			(246)			(1,465)
Chargeoffs		(1,365)			(530)			(1,083)			(45)			(3,023)
Recoveries		398			31			517			558			1,504
Ending balance (09/30/14)	$	12,475		$	931		$	3,720		$	1,006		$	18,132
September 30, 2014
Period-end amount allocated to:
Loans individually evaluated for impairment	$	2,368		$	203		$	1,058		$	3		$	3,632
Loans collectively evaluated for impairment		10,107			728			2,662			1,003			14,500
Ending balance	$	12,475		$	931		$	3,720		$	1,006		$	18,132
Period-end balances:
Loans individually evaluated for impairment	$	27,871		$	2,453		$	12,926		$	4,029		$	47,279
Loans collectively evaluated for impairment		830,591			54,949			168,548			35,824			1,089,912
Ending balance	$	858,462		$	57,402		$	181,474		$	39,853		$	1,137,191

	Permanent Real Estate Loans			Construction Loans			Consumer Loans			Commercial Loans			Total
For the three months ended September 30, 2013
Beginning balance (06/31/13)	$	12,129		$	1,803		$	4,202		$	903		$	19,037
Provision		2,286			(1,800	)		394			(223	)		657
Chargeoffs		(651	)		(37	)		(400	)		(16	)		(1,104	)
Recoveries		92			1,913			257			180			2,442
Ending balance (09/30/13)	$	13,856		$	1,879		$	4,453		$	844		$	21,032
For the nine months ended September 30, 2013
Beginning balance (12/31/12)	$	13,819		$	1,404		$	4,459		$	1,448		$	21,130
Provision		5,064			(1,354	)		967			(843	)		3,834
Chargeoffs		(5,794	)		(402	)		(1,514	)		(144	)		(7,854	)
Recoveries		767			2,231			541			383			3,922
Ending balance (09/30/13)	$	13,856		$	1,879		$	4,453		$	844		$	21,032
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.

The following table presents loans individually evaluated for impairment by class of loans as of and for the nine months ended September 30, 2014:

	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	$	7,592	$	6,177	$	—	$	6,985	$	43	$	147
Multifamily residential		185		86		—		207		—		—
Nonresidential		5,408		3,804		—		4,180		—		23
Land		3,958		532		—		510		—		—
Total		17,143		10,599		—		11,882		43		170
Construction loans
One-to four-family residential		1,741		639		—		711		—		—
Multifamily and nonresidential		—		—		—		—		—		—
Total		1,741		639		—		711		—		—
Consumer loans
Home Equity		2,622		2,015		—		2,893		8		53
Auto		105		96		—		73		1		5
Marine		154		154		—		157		—		5
Recreational vehicle		365		252		—		257		4		8
Other		5		5		—		4		—		—
Total		3,251		2,522		—		3,384		13		71
Commercial loans
Secured		3,929		3,704		—		3,792		—		2
Unsecured		3,651		—		—		—		—		57
Total		7,580		3,704		—		3,792		—		59
Total	$	29,715	$	17,464	$	—	$	19,769	$	56	$	300

	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	$	13,980	$	13,980	$	2,113	$	13,590	$	284	$	285
Multifamily residential		54		29		6		312		—		—
Nonresidential		3,729		3,264		249		1,660		51		56
Land		—		—		—		—		—		—
Total		17,763		17,273		2,368		15,562		335		341
Construction loans
One-to four-family residential		3,436		1,814		203		2,033		—		—
Multifamily and nonresidential		—		—		—		—		—		—
Total		3,436		1,814		203		2,033		—		—
Consumer loans
Home Equity		9,654		9,654		917		9,300		241		243
Auto		7		7		—		6		—		—
Marine		—		—		—		—		—		—
Recreational vehicle		743		743		141		747		11		11
Other		—		—		—		—		—		—
Total		10,404		10,404		1,058		10,053		252		254
Commercial loans
Secured		324		324		3		243		—		—
Unsecured		—		—		—		—		—		—
Total		324		324		3		243		—		—
Total	$	31,927	$	29,815	$	3,632	$	27,891	$	587	$	595
Total	$	61,642	$	47,279	$	3,632	$	47,660	$	643	$	895

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

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With no specific allowance recorded Permanent real estate
One-to four-family residential	$	14,867	$	12,469	$	—	$	16,088	$	333	$	385
Multifamily residential		737		643		—		766		2		9
Nonresidential		6,380		5,227		—		7,209		12		44
Land		3,913		487		—		2,120		—		—
Total		25,717		18,826		—		26,183		347		438
Construction loans
One-to four-family residential		1,501		1,092		—		2,070		—		2
Multifamily and nonresidential		—		—		—		—		—		—
Total		1,501		1,092		—		2,070		—		2
Consumer loans
Home Equity		9,073		8,511		—		8,942		300		328
Auto		50		33		—		40		1		3
Marine		162		162		—		182		—		7
Recreational vehicle		270		245		—		737		9		12
Other		—		—		—		2		—		—
Total		9,555		8,951		—		9,903		310		350
Commercial loans
Secured		4,701		4,328		—		2,798		—		41
Unsecured		4,197		—		—		188		1		56
Total		8,898		4,328		—		2,986		1		97
Total	$	45,671	$	33,197	$	—	$	41,142	$	658	$	887

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With a specific allowance recorded Permanent real estate
One-to four-family residential	$	6,670	$	6,665	$	1,092	$	2,036	$	192	$	193
Multifamily residential		185		85		25		554		—		—
Nonresidential		950		683		105		4,869		—		8
Land		—		—		—		1,064		—		—
Total		7,805		7,433		1,222		8,523		192		201
Construction loans
One-to four-family residential		3,829		2,241		677		2,984		—		—
Multifamily and nonresidential		—		—		—		—		—		—
Total		3,829		2,241		677		2,984		—		—
Consumer loans
Home Equity		2,728		2,728		365		683		69		72
Auto		—		—		—		—		—		—
Marine		—		—		—		—		—		—
Recreational vehicle		756		728		159		182		14		14
Other		—		—		—		—		—		—
Total		3,484		3,456		524		865		83		86
Commercial loans
Secured		—		—		—		208		—		—
Unsecured		—		—		—		—		—		—
Total		—		—		—		208		—		—
Total	$	15,118	$	13,130	$	2,423	$	12,580	$	275	$	287
Total	$	60,789	$	46,327	$	2,423	$	53,722	$	933	$	1,174

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

	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	$	—

	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

The following tables present loans individually evaluated for impairment by class of loans as of and for the three months ended September 30, 2014:

	Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With no specific allowance recorded Permanent real estate
One-to four-family residential	$	5,226	$	19	$	50
Multifamily residential		88		—		—
Nonresidential		3,802		4		11
Land		510		—		—
Total		9,626		23		61
Construction loans
One-to four-family residential		690		—		—
Multifamily and nonresidential		—		—		—
Total		690		—		—
Consumer loans
Home Equity		1,875		19		22
Auto		65		—		1
Marine		157		—		2
Recreational vehicle		195		1		4
Other		4		—		—
Total		2,296		20		29
Commercial loans
Secured		3,710		—		1
Unsecured		—		—		22
Total		3,710		—		23
Total	$	16,322	$	43	$	113

	Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With a specific allowance recorded Permanent real estate
One-to four-family residential	$	15,742	$	137	$	137
Multifamily residential		567		—		—
Nonresidential		1,404		—		3
Land		—		—		—
Total		17,713		137		140
Construction loans
One-to four-family residential		2,026		—		—
Multifamily and nonresidential		—		—		—
Total		2,026		—		—
Consumer loans
Home Equity		10,399		123		121
Auto		9		—		—
Marine		—		—		—
Recreational vehicle		794		6		6
Other		—		—		—
Total		11,202		129		127
Commercial loans
Secured		324		—		—
Unsecured		—		—		—
Total		324		—		—
Total	$	31,265	$	266	$	267
Total	$	47,587	$	309	$	380

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

	Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With no specific allowance recorded Permanent real estate
One-to four-family residential	$	14,977	$	128	$	165
Multifamily residential		652		—		4
Nonresidential		5,270		2		20
Land		487		—		—
Total		21,386		130		189
Construction loans
One-to four-family residential		1,587		—		—
Multifamily and nonresidential		—		—		—
Total		1,587		—		—
Consumer loans
Home Equity		9,467		109		116
Auto		39		—		1
Marine		174		—		2
Recreational vehicle		677		4		6
Other		—		—		—
Total		10,357		113		125
Commercial loans
Secured		4,420		—		8
Unsecured		1		—		28
Total		4,421		—		36
Total	$	37,751	$	243	$	350

	Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With a specific allowance recorded Permanent real estate
One-to four-family residential	$	3,338	$	98	$	98
Multifamily residential		85		—		—
Nonresidential		1,339		—		1
Land		—		—		—
Total		4,762		98		99
Construction loans
One-to four-family residential		2,279		—		—
Multifamily and nonresidential		—		—		—
Total		2,279		—		—
Consumer loans
Home Equity		1,364		38		38
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		364		5		5
Other		—		—		—
Total		1,728		43		43
Commercial loans
Secured		102		—		—
Unsecured		—		—		—
Total		102		—		—
Total	$	8,871	$	141	$	142
Total	$	46,622	$	384	$	492

