News Column

UNITED COMMUNITY FINANCIAL CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 7, 2014

UNITED COMMUNITY FINANCIAL CORP.

At or For the Three At or For the Six Months Ended Months Ended June 30, June 30, 2014 2013 2014 2013 Selected financial ratios and other data: (1) Performance ratios: Return on average assets (2) 9.67 % 0.75 % 5.09 % 0.67 % Return on average equity (3) 84.84 % 6.47 % 46.18 % 6.31 % Interest rate spread (4) 2.92 % 2.76 % 2.92 % 2.81 % Net interest margin (5) 3.09 % 2.93 % 3.08 % 2.97 % Noninterest expense to average assets 3.24 % 3.15 % 3.17 % 3.10 % Efficiency ratio (6) 87.77 % 78.38 % 85.61 % 76.96 % Average interest-earning assets to average interest-bearing liabilities 123.00 % 121.64 % 122.00 % 120.03 % Capital ratios: Average equity to average assets 11.40 % 11.52 % 11.02 % 10.56 % Equity to assets, end of period 13.13 % 10.28 % 13.13 % 10.28 % Tier 1 leverage ratio 12.05 % 10.03 % 12.05 % 10.03 % Tier 1 risk-based capital ratio 20.00 % 18.17 % 19.60 % 18.17 % Total risk-based capital ratio 21.26 % 19.42 % 20.86 % 19.42 % Asset quality ratio: Nonperforming loans to net loans at end of period (7) 1.87 % 2.88 % 1.87 % 2.88 % Nonperforming assets to average assets (8) 1.42 % 2.22 % 1.42 % 2.22 % Nonperforming assets to total assets at end of period 1.39 % 2.26 % 1.39 % 2.26 % Allowance for loan losses as a percent of loans 1.65 % 1.85 % 1.65 % 1.85 % Allowance for loan losses as a percent of nonperforming loans (7) 89.91 % 65.41 % 89.91 % 65.41 % Texas ratio (9) 9.82 % 19.97 % 9.82 % 19.97 % Total classified assets as a percent of Tier 1 Capital 21.97 % 30.72 % 21.97 % 30.72 % Total classified loans as a percent of Tier 1 Capital and ALLL 18.23 % 22.22 % 18.23 % 22.22 % Total classified assets as a percent of Tier 1 Capital and ALLL 20.21 % 27.83 % 20.21 % 27.83 % Net chargeoffs as a percent of average loans 0.25 % 1.54 % 0.24 % 1.02 % Total 90+ days past due as a percent of net loans 1.53 % 2.58 % 1.53 % 2.58 % Office data: Number of full service banking offices 33 33 33 33 Number of loan production offices 9 9 9 9 Per share data: Basic earnings (loss) per common share (10) $ 0.84$ (0.06 )$ 0.88$ (0.02 ) Diluted earnings (loss) per common share (10) 0.84 (0.06 ) 0.88 (0.02 ) Book value per common share (11) 4.66 3.66 4.66 3.66 Tangible book value per common share (12) 4.66 3.66 4.66 3.66 Notes:



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

2. Net income divided by average total assets

3. Net income divided by average total equity

4. Difference between weighted average yield on interest-earning assets and

weighted average cost of interest-bearing liabilities

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

6. Noninterest expense, excluding the amortization of the core deposit

intangible, divided by the sum of net interest income and noninterest income,

excluding gains and losses on securities, other than temporary impairment

charges and gains and losses on foreclosed assets

7. Nonperforming loans consist of nonaccrual loans and loans past due ninety

days and still accruing

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

other repossessed assets

9. Nonperforming assets divided by the sum of tangible common equity and the

allowance for loan losses

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

11. Shareholders' equity divided by number of shares outstanding

12. Shareholders' equity minus core deposit intangible divided by number of

shares outstanding 58



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



Comparison of Financial Condition at June 30, 2014 and December 31, 2013

Total assets increased $52.1 million to $1.8 billion at June 30, 2014, compared to December 31, 2013. Contributing to the change were increases in available for sale securities of $5.6 million, net loans of $57.6 million, loans held for sale of $4.5 million and other assets of $28.1 million offset by decreases in cash and cash equivalents of $33.7 million, Federal Home Loan Bank stock of $8.4 million and real estate owned and other repossessed assets of $1.8 million. Funds not currently utilized for general corporate purposes are invested in overnight funds. Cash and cash equivalents decreased during the first six months of 2014 as excess funds held on deposit at the Federal Reserve were used to fund loan growth during the period. The increase in available for sale securities was the result of a positive market value adjustment of $24.3 million during the first six months of 2014, offset by maturities, paydowns and amortization of securities totaling $12.2 million and sales of $5.0 million. The balance of the unrealized loss position at June 30, 2014 was $16.1 million, pretax. The unrealized loss position is entirely driven by the level of interest rates. To that end, the Company expects to receive all principal and interest payments contractually due and has the ability and intent to hold the securities until maturity. All of the securities are GSE issued debt or mortgage-backed securities and carry the same rating as the U.S. Government. 59



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The duration of the securities portfolio was approximately 6.2 years at June 30, 2014. There is risk that longer term rates could continue to rise, resulting in greater unrealized losses. But it is also possible that longer term rates could fall, resulting in the recovery of all of the unrealized losses. Management continues to allow the portfolio to decline as no new investment purchases are being considered at this time. In addition, the Company may look for opportunities to sell securities to reduce the portfolio or change the duration characteristics of the portfolio.



Net loans increased $57.6 million during the first six 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 June 30, 2014: Allowance For Loan Losses (Dollars in thousands) December 31, June 30, Real Estate Loans 2013 Provision Recovery Chargeoff 2014 Permanent One-to four-family residential $ 8,319$ 119$ 207$ (551 )$ 8,094 Multifamily residential 610 148 - (140 ) 618 Nonresidential 4,791 (1,026 ) 140 (336 ) 3,569 Land 74 (2 ) - - 72 Total 13,794 (761 ) 347 (1,027 ) 12,353 Construction Loans One-to four-family residential 2,281 (739 ) 21 (430 ) 1,133 Multifamily and nonresidential - 31 - - 31 Total 2,281 (708 ) 21 (430 ) 1,164 Consumer Loans Home Equity 3,552 (62 ) 82 (439 ) 3,133 Auto 35 (4 ) 5 (9 ) 27 Marine 40 (6 ) 14 - 48 Recreational vehicle 661 86 72 (251 ) 568 Other 14 11 144 (155 ) 14 Total 4,302 25 317 (854 ) 3,790 Commercial Loans Secured 686 204 50 - 940 Unsecured 53 (341 ) 350 (45 ) 17 Total 739 (137 ) 400 (45 ) 957 Total $ 21,116$ (1,581 )$ 1,085$ (2,356 )$ 18,264 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 $18.3 million at June 30, 2014, down from $21.1 million at December 31, 2013. The allowance for loan losses as a percentage of loans was 1.65% at June 30, 2014, compared to 2.01% at December 31, 2013. The allowance for loan losses as a percentage of nonperforming loans was 89.91% at June 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. 60



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During the first six months of 2014, the Company recorded a negative loan loss provision of ($1.6) million. The negative provision of $1.0 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 $739,000 associated with residential construction one-to four-family loans is being impacted by a change in loan loss factors. 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. This alignment resulted in the release of approximately $794,000 in reserves. At the time of completion construction phase these loans will convert to permanent one-to four-family residential loans. Loan loss factors applied to these construction loans are being aligned with mortgage loans to more closely reflect the loss experience of a mortgage loan. In the past Home Savings has applied a loan loss factor similar to the one used for construction loans to contractors. As a result, the reserves set aside for these specific loans has declined approximately $794,000. 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 $47.1 million at June 30, 2014 as compared to $48.2 million at December 31, 2013. The schedule below summarizes impaired loans for June 30, 2014 and December 31, 2013. Impaired Loans (Dollars in