The following table presents the recorded investment in nonaccrual and loans past due over 90 days and still on accrual by class of loans as of September 30, 2014:

	Nonaccrual		Loans past due over 90 days and still accruing
Real Estate Loans
Permanent
One-to four-family residential	$	4,700	$	—
Multifamily residential		114		—
Nonresidential		6,804		—
Land		531		—
Total		12,149		—
Construction Loans
One-to four-family residential		2,453		—
Multifamily and nonresidential		—		—
Total		2,453		—
Consumer Loans
Home Equity		1,574		—
Auto		84		—
Marine		123		—
Recreational vehicle		175		—
Other		4		—
Total		1,960		—
Commercial Loans
Secured		4,019		—
Unsecured		125		—
Total		4,144		—
Total	$	20,706	$	—

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 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

The following table presents an age analysis of past-due loans, segregated by class of loans as of September 30, 2014:

	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current Loans		Total Loans
Real Estate Loans
Permanent
One-to four-family residential	$	2,021	$	873	$	2,873	$	5,767	$	663,503	$	669,270
Multifamily residential		233		—		114		347		56,098		56,445
Nonresidential		—		—		6,773		6,773		116,487		123,260
Land		—		—		530		530		8,957		9,487
Total		2,254		873		10,290		13,417		845,045		858,462
Construction Loans
One-to four-family residential		—		—		2,453		2,453		50,282		52,735
Multifamily and nonresidential		—		—		—		—		4,667		4,667
Total		—		—		2,453		2,453		54,949		57,402
Consumer Loans
Home Equity		463		544		1,181		2,188		152,748		154,936
Auto		7		6		27		40		5,260		5,300
Marine		—		381		—		381		3,622		4,003
Recreational vehicle		606		221		19		846		14,403		15,249
Other		3		6		—		9		1,977		1,986
Total		1,079		1,158		1,227		3,464		178,010		181,474
Commercial Loans
Secured		—		—		4,019		4,019		35,666		39,685
Unsecured		—		—		125		125		43		168
Total		—		—		4,144		4,144		35,709		39,853
Total	$	3,333	$	2,031	$	18,114	$	23,478	$	1,113,713	$	1,137,191

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

	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

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended September 30, 2014:

	Number of loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Recorded Investment
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family		6	$	643	$	645
Multifamily residential		—		—		—
Nonresidential		—		—		—
Land		—		—		—
Total		6		643		45
Construction Loans
One-to four-family residential		—		—		—
Multifamily and nonresidential		—		—		—
Total		—		—		—
Consumer Loans
Home Equity		7		394		405
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—
Total		7		394		405
Commercial Loans
Secured		—		—		—
Unsecured		—		—		—
Total		—		—		—
Total Restructured Loans		13	$	1,037	$	1,050

The troubled debt restructurings described above increased the allowance for loan losses by $59,000 and resulted in charge-offs of $70,000 during the three months ended September 30, 2014.

The following table presents loans by class modified as troubled debt restructurings that occurred during the nine months ended September 30, 2014:

	Number of loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Recorded Investment
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family		26	$	2,134	$	2,190
Multifamily residential		—		—		—
Nonresidential		1		120		120
Land		—		—		—
Total		27		2,254		2,310
Construction Loans
One-to four-family residential		—		—		—
Multifamily and nonresidential		—		—		—
Total		—		—		—
Consumer Loans
Home Equity		26		1,411		1,414
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—
Total		26		1,411		1,414
Commercial Loans
Secured		—		—		—
Unsecured		—		—		—
Total		—		—		—
Total Restructured Loans		53	$	3,665	$	3,724

The troubled debt restructurings described above increased the allowance for loan losses by $175,000 and resulted in charge-offs of $73,000 during the nine months ended September 30, 2014.

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

	Number of loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Recorded Investment
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family		14	$	1,316	$	1,363
Multifamily residential		—		—		—
Nonresidential		—		—		—
Land		—		—		—
Total		14		1,316		1,363
Construction Loans
One-to four-family residential		—		—		—
Multifamily and nonresidential		—		—		—
Total		—		—		—
Consumer Loans
Home Equity		31		1,437		1,349
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—
Total		31		1,437		1,349
Commercial Loans
Secured		—		—		—
Unsecured		—		—		—
Total		—		—		—
Total Restructured Loans		45	$	2,753	$	2,712

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

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

	Number of loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Recorded Investment
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family		36	$	3,158	$	2,969
Multifamily residential		1		469		469
Nonresidential		1		41		41
Land		2		2,127		487
Total		40		5,795		3,966
Construction Loans
One-to four-family residential		1		942		823
Multifamily and nonresidential		—		—		—
Total		1		942		823
Consumer Loans
Home Equity		94		3,963		3,886
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		4		791		804
Other		—		—		—
Total		98		4,754		4,690
Commercial Loans
Secured		—		—		—
Unsecured		—		—		—
Total		—		—		—
Total Restructured Loans		139	$	11,491	$	9,479

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

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within a twelve month cycle following the modification as September 30, 2014:

	Number of loans		Recorded Investment
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family		1	$	145
Multifamily residential		—		—
Nonresidential		—		—
Land		—		—
Total		1		145
Construction Loans
One-to four-family residential		—		—
Multifamily and nonresidential		—		—
Total		—		—
Consumer Loans
Home Equity		2		127
Auto		—		—
Marine		—		—
Recreational vehicle		—		—
Other		—		—
Total		2		127
Commercial Loans
Secured		—		—
Unsecured		—		—
Total		—		—
Total Restructured Loans		3	$	272

The troubled debt restructurings that subsequently defaulted described above resulted in no charge-offs during the three or nine months ended September 30, 2014, and had no effect on the provision for loan losses.

	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.

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.

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

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

Special Mention. Loans classified as special mention have potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

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

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

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

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

As of September 30, 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:

	Unclassified				Classified
	Unclassified		Special Mention		Substandard		Doubtful		Loss		Total Classified		Total Loans
Real Estate Loans
Permanent
One-to four-family residential	$	661,994	$	1,492	$	5,784	$	—	$	—	$	5,784	$	669,270
Multifamily residential		49,294		4,167		2,984		—		—		2,984		56,445
Nonresidential		94,968		9,479		18,813		—		—		18,813		123,260
Land		8,955		—		532		—		—		532		9,487
Total		815,211		15,138		28,113		—		—		28,113		858,462
Construction Loans
One-to four-family residential		50,285		—		2,450		—		—		2,450		52,735
Multifamily and nonresidential		4,667		—		—		—		—		—		4,667
Total		54,952		—		2,450		—		—		2,450		57,402
Consumer Loans
Home Equity		153,068		—		1,868		—		—		1,868		154,936
Auto		5,217		—		83		—		—		83		5,300
Marine		3,839		11		153		—		—		153		4,003
Recreational vehicle		15,051		—		198		—		—		198		15,249
Other		1,981		—		5		—		—		5		1,986
Total		179,156		11		2,307		—		—		2,307		181,474
Commercial Loans
Secured		32,671		920		6,094		—		—		6,094		39,685
Unsecured		54		—		114		—		—		114		168
Total		32,725		920		6,208		—		—		6,208		39,853
Total	$	1,082,044	$	16,069	$	39,078	$	—	$	—	$	39,078	$	1,137,191

	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		156,795		46		2,954		—		—		2,954		159,795
Auto		5,548		5		116		—		—		116		5,669
Marine		4,148		—		160		—		—		160		4,308
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

Mortgage loans serviced for others, which are not reported in United Community’s assets, totaled $1.1 billion as of September 30, 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:

Escrow balances are maintained at the Federal Home Loan Bank (FHLB) in connection with serviced loans totaling $1.3 and $1.1 million at September 30, 2014 and December 31, 2013, respectively.

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

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

The fair value of mortgage servicing rights as of September 30, 2014, was approximately $9.8 million and at December 31, 2013, the fair value was approximately $9.9 million.

Key economic assumptions in measuring the value of mortgage servicing rights at September 30, 2014, and December 31, 2013, were as follows:

Real estate owned and other repossessed assets at September 30, 2014 and September 30, 2013 were as follows:

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

			Fair Value Measurements at 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:
Available for sale securities
U.S. 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		—

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2014 and 2013:

The following table presents quantitative information about recurring Level 3 fair value measurements at September 30, 2014:

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

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

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

			Fair Value Measurements at September 30, 2014 Using:
	September 30, 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	$	2,751	$	—	$	—	$	2,751
Construction loans		1,899		—		—		1,899
Consumer loans		249		—		—		249
Mortgage servicing assets		228		—		228		—
Other real estate owned, net:
Permanent real estate		1,073		—		—		1,073
Construction		1,698		—		—		1,698

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 $4.9 million at September 30, 2014, that includes a specific valuation allowance of $450,000. This resulted in a increase of the provision for loan losses of $21,000 during the three months ended September 30, 2014 and an increase in the provision for loan losses of $460,000 during the nine months ended September 30, 2014. Impaired loans with specific allocations of the allowance for loan losses, carried at fair value, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a net carrying amount of $2.2 million at September 30, 2013, which includes a specific valuation allowance of $808,000. This resulted in an increase in the provision for loan losses of $307,000 during the three months ended September 30, 2013 and an increase in the provision for loan losses of $2.6 million during the nine months ended September 30, 2013. Impaired loans with specific allocations of the allowance for loan losses, carried at fair value, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a net carrying amount of $4.1 million at December 31, 2013, that includes a specific valuation allowance of $792,000.

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

At September 30, 2014, mortgage servicing rights carried at fair value were $228,000, resulting in a net valuation allowance of $2,000 for the nine months ended September 30, 2014. At September 30, 2013, mortgage servicing rights, carried at fair value, totaled $387,000, which is made up of the outstanding balance of $391,000, net of a valuation allowance of $4,000. At December 31, 2013, mortgage servicing rights carried at fair value of $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.

At September 30, 2014, other real estate owned, carried at fair value, which is measured for impairment using the fair value of the property less estimated selling costs and had a gross carrying amount of $6.3 million, with a valuation allowance of $3.5 million. This resulted in additional expenses of $140,000 during the three months ended September 30, 2014 and additional expenses of $578,000 during the nine months ended September 30, 2014. At September 30, 2013, other real estate owned, carried at fair value, which is measured for impairment using the fair value of the property less estimated selling costs, and had a net carrying amount of $6.4 million with a valuation allowance of $6.7 million. This resulted in additional expenses of $464,000 during the three months ended September 30, 2013 and additional expenses of $1.8 million during the nine months ended September 30, 2013. At December 31, 2013, other real estate owned had a net carrying amount of $4.2 million, with a valuation allowance of $4.1 million.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at September 30, 2014:

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:

In accordance with U.S. GAAP, the carrying value and estimated fair values of financial instruments at September 30, 2014 and December 31, 2013, were as follows:

				Fair Value Measurements at September 30, 2014 Using:
	September 30, 2014 Carrying Value			(Level 1)			(Level 2)			(Level 3)
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	29,590		$	29,590		$	—		$	—
Available for sale securities		507,125			—			507,125			—
Loans held for sale		10,567			—			10,873			—
Loans, net		1,119,955			—			—			1,131,377
FHLB stock		18,068			n/a			n/a			n/a
Accrued interest receivable		5,256			—			1,941			3,315
Interest rate caps		268			—			—			268
Purchased certificate of deposit option		557			—			557			—
Liabilities:
Deposits:
Checking, savings and money market accounts		(899,603	)		(899,603	)		—			—
Certificates of deposit		(446,774	)		—			(452,727	)		—
FHLB advances		(138,000	)		—			(141,993	)		—
Repurchase agreements and other		(60,563	)		—			(64,335	)		—
Advance payments by borrowers for taxes and insurance		(13,350	)		(13,350	)		—			—
Accrued interest payable		(380	)		—			(380	)		—
Written certificate of deposit option		(557	)		—			(557	)		—

				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:

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

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

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.

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.

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.

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.

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.

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.

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 75,008 shares were anti-dilutive for the three months ended September 30, 2014 and stock options for 685,272 shares were anti-dilutive for the three months ended September 30, 2013. Stock options for 78,220 shares were anti-dilutive for the nine months ended September 30, 2014 and stock options for 681,962 shares were anti-dilutive for the nine months ended September 30, 2013.

	Three months ended September 30, 2014			Three months ended September 30, 2013
	(Dollars in thousands, except per share data)
Net income per consolidated statements of income	$	2,900		$	1,717
Net income allocated to participating securities		(19	)		(4	)
Net income allocated to common stock	$	2,881		$	1,713
Basic earnings per common share computation:
Distributed earnings allocated to common stock	$	500		$	—
Undistributed earnings allocated to common stock		2,381			1,713
Net income allocated to common stock	$	2,881		$	1,713
Weighted average common shares outstanding, including shares considered participating securities		50,031			50,219
Less: Average participating securities		(333	)		(109	)
Weighted average shares		49,698			50,110
Basic earnings per common share	$	0.06		$	0.03
Diluted earnings per common share computation:
Net income allocated to common stock	$	2,881		$	1,713
Weighted average common shares outstanding for basic earnings per common share		49,698			50,110
Add: Dilutive effects of assumed exercises of stock options		260			272
Weighted average shares and dilutive potential common shares		49,958			50,382
Diluted earnings per common share	$	0.06		$	0.03

	Nine months ended September 30, 2014			Nine months ended September 30, 2013
	(Dollars in thousands, except per share data)
Net income per consolidated statements of income	$	47,398		$	7,788
Net income allocated to participating securities		(247	)		(22	)
Amortization of discount on preferred stock		—			(6,751	)
Net income allocated to common stock	$	47,151		$	1,015
Basic earnings per common share computation:
Distributed earnings allocated to common stock	$	500		$	—
Undistributed earnings allocated to common stock		46,651			1,015
Net income allocated to common stock	$	47,151		$	1,015
Weighted average common shares outstanding, including shares considered participating securities		50,329			42,455
Less: Average participating securities		(263	)		(118	)
Weighted average shares		50,066			42,337
Basic earnings per common share	$	0.94		$	0.02
Diluted earnings per common share computation:
Net income allocated to common stock	$	47,151		$	1,015
Weighted average common shares outstanding for basic earnings per common share		50,066			42,337
Add: Dilutive effects of assumed exercises of stock options		234			275
Weighted average shares and dilutive potential common shares		50,300			42,612
Diluted earnings per common share	$	0.94		$	0.02

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:

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 of 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.

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 $328,000 reclassification of gains on sales of securities and no impairment charges for the three months ended September 30, 2014, and no gains on sales of securities and no impairment charges for the three months ended September 30, 2013. The change includes $362,000 reclassification of gains on sales of securities and no impairment charges for the nine months ended September 30, 2014, and gains on sales of securities of $2.6 million and no impairment charges for the nine months ended September 30, 2013.

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

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

As of June 30, 2014, management concluded it was more likely than not that the Company’s net deferred tax asset (DTA) would be realized and accordingly determined a full deferred tax valuation allowance was no longer required. Upon reversal of the former full deferred tax valuation allowance as of September 30, 2014, certain disproportionate tax effects are retained in accumulated other comprehensive income (loss) totaling approximately a ($16.6) million loss. Almost the entire disproportionate tax effect is attributable to valuation allowance expense recorded through other comprehensive income (loss) on the tax benefit of losses sustained on the available for sale securities portfolio while the Company was in a full deferred tax valuation allowance. This valuation allowance was appropriately reversed through continuing operations at June 30, 2014, leaving the original expense in accumulated other comprehensive income (loss), where it will remain in accordance with the Company’s election of the “portfolio approach”, until such time as the Company would cease to have an available for sale security portfolio.

The following is a summary of each component of accumulated other comprehensive income (loss) that was reclassified into net income during the three and nine months ended September 30, 2014, net of tax:

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

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

The following is significant amounts reclassified out of each component of accumulated comprehensive income (loss) for the three months ended September 30, 2013:

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

The following is significant amounts reclassified out of each component of accumulated comprehensive income (loss) for the nine months ended September 30, 2013:

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.

As of September 30, 2014 and December 31, 2013, Home Savings was considered well capitalized.

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

	September 30, 2014			December 31, 2013
	(Dollars in thousands)
Deferred tax assets:
Loan loss reserves	$	6,346		$	7,391
Postretirement benefits		1,090			1,162
Other real estate owned valuation		1,227			1,421
Tax credits carryforward		576			339
Securities impairment charges		—			153
Unrealized loss on securities available for sale		5,869			14,138
Interest on nonaccrual loans		897			758
Net operating loss carryforward		22,827			26,708
Purchase accounting adjustment		79			70
Accrued bonuses		278			456
Other		697			295
Less: Valuation allowance		(1,146	)		(42,802	)
Deferred tax assets		38,740			10,089

Deferred tax liabilities:
Deferred loan fees		321			405
Federal Home Loan Bank stock dividends		4,585			6,715
Mortgage servicing rights		1,984			2,079
Postretirement benefits accrual		640			640
Prepaid expenses		181			250
Deferred tax liabilities		7,711			10,089
Net deferred tax asset	$	31,029		$	—

As of September 30, 2014, the net deferred tax asset (DTA) was $31.0 million, and as of December 31, 2013, the net DTA (prior to any valuation allowance) was $42.8 million. Management recorded a valuation allowance against the net deferred tax assets at 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.

The remaining $1.1 million of valuation allowance is expected to reverse due to operating income projected for the remainder of 2014. The realization of a DTA is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the DTA will not be realized. “More likely than not” is defined as the DTA being more than 50% likely of being realized. All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance against the net DTA is required. In assessing the need for a valuation allowance, the Company considered all available evidence about the realization of the DTA both positive and negative, that could be objectively verified.

Positive evidence considered included (1) the Company’s recent history of quarterly pre-tax earnings (with the most recent quarterly loss being recorded for the quarter ended September 30, 2012), (2) expectations for sustained and continued profitability with sufficient taxable income to fully utilize the remaining net deferred tax benefits (3) significant reductions in the level of non-performing assets since their peak, which was the primary source of the losses generated in prior periods (4) resolution to an executive search placed on a key management position (5) evaluation of core earnings (6) adequacy of capital to fund balance sheet and future growth and (7) cost-saving initiatives triggered during 2014.

Negative evidence considered was (1) the uncertainty about the potential impact on future earnings from nonperforming assets along with (2) former pre-tax losses reported by the Company. As the number of consecutive periods of profitability increased and the level of profits are indicative of on-going results, the weight of cumulative losses as negative evidence decreased. A reduction in the weight given to such losses is further validated given that the source of the losses was due to an elevated level of problem assets and related credit costs, which have since been significantly reduced due to the bulk asset sale in 2012 and as evidenced by the improvements in the Company’s asset quality metrics.

After weighing both the positive and negative evidence, management determined that a valuation allowance on the net DTA was no longer warranted as of June 30, 2014. For a more detailed discussion of the Company’s tax calculation, see Note 14 to the consolidated financial statements, included in Item 8 of the Company’s Form 10-K.

Net operating loss carryforwards begin to expire in the year ending December 31, 2030.

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

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.

	At or For the Three						At or For the Nine
	Months Ended						Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
Selected financial ratios and other data: (1)
Performance ratios:
Return on average assets (2)		0.65	%		0.39	%		3.58	%		0.58	%
Return on average equity (3)		4.90	%		3.75	%		30.46	%		5.49	%
Interest rate spread (4)		2.90	%		2.89	%		2.91	%		2.84	%
Net interest margin (5)		3.06	%		3.04	%		3.07	%		2.99	%
Noninterest expense to average assets		3.17	%		3.06	%		3.17	%		3.09	%
Efficiency ratio (6)		84.87	%		81.14	%		85.35	%		78.27	%
Average interest-earning assets to average interest-bearing liabilities		123.35	%		119.56	%		122.48	%		119.87	%
Capital ratios:
Average equity to average assets		13.16	%		10.34	%		11.75	%		10.49	%
Equity to assets, end of period		12.97	%		10.44	%		12.97	%		10.44	%
Tier 1 leverage ratio (Bank only)		12.05	%		10.26	%		12.05	%		10.26	%
Tier 1 risk-based capital ratio (Bank only)		19.94	%		18.52	%		19.94	%		18.52	%
Total risk-based capital ratio (Bank only)		21.19	%		19.78	%		21.19	%		19.78	%
Asset quality ratios:
Nonperforming loans to net loans at end of period (7)		1.85	%		2.72	%		1.85	%		2.72	%
Nonperforming assets to average assets (8)		1.40	%		2.08	%		1.43	%		2.04	%
Nonperforming assets to total assets at end of period		1.40	%		2.10	%		1.40	%		2.10	%
Allowance for loan losses as a percent of loans		1.59	%		2.04	%		1.59	%		2.04	%
Allowance for loan losses as a percent of nonperforming loans (7)		87.57	%		76.52	%		87.57	%		76.52	%
Texas ratio (9)		10.01	%		18.02	%		10.01	%		18.02	%
Total classified assets as a percent of Tier 1 Capital		20.16	%		34.89	%		20.16	%		34.89	%
Total classified loans as a percent of Tier 1 Capital and ALLL		16.69	%		26.82	%		16.69	%		26.82	%
Total classified assets as a percent of Tier 1 Capital and ALLL		18.60	%		31.34	%		18.60	%		31.34	%
Net chargeoffs as a percent of average loans		0.09	%		-0.53	%		0.19	%		0.51	%
Total 90+ days past due as a percent of net loans		1.62	%		2.41	%		1.62	%		2.41	%
Office data:
Number of full service banking offices	32			33			32			33
Number of loan production offices	9			9			9			9
Per share data:
Basic earnings per common share (10)	$	0.06		$	0.03		$	0.94		$	0.02
Diluted earnings per common share (10)		0.06			0.03			0.94			0.02
Book value per common share (11)		4.70			3.65			4.70			3.65
Tangible book value per common share (12)		4.70			3.65			4.70			3.65

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.

Total assets increased $63.7 million to $1.8 billion at September 30, 2014, compared to December 31, 2013. Contributing to the change were increases in net loans of $90.8 million, loans held for sale of $5.7 million and other assets of $29.3 million offset by decreases in cash and cash equivalents of $47.7 million, available for sale securities of $3.9 million, Federal Home Loan Bank stock of $8.4 million and real estate owned and other repossessed assets of $1.9 million.

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

The decrease in available for sale securities was the result of maturities, paydowns and amortization of securities totaling $20.1 million and sales of $5.5 million, offset by a positive market value adjustment of $23.6 million during the first nine months of 2014. The balance of the unrealized loss position at September 30, 2014 was $16.8 million, pretax. The unrealized loss position is primarily driven by market conditions. To that end, the Company expects to receive all principal and interest payments contractually due and has no intent to sell and more than likely will not be required to sell these 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 6.3 years at September 30, 2014. There is risk that longer term rates could rise, resulting in greater unrealized losses. It is also possible, however, that longer term rates could fall, resulting in the recovery of all of the unrealized losses. Management continues to allow the portfolio to decline in the normal course. In addition, the Company may look for opportunities to sell securities to continue to reduce the portfolio and/or change the duration characteristics of the portfolio.

Net loans increased $90.8 million during the first nine months of 2014. Contributing to the increase was a combination of an increase in permanent construction and secured commercial loans 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 September 30, 2014:

	December 31, 2013		Provision			Recovery		Chargeoff			September 30, 2014
Real Estate Loans
Permanent
One-to four-family residential	$	8,319	$	435		$	218	$	(840	)	$	8,132
Multifamily residential		610		308			—		(140	)		778
Nonresidential		4,791		(1,120	)		180		(385	)		3,466
Land		74		25			—		—			99
Total		13,794		(352	)		398		(1,365	)		12,475
Construction Loans
One-to four-family residential		2,281		(995	)		31		(530	)		787
Multifamily and nonresidential		—		144			—		—			144
Total		2,281		(851	)		31		(530	)		931
Consumer Loans
Home Equity		3,552		(68	)		191		(544	)		3,131
Auto		35		13			6		(24	)		30
Marine		40		(21	)		17		—			36
Recreational vehicle		661		29			84		(264	)		510
Other		14		31			219		(251	)		13
Total		4,302		(16	)		517		(1,083	)		3,720
Commercial Loans
Secured		686		239			63		—			988
Unsecured		53		(485	)		495		(45	)		18
Total		739		(246	)		558		(45	)		1,006
Total	$	21,116	$	(1,465	)	$	1,504	$	(3,023	)	$	18,132

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 $18.1 million at September 30, 2014, down from $21.1 million at December 31, 2013. The allowance for loan losses as a percentage of loans was 1.59% at September 30, 2014, compared to 2.01% at December 31, 2013. The allowance for loan losses as a percentage of nonperforming loans was 87.57% at September 30, 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 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.

During the first nine months of 2014, the Company recorded a negative loan loss provision of $1.5 million. The negative provision of $1.1 million associated with nonresidential real estate loans has been impacted by the payoff of a nonresidential real estate loan aggregating $7.7 million, which resulted in a release of approximately $748,000 in reserves. In addition, the negative provision of $995,000 associated with residential construction one- to four-family loans is being impacted by a change in loan loss factors. When construction is complete and the borrower occupies the residence, the loan will convert to a permanent one-to four- family residential loan. Accordingly, the loan loss factors applied to these construction one- to four-family residential loans are being aligned with one-to four-family residential real estate loans.

Home Savings individually analyzed a large portion of impaired mortgage and home equity loans in 2014. Many of these loans were deemed to have adequate collateral to cover any potential future losses allowing for the release of reserves. Finally, as a result of continued improvement in asset quality and a decline in loan loss history Home Savings has adjusted historical and environmental factors resulting in a decrease in reserves.

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 $47.3 million at September 30, 2014 as compared to $48.2 million at December 31, 2013. The schedule below summarizes impaired loans for September 30, 2014 and December 31, 2013.

	September 30, 2014		December 31, 2013		Change
Real Estate Loans
Permanent
One-to four-family residential	$	20,157	$	20,206	$	(49	)
Multifamily residential		114		652		(538	)
Nonresidential		7,068		5,879		1,189
Land		532		487		45
Total		27,871		27,224		647
Construction Loans
One-to four-family residential		2,453		3,092		(639	)
Multifamily and nonresidential		—		—		—
Total		2,453		3,092		(639	)
Consumer Loans
Home Equity		11,669		12,550		(881	)
Auto		103		66		37
Boat		154		160		(6	)
Recreational vehicle		995		1,043		(48	)
Other		5		2		3
Total		12,926		13,821		(895	)
Commercial Loans
Secured		4,029		4,044		(15	)
Unsecured		—		—		—
Total		4,029		4,044		(15	)
Total Impaired Loans	$	47,279	$	48,181	$	(902	)

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

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

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:

	September 30, 2014		December 31, 2013		Change
	(Dollars in thousands)
Real Estate Loans
Permanent
One-to four-family	$	16,330	$	16,700	$	(370	)
Multifamily residential		—		463		(463	)
Nonresidential		821		858		(37	)
Land		487		487		—
Total		17,638		18,508		(870	)
Construction Loans
One-to four-family residential		288		698		(410	)
Multifamily and nonresidential		—		—		—
Total		288		698		(410	)
Consumer Loans
Home Equity		10,414		11,133		(719	)
Auto		9		10		(1	)
Marine		—		—		—
Recreational vehicle		895		836		59
Other		—		—		—
Total		11,318		11,979		(661	)
Commercial Loans
Secured		324		333		(9	)
Unsecured		—		—		—
Total		324		333		(9	)
Total Restructured Loans	$	29,568	$	31,518	$	(1,950	)

The decrease in the level of TDR loans during the nine months ended September 30, 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 $4.4 million and $4.9 million at September 30, 2014 and December 31, 2013, respectively. Such loans are considered nonperforming loans. TDR loans that were accruing according to their modified terms aggregated $25.1 million at September 30, 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 $20.7 million, or 1.85% of net loans, at September 30, 2014, compared to $23.6 million, or 2.29% of net loans, at December 31, 2013.

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

	September 30, 2014		December 31, 2013		Change
Real Estate Loans
Permanent
One-to four-family residential	$	4,700	$	6,356	$	(1,656	)
Multifamily residential		114		641		(527	)
Nonresidential		6,804		5,560		1,244
Land		531		496		35
Total		12,149		13,053		(904	)
Construction Loans
One-to four-family residential		2,453		3,084		(631	)
Multifamily and nonresidential		—		—		—
Total		2,453		3,084		(631	)
Consumer Loans
Home Equity		1,574		2,771		(1,197	)
Auto		84		110		(26	)
Marine		123		136		(13	)
Recreational vehicle		175		263		(88	)
Other		4		13		(9	)
Total		1,960		3,293		(1,333	)
Commercial Loans
Secured		4,019		4,028		(9	)
Unsecured		125		130		(5	)
Total		4,144		4,158		(14	)
Total Nonperforming Loans	$	20,706	$	23,588	$	(2,882	)

Loans held for sale increased $5.8 million, or 118.4%, to $10.6 million at September 30, 2014, compared to $4.8 million at December 31, 2013. The change was primarily attributable to the originations of permanent construction loans during the period. These loans are not sold until construction of the new residence is complete. 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.

Federal Home Loan Bank (FHLB) stock decreased to $18.1 million at September 30, 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 first nine months of 2014, the FHLB paid a cash dividend of $677,000 in lieu of stock dividends to its member banks.

Real estate owned and other repossessed assets decreased $1.9 million, or 29.2%, during the nine months ended September 30, 2014. The following table summarizes the activity in real estate owned and other repossessed assets during the period:

The following table depicts the type of property secured in the satisfaction of loans and the valuation allowance associated with each type as of September 30, 2014:

	Balance		Valuation Allowance			Net Balance
	(Dollars in thousands)
Real estate owned
One-to four-family	$	2,978	$	(422	)	$	2,556
Multifamily residential		—		—			—
Nonresidential		—		—			—
One-to four-family residential construction		4,702		(3,004	)		1,698
Land		270		(79	)		191
Total real estate owned		7,950		(3,505	)		4,445
Repossessed assets
Auto		—		—			—
Marine		—		—			—
Recreational vehicle		42		—			42
Total repossessed assets		42		—			42
Total real estate owned and other repossessed assets	$	7,992	$	(3,505	)	$	4,487

Real estate owned and other repossessed assets are recorded at the lower of (a) the loan’s acquisition balance or (b) the fair market value of the property secured less costs to sell. Appraisals are obtained at least annually on 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 benefits provided to participants covered by the BOLI. Home Savings recognized $1.1 million and $722,000, as other non-interest income based on the change in cash value of the policies in the nine months ended September 30, 2014 and 2013, respectively.

Other assets increased $29.3 million, largely due to the reversal of the valuation allowance previously established on the Company’s net deferred tax assets. 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 future effects of enacted tax law changes. Based on these criteria, including 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 December 31, 2013.

As of September 30, 2014, the net deferred tax asset (DTA) was $31.0 million, and as of December 31, 2013, the net DTA (prior to any valuation allowance) was $42.8 million. Management maintained a valuation allowance against the net deferred tax asset at 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.

As of September 30, 2014, the Company had reversed $41.7 million of the valuation allowance on its net DTA. $3.0 million of the reversal is due to current year-to-date operating income; the remaining $38.7 million is due to management’s reassessment and judgment regarding the ability to realize deferred tax assets in future years. The realization of a DTA is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the DTA will not be realized. “More likely than not” is defined as the DTA being more than 50% likely of being realized. All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance against the net DTA is required. In assessing the need for a valuation allowance, the Company considered all available evidence about the realization of the DTA both positive and negative, that could be objectively verified.

Positive evidence considered included (1) the Company’s recent history of quarterly pre-tax earnings (with the most recent quarterly loss being recorded for the quarter ended September 30, 2012 due to a bulk sale of troubled assets), (2) expectations for sustained and continued profitability with sufficient taxable income to fully utilize the remaining net deferred tax benefits (3) significant reductions in the level of non-performing assets since their peak, which was the primary source of the losses generated in prior periods (4) resolution of an executive search focused on a key management position (5) evaluation of core earnings (6) adequacy of capital to fund balance sheet and future growth and (7) cost-saving initiatives realized during the quarter.

Negative evidence considered was (1) the uncertainty about the potential impact on future earnings from nonperforming assets along with (2) a pre-tax loss reported by the Company during one quarterly period over the previous eleven quarters. As the number of consecutive periods of profitability increased and the level of profits are indicative of on-going results, the weight of cumulative losses as negative evidence decreased. A reduction in the weight given to such losses is further validated given that the source of the losses was due to an elevated level of problem assets and related credit costs, which have since been significantly reduced due to the bulk asset sale in 2012 and as evidenced by the improvements in the Company’s asset quality metrics.

After weighing both the positive and negative evidence, management determined that a full valuation allowance on the net DTA was no longer warranted as of June 30, 2014 and September 30, 2014. For a more detailed discussion of the Company’s tax calculation, see Note 14 to the consolidated financial statements, included in Item 8 of the Company’s Form 10-K.

Total deposits decreased $45.4 million to $1.4 billion at September 30, 2014, compared to December 31, 2013. Certificates of deposit declined $45.5 million and other interest bearing deposits declined $10.9 million. Partially offsetting these declines was an increase in noninterest bearing deposits of $11.0 million. As of September 30, 2014, Home Savings had no brokered deposits.

Advance payments by borrowers for taxes and insurance decreased $6.7 million during the first nine 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 $4.9 million.

FHLB advances increased from $50.0 million at December 31, 2013 to $138.0 million at September 30, 2014. FHLB term advances were $50.0 million at September 30, 2014 and December 31, 2013. Overnight advances were $88.0 million at September 30, 2014 and $0 at Decenber 31, 2013.The change in overnight advances was due to an increase of $88.0 million that partially funded the growth of the Company. Additionally, the Company prepaid a $30.0 million tranche of repurchase agreements with overnight borrowings, discussed below.

Repurchase agreements and other borrowings decreased from $90.6 million at December 31, 2013 to $60.6 million at September 30, 2014. At the end of September 2014, Home Savings prepaid one $30.0 million tranche of the Company’s repurchase agreements and, as a result, incurred a $1.4 million prepayment charge. Due to the timing of the debt prepayment, there was minimal impact on the third quarter net interest margin. The debt prepayment actions are one of many efforts underway to reduce the Company’s funding costs.

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 nine months ended September 30, 2014, Home Savings incurred expenses of $44,000 associated with such repurchases. Home Savings has included in other liabilities a reserve for future make-whole settlements aggregating $992,000 at September 30, 2014.

Other liabilities decreased $672,000 to $9.2 million at September 30, 2014, from $9.8 million at December 31, 2013. The change was the result of the payment of accrued expenses associated with severance payments, a reduction of $189,000 in the reserve for loan repurchases and the remittance of funds owed to the Small Business Administration after the sale of collateral secured on a foreclosed loan.

Shareholders’ equity increased $58.6 million to $233.7 million at September 30, 2014, from $175.1 million at December 31, 2013. The change occurred as a result of net income for the period, including the tax benefit recognized on the reversal of the valuation allowance on net deferred tax assets, along with positive adjustments to other comprehensive income for the recovery of value of available for sale securities during the period, offset by the payment of a quarterly dividend in the third quarter of 2014.

Accumulated other comprehensive income improved $15.4 million from December 31, 2013 to September 30, 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 September 30, 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 September 30, 2014 was $4.70 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.

Net Income. United Community recognized net income for the three months ended September 30, 2014, of $2.9 million, or $0.06 per diluted common share compared to net income of $1.7 million for the three months ended September 30, 2013, or $0.03 per diluted share.

The increase in earnings for the third quarter of 2014 was primarily a result of the $541,000 lower provision for loan loss and a reversal of portions of the remaining valuation allowance on net deferred tax assets adjusted for forecasted 2014 income, which provided an income tax benefit of $369,000. In addition, the Company recorded $21,000 higher net interest income and $626,000 higher noninterest income. These increases were offset partially by higher noninterest expense due to a prepayment charge on the early repayment of a repurchase agreement.

Net Interest Income. Net interest income for both of the three months ended September 30, 2014 and 2013 was $12.7 million. Net interest margin for the three months ended September 30, 2014 and 2013 was 3.06% and 3.04%, respectively.

Total interest income decreased $273,000 in the third quarter of 2014 compared to the third quarter of 2013, primarily as a result of a decrease of $31.7 million in the average balance of available for sale securities as well as a decrease in the yield on these assets of 13 basis points. These declines were offset by an increase in the average balance of net loans of $96.6 million in the third quarter of 2014 as compared to the same quarter last year, despite a decrease in the yield on those assets of 35 basis points.

Total interest expense decreased $294,000 for the quarter ended September 30, 2014, as compared to the same quarter last year. The change was due primarily to reductions of $299,000 in interest paid on deposits. The overall decrease in interest expense was a reduction in the average balance of certificates of deposit of $68.6 million.

The following table shows the impact of interest rate and outstanding balance (volume) changes compared to the third quarter of last year. The interest rate spread for the three months ended September 30, 2014 and 2013, was 2.90 % and 2.89%, respectively. The net interest margin increased two basis points to 3.06% for the three months ended September 30, 2014 compared to 3.04% for the same quarter in 2013.

	For the Three Months Ended September 30,
	2014 vs. 2013
	Increase (decrease) due to						Total increase
	Increase (decrease) due to						Total increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	(624	)	$	827		$	203
Loans held for sale		20			14			34
Investment securities:
Available for sale		(172	)		(190	)		(362	)
FHLB stock		(16	)		(84	)		(100	)
Other interest-earning assets		(21	)		(27	)		(48	)
Total interest-earning assets	$	(813	)	$	540		$	(273	)
Interest-bearing liabilities:
Savings accounts		(12	)		1			(11	)
NOW and money market accounts		(71	)		(8	)		(79	)
Certificates of deposit		(4	)		(205	)		(209	)
Federal Home Loan Bank advances		(13	)		21			8
Repurchase agreements and other		4			(7	)		(3	)
Total interest-bearing liabilities	$	(96	)	$	(198	)		(294	)
Change in net interest income							$	21

During the third quarter of 2014, chargeoffs exceeded provision expense primarily as a result of reserves for loans charged off being established in a prior period. Home Savings also made a change in loan loss factors associated with residential construction one- to four-family loans. When construction is complete the loan will convert to a permanent one-to four- family residential loan. Accordingly, the loan loss factors applied to these construction one- to four-family residential loans are being aligned with one- to four-family residential real estate loans.

Noninterest Income. Noninterest income in the third quarter of 2014 was $4.2 million, as compared to noninterest income for the third quarter of 2013 of $3.5 million. The increase in noninterest income was driven by increased nondeposit investment income, gains on the sale of available for sale securities and other income. The increase in nondeposit investment income was due to higher sales volume in the third quarter of 2014 as compared to the same quarter last year. The change in gains recognized on the sale of available for sale securities was the result of sales in the third quarter of 2014. The increase in other income was the result of a valuation allowance on interest rate caps that was recognized in the third quarter of 2013. A similar charge was not required in the third quarter of 2014. These changes were offset by a decline in mortgage banking income of $219,000, resulting from a decrease of $11.6 million in mortgage originations sold, when comparing the third quarter of 2014 to the third quarter of 2013.

Noninterest Expense. Noninterest expense was $14.3 million in the third quarter of 2014, compared to $13.5 million in the third quarter of 2013, a difference of $724,000. During the third quarter of 2014, Home Savings incurred a $1.4 million charge related to the prepayment of a repurchase agreement discussed above.

In the third quarter of 2014, most other expenses decreased primarily because of lower expenses incurred on loans sold in the secondary market. Reduced FDIC insurance premiums of $303,000 and franchise/financial institutions tax expenses of $187,000 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 in Ohio tax law. Salaries and employee benefits also declined, primarily due to cost reduction initiatives that began in the second quarter of 2014.

Income Taxes. During the three months ended September 30, 2014, the Company recognized a tax benefit of $369,000 on pre-tax income of $2.5 million, compared to tax expense of $350,000 on pre-tax income of $2.1 million for the three months ended September 30, 2013. The primary reason for the variance was the reversal of portions of the remaining valuation allowance on net deferred tax assets adjusted for forecasted 2014 income in the quarter ended September 30, 2014.

After weighing both the positive and negative evidence, management determined that a valuation allowance on the net DTA was no longer warranted as of June 30, 2014 and not required as of September 30, 2014. For a more detailed discussion of the Company’s tax calculation, see Note 14 to the consolidated financial statements, included in Item 8 of the Company’s Form 10-K.

The Company expects tax expense for the remainder of the year to be offset by the reversal of the remaining valuation allowance, for an effective tax rate of zero, excluding the discrete benefit recorded in the second quarter. The effective tax rate for 2015 is expected to more closely reflect marginal tax rates.

Net Income. United Community recognized net income for the nine months ended September 30, 2014, of $47.4 million, or $0.94 per diluted common share compared to net income of $7.8 million, before amortization of the discount on preferred stock for the nine months ended September 30, 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. GAAP and is deducted in the calculation of net income available to common shareholders. Therefore, net income available to common shareholders as of September 30, 2013 was $1.0 million, or $0.02 per diluted share.

The significant increase in earnings for the first nine months of 2014 was primarily a result of the reversal of the valuation allowance on net deferred tax assets, which provided an income tax benefit of $39.1 million. In addition, the Company recorded a negative loan loss provision of $(1.5) million, compared to provision for loan losses of $3.8 million for the first nine months of 2013.

Net interest income for the period decreased $189,000. The provision for loan losses decreased $5.3 million during the same period. Additionally, non-interest income decreased $4.8 million and noninterest expense increased $261,000. United Community’s annualized return on average assets and return on average equity were 3.58% and 30.46%, respectively, for the nine months ended September 30, 2014. The annualized return on average assets and return on average equity for the comparable period in 2013 were 0.58% and 5.49%, respectively.

Net Interest Income. Net interest income for the nine months ended September 30, 2014 and 2013 was $38.1 million and $38.3 million, respectively. Net interest margin for the nine months ended September 30, 2014 and 2013 was 3.07% and 2.99%, respectively.

Total interest income decreased $1.2 million in the first nine months of 2014 compared to the first nine months of 2013, primarily as a result of a decrease of $62.7 million in the average balance of available for sale securities as well as a decrease in the yield on net loans of 24 basis points. These declines were offset by an increase in the average balance of net loans of $48.4 million in the first nine months of 2014 as compared to the same period last year.

Total interest expense decreased $991,000 for the nine months ended September 30, 2014, as compared to the same period last year. The overall decrease in interest expense was partially attributable to a 15.8% growth in noninterest bearing deposits. Also contributing to the decrease between the two periods was a reduction of three basis points in the cost of certificates of deposit. The average outstanding balance of certificates of deposit in the first nine months of 2014 declined by $70.4 million as compared to the first nine months of 2013. Furthermore, the average balance of non-time deposits decreased $7.9 million and the cost of non-time deposits decreased 4 basis points.

The following table shows the impact of interest rate and outstanding balance (volume) changes compared to the first nine months of last year. The interest rate spread for the nine months ended September 30, 2014, increased to 2.91% compared to 2.83% for the nine months ended September 30, 2013. The net interest margin increased eight basis points to 3.07% for the nine months ended September 30, 2014 compared to 2.99% for the same period in 2013.

	For the Nine Months Ended September 30,
	2014 vs. 2013
	Increase (decrease) due to						Total increase
	Increase (decrease) due to						Total increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	(4,314	)	$	4,166		$	(148	)
Loans held for sale		(44	)		34			(10	)
Investment securities:
Available for sale		345			(1,153	)		(808	)
FHLB stock		74			(237	)		(163	)
Other interest-earning assets		(9	)		(42	)		(51	)
Total interest-earning assets	$	(3,948	)	$	2,768	)	$	(1,180	)
Interest-bearing liabilities:
Savings accounts		(72	)		3			(69	)
NOW and money market accounts		(143	)		(19	)		(162	)
Certificates of deposit		(131	)		(629	)		(760	)
Federal Home Loan Bank advances		(26	)		29			3
Repurchase agreements and other		4			(7	)		(3	)
Total interest-bearing liabilities	$	(368	)	$	(623	)		(991	)
Change in net interest income							$	(189	)

Provision for Loan Losses. A provision for loan losses is charged to income to bring the total allowance for loan losses to a level considered by management to be adequate, based on management’s evaluation of such factors as the delinquency status of loans, current economic conditions, the net realizable value of the underlying collateral, changes in the composition of the loan portfolio and prior loan loss experience. The Company recognized negative loan loss provision of $1.5 million in the first nine months of 2014, compared to a $3.8 million expense in the first nine months of 2013. During the second quarter of 2014, a commercial real estate loan aggregating $7.7 million paid off, causing a reduction in the loan loss provision $748,000. Furthermore, the provision was reduced by $968,000 due to the realignment of loan loss factors assigned to construction one- to four- family residential loans. The loan loss factors applied to these construction one- to four-family residential loans are being aligned with permanent one to four family residential real estate loans. Also contributing to the change in the provision for loan losses were charge offs 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 the anticipated resolution balance.

Noninterest Income. Noninterest income in the first nine months of 2014 was $10.8 million, as compared to noninterest income for the first nine months of 2013 of $15.6 million. The decrease in noninterest income was driven by decreases in mortgage banking income, gains on the sale of available for sale securities and other income. The decrease in mortgage banking income was caused by a $92.9 million reduction in mortgage originations sold, which resulted in a $2.3 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 nine months of 2013 that did not reoccur in the first nine months of 2014. The change in other income was the result of lower net rental income received on real estate owned and lower debit card fees earned in the current quarter, compared to the same quarter last year. Also, Home Savings recognized a recovery of $547,000 on interest rate caps in the first nine months of 2013.

Noninterest Expense. Noninterest expense was $42.0 million in the first nine months of 2014, compared to $41.8 million in the first nine months of 2013; a difference of $261,000. In the first nine months of 2014, other expenses increased primarily because of a $1.4 million prepayment charge incurred on the early termination of repurchase agreements mentioned above. Salaries and employee benefits were also $1.9 million higher. Reduced FDIC premiums of $880,000 and franchise/financial institutions tax expenses of $622,000 partially offset the change. Reduced FDIC premiums are the result of the termination of all regulatory orders under which the Bank had been operating. The lower franchise/financial institutions tax is the result of a change in Ohio tax law.

Income Taxes. During the nine months ended September 30, 2014 the Company recognized a tax benefit of $39.1 million on pre-tax income of $8.3 million, compared to tax expense of $500,000 on pre-tax income of $8.3 million for the nine months ended September 30, 2013. The primary reason for the variance was the reversal of substantially all of the Company’s deferred tax asset valuation allowance in the quarter ended June 30, 2014. As of September 30, 2014, the net DTA was $31.0 million, and as of December 31, 2013, the net DTA (prior to any valuation allowance) was $42.8 million. Management maintained a valuation allowance against the net deferred tax assets at 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.

Positive evidence considered included (1) the Company’s recent history of quarterly pre-tax earnings (ten out of the last eleven quarters with the most recent quarterly loss being recorded for the quarter ended September 30, 2012 due to a bulk sale of troubled assets ), (2) expectations for sustained and continued profitability with sufficient taxable income to fully utilize the remaining net deferred tax benefits (3) significant reductions in the level of non-performing assets since their peak, which was the primary source of the losses generated in prior periods (4) resolution of an executive search focused on a key management position (5) evaluation of core earnings (6) adequacy of capital to fund balance sheet and future growth and (7) cost-saving initiatives realized during the period.

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

The principal sources of funds for United Community are deposits, loan repayments, maturities of securities, borrowings from financial institutions, repurchase agreements and other funds provided by operations. Home Savings also has the ability to borrow from the Federal Home Loan Bank. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan prepayments are more influenced by interest rates, general economic conditions and competition. Investments in liquid assets maintained by United Community and Home Savings are based upon management's assessment of (1) the need for funds, (2) expected deposit flows, (3) yields available on short-term liquid assets, and (4) objectives of the asset and liability management program. At September 30, 2014, approximately $171.4 million of Home Savings’ certificates of deposit were expected to mature within one year. Based on past experience and Home Savings’ prevailing pricing strategies, management believes that a substantial percentage of such certificates will be renewed with Home Savings at maturity, although there can be no assurance that this will occur.

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

At September 30, 2014, United Community had total on-hand liquidity, defined as cash and cash equivalents, unencumbered securities and additional FHLB borrowing capacity, of $699.7 million.

The following table presents the total dollar amounts of interest income and interest expense on the indicated amounts of average interest-earning assets or interest-bearing liabilities, together with the weighted average interest rates for the three months ended September 30, 2014 and 2013. Average balance calculations were based on daily balances.

	Three Months Ended September 30,
	2014							2013
	Average		Interest					Average		Interest
	outstanding		earned/		Yield/			outstanding		earned/		Yield/
	balance		paid		rate			balance		paid		rate
	(Dollars In thousands)
Interest-earning assets:
Net loans (1)	$	1,104,571	$	12,436		4.50	%	$	1,007,971	$	12,233		4.85	%
Net loans held for sale		8,339		114		5.47	%		7,159		80		4.47	%
Investment securities:
Available for sale		513,282		3,002		2.34	%		545,003		3,364		2.47	%
FHLB stock		18,068		180		3.98	%		26,464		280		4.23	%
Other interest-earning assets		17,881		4		0.09	%		85,026		52		0.24	%
Total interest-earning assets		1,662,141		15,736		3.79	%		1,671,623		16,009		3.83	%
Noninterest-earning assets		134,601							99,206
Total assets	$	1,796,742						$	1,770,829
Interest-bearing liabilities:
NOW and money market accounts	$	453,312	$	164		0.14	%	$	469,372	$	243		0.21	%
Savings accounts		275,705		41		0.06	%		270,655		52		0.08	%
Certificates of deposit		448,943		1,343		1.20	%		517,583		1,552		1.20	%
Federal Home Loan Bank advances		79,641		537		2.70	%		50,000		529		4.23	%
Repurchase agreements and other		89,912		926		4.12	%		90,586		929		4.10	%
Total interest-bearing liabilities		1,347,513		3,011		0.89	%		1,398,196		3,305		0.95	%
Noninterest-bearing liabilities		212,705							189,545
Total liabilities		1,560,218							1,587,741
Equity		236,524							183,088
Total liabilities and equity	$	1,796,742						$	1,770,829
Net interest income and interest rate spread			$	12,725		2.90	%			$	12,704		2.89	%
Net interest margin						3.06	%						3.04	%
Average interest-earning assets to average interest-bearing liabilities						123.35	%						119.56	%

The following table presents the total dollar amounts of interest income and interest expense on the indicated amounts of average interest-earning assets or interest-bearing liabilities, together with the weighted average interest rates for the nine months ended September 30, 2014 and 2013. Average balance calculations were based on daily balances.

	Nine Months Ended September 30,
	2014							2013
	Average		Interest					Average		Interest
	outstanding		earned/		Yield/			outstanding		earned/		Yield/
	balance		paid		rate			balance		paid		rate
	(Dollars In thousands)
Interest-earning assets:
Net loans (1)	$	1,072,404	$	36,919		4.59	%	$	1,024,002	$	37,067		4.83	%
Net loans held for sale		6,116		237		5.17	%		9,052		247		3.64	%
Investment securities:
Available for sale		515,943		9,368		2.42	%		578,611		10,176		2.34	%
FHLB stock		19,760		677		4.57	%		26,464		840		4.23	%
Other interest-earning assets		36,457		51		0.19	%		65,667		102		0.21	%
Total interest-earning assets		1,650,680		47,252		3.82	%		1,703,796		48,432		3.79	%
Noninterest-earning assets		114,764							100,885
Total assets	$	1,765,444						$	1,804,681
Interest-bearing liabilities:
NOW and money market accounts	$	460,353	$	620		0.18	%	$	472,345	$	782		0.22	%
Savings accounts		275,547		128		0.06	%		271,464		197		0.10	%
Certificates of deposit		461,366		4,104		1.19	%		531,780		4,864		1.22	%
Federal Home Loan Bank advances		60,117		1,579		3.50	%		55,132		1,576		3.81	%
Repurchase agreements and other		90,350		2,753		4.06	%		90,591		2,756		4.06	%
Total interest-bearing liabilities		1,347,733		9,184		0.91	%		1,421,312		10,175		0.95	%
Noninterest-bearing liabilities		210,219							194,070
Total liabilities		1,557,952							1,615,382
Equity		207,492							189,299
Total liabilities and equity	$	1,765,444						$	1,804,681
Net interest income and interest rate spread			$	38,068		2.91	%			$	38,257		2.84	%
Net interest margin						3.07	%						2.99	%
Average interest-earning assets to average interest-bearing liabilities						122.48	%						119.87	%

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 September 30, 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.

Quarter Ended September 30, 2014
									Next 12 months net interest income
NPV as % of portfolio value of assets									(Dollars in thousands)
Change in rates (Basis points)	NPV Ratio		Internal policy limitations		Change in %		Internal policy limitations on NPV Change			$ Change		Internal policy limitations		% Change
400	11.43	%	6.00	%	-2.54	%	30.00	%	$	(1,010)		-20.00	%	-1.90	%
300	12.23	%	6.00	%	-1.74	%	25.00	%		(1,017)		-15.00	%	-1.92	%
200	13.03	%	7.00	%	-0.94	%	20.00	%		(1,022)		-10.00	%	-1.93	%
100	13.71	%	7.00	%	-0.26	%	15.00	%		(910	)	-5.00	%	-1.72	%
Static	13.97	%	9.00	%	—	%	—	%		—		—	%	—	%

Year Ended December 31, 2013
									Next 12 months net interest income
NPV as % of portfolio value of assets									(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.

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 September 30, 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 September 30, 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 September 30, 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.

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.

Excluding deferred tax assets and liabilities, as discussed below, 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.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision (credit) for income taxes. A valuation allowance, if needed, reduces deferred tax assets to the expected amount to be realized.

Income tax positions that meet a more-likely-than-not recognition threshold are measured as the largest amount of income tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority.

The Company reversed its DTA valuation allowance as of June 30, 2014 resulting in a net deferred tax asset of $30.2 million at that date. This compares to no deferred tax asset as of December 31, 2013 as it was fully reserved against. There are a number of tax issues that impact the deferred tax asset balancing including changes in temporary differences between the financial statement and tax recognition of revenue and expenses and estimates as to the deductibility of prior losses.

For the quarter ended June 30, 2014, management determined it was more likely than not that a significant portion of the DTA would be realized. Management’s decision was based upon evidence including its earnings performance trend, expected continued profitability, and improvement in the Company’s financial condition. The Company’s ultimate realization of the DTA is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the nature and amount of historical and projected future taxable income, the scheduled reversal of deferred tax assets and liabilities and available tax planning strategies in making this assessment. The amount of deferred taxes recognized could be impacted by changes to any of these variables.

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.

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.

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).

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

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.

Incorporated by reference to the Form 8-K filed by United Community on September 29, 2014 with the SEC, film number 141127272, Exhibit 10.1.

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

Large accelerated filer	¨	Accelerated filer	x

Non-accelerated filer	¨	Smaller reporting company	¨

			PAGE
Part I. FINANCIAL INFORMATION
	Item 1.	Financial Statements	3
	Consolidated Statements of Financial Condition as of September 30, 2014 (Unaudited) and December 31, 2013		3
	Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2014 and 2013 (Unaudited)		4
	Consolidated Statement of Shareholders’ Equity for the Nine Months ended September 30, 2014 and 2013 (Unaudited)		7
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (Unaudited)		8
	Notes to Consolidated Financial Statements (Unaudited)		9-55
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	56-72
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	73-74
	Item 4.	Controls and Procedures	74
Part II.OTHER INFORMATION
	Item 1.	Legal Proceedings	75
	Item 1A.	Risk Factors	75
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	76
	Item 3.	Defaults Upon Senior Securities (None)
	Item 4.	Mine Safety Disclosures (None)
	Item 5.	Other Information (None)
	Item 6.	Exhibits	77
Signatures			78
Exhibits			79

	For the nine months ended September 30, 2014
	Shares		Weighted average exercise price		Aggregate intrinsic value (in thousands)
Outstanding at beginning of year		948,690	$	5.44
Granted		5,443		3.91
Exercised		(85,000)		2.02
Forfeited and expired		(290,909)		12.24
Outstanding at end of period		578,224		2.51	$	1,341
Options exercisable at end of period		557,358		2.47	$	1,321

	September 30, 2014
Intrinsic value of options exercised	$	147,410
Cash received from option exercises		173,000
Tax benefit realized from option exercises		10,267
Weighted average fair value of options granted, per share	$	2.07

	July 3, 2014
Risk-free interest rate		1.74	%
Expected term (years)		5
Expected stock volatility		55.96	%
Dividend yield		—	%

	Shares			Weighted average grant date fair value
Nonvested shares at January 1, 2014		192,937		$	3.49
Granted		248,213			3.86
Vested		(52,951	)		3.55
Forfeited		(54,611	)		3.55
Nonvested shares at September 30, 2014		333,588		$	3.74

	September 30, 2014
	Amortized cost		Gross Unrealized Gains		Gross unrealized losses			Fair value
	(Dollars in thousands)
Available for Sale
U.S. Treasury and government sponsored entities’ securities	$	242,043	$	—	$	(10,404	)	$	231,639
Mortgage-backed GSE securities: residential		281,852		45		(6,411	)		275,486
Total	$	523,895	$	45	$	(16,815	)	$	507,125

	September 30, 2014
	(Dollars in thousands)
	Less Than 12 Months					12 Months or More							Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Treasury and government sponsored entities’ securities	$	4,444	$	(46	)	$	226,695	$	(10,358	)	$	231,139	$	(10,404	)
Mortgage-backed GSE securities:
residential		33,726		(87	)		241,010		(6,324	)		274,736		(6,411	)
Total	$	38,170	$	(133	)	$	467,705	$	(16,682	)	$	505,875	$	(16,815	)

	Nine Months Ended September 30, 2014			Nine Months Ended September 30, 2013
	(Dollars in thousands)
Balance, beginning of year	$	5,941		$	5,506
Originations		958			2,228
Amortized to expense		(1,259	)		(1,712	)
Balance, end of period		5,640			6,022
Less valuation allowance		(4	)		(4	)
Net balance	$	5,636		$	6,018

	September 30, 2014	December 31, 2013
Weighted average prepayment rate	189 PSA	182 PSA
Weighted average life (in years)	3.69	3.94
Weighted average discount rate	8.00%	8.00%

	September 30, 2014			September 30, 2013
	(Dollars in thousands)
Real estate owned and other repossessed assets	$	7,992		$	15,989
Valuation allowance		(3,505	)		(6,674	)
End of period	$	4,487		$	9,315

	Three Months Ended September 30, 2014		Three Months Ended September 30, 2013
	(Dollars in thousands)
Net (gain) loss on sales	$	63	$	(69	)
Provision for unrealized losses, net		140		464
Operating expenses, net of rental income		189		354
Total expenses	$	392	$	749

Assumptions used in the valuations were as follows:
Weighted average discount rate		3.95	%			3.00	%			3.95	%			3.00	%

		Fair Value	Valuation Technique(s)	Unobservable Input(s)	Range (Average)
		(Dollars in thousands)
Impaired loans:
Permanent real estate loans	$	2,751	Sales comparison approach	Adjustment for differences between comparable sales	5.00%-20.00% (12.50%)
			Income approach	Adjustment for differences in net operating income Capitalization rate	4.70%-11.94% (9.50%)
Construction loans		1,899	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-20.00% (10.00%)
Consumer loans		249	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-10.00% (5.00%)
Other real estate owned, net:
Permanent real estate loans		1,073	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-51.10% (26.83%)
Construction loans		1,698	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-53.10% (22.20%)

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

	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
	(Dollars in thousands)
Unrealized holding gain (loss) on securities available for sale	$	(302	)	$	(2,121	)	$	23,985		$	(35,428	)
Unrealized holding gain (loss) on postretirement benefits		—			—			—			—
Reclassification adjustment for gains realized in income		(328	)		—			(362	)		(2,578	)
Net unrealized gains (losses)		(630	)		(2,121	)		23,623			(38,006	)
Tax effect		221			—			(8,268	)		—
Net of tax amount	$	(409	)	$	(2,121	)	$	15,355		$	(38,006	)

	Balance at December 31, 2013			Current Period Change		Balance at September 30, 2014
Unrealized gains (losses) on securities available for sale	$	(43,364	)	$	15,355	$	(28,009	)
Unrealized gains (losses) on post-retirement benefits		1,699			—		1,699
Total	$	(41,665	)	$	15,355	$	(26,310	)

	Balance at December 31, 2012		Current Period Change			Balance at September 30, 2013
Unrealized gains (losses) on securities available for sale	$	5,082	$	(38,006	)	$	(32,924	)
Unrealized gains (losses) on post-retirement benefits		1,600		—			1,600
Total	$	6,682	$	(38,006	)	$	(31,324	)

	Unrealized gains/losses on Available for Sale Securities			Postretirement Benefits		Total
	(Dollars in thousands)
Beginning balance (06/30/2014)	$	(27,600	)	$	1,699	$	(25,901	)
Other comprehensive income before reclassification, net of tax		(196	)		—		(196	)
Amounts reclassified from accumulated other compressive income, net of tax		(213	)		—		(213	)
Net current period other comprehensive income, net of tax		(409	)		—		(409	)
Ending balance (09/30/2014)	$	(28,009	)	$	1,699	$	(26,310	)

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	$	(328	)	Net gains on securities available for sale
		115		Tax expense (benefit)
		(213	)	Net of tax
Total reclassification during the period	$	(213	)

	As of September 30, 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	$	229,663		21.19	%	$	86,695		8.00	%	$	108,368		10.00	%
Tier 1 capital to risk-weighted assets		216,061		19.94	%		*		*			65,021		6.00	%
Tier 1 capital to average total assets**		216,061		12.05	%		71,711		4.00	%		89,638		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	%

	Real Estate Owned			Repossessed Assets			Total
	(Dollars in thousands)
Balance at beginning of period	$	6,318		$	23		$	6,341
Acquisitions		1,472			44			1,516
Sales, net		(2,767	)		(25	)		(2,792	)
Change in valuation allowance		(578	)		—			(578	)
Balance at end of period	$	4,445		$	42		$	4,487

Period	Total number of common shares purchased		Average price paid per common share		Total number of common shares purchased as part of publicly announced plans		Maximum number of shares remaining that may yet be purchased under the plan
July 1 through July 31, 2014		213,700	$	4.34		213,700		1,107,604
August 1 through August 31, 2014		526,200	$	4.49		526,200		581,404
September 1 through September 30, 2014		39,000	$	4.59		39,000		542,404
Total		778,900	$	4.45		778,900		542,404

			UNITED COMMUNITY FINANCIAL CORP.
Date: November 10, 2014			/S/ Gary M. Small
			Gary M. Small President and Chief Executive Officer
			(Principal Executive Officer)
Date: November 10, 2014			/S/ Timothy W. Esson
			Timothy W. Esson Principal Accounting Officer
			(Principal Financial Officer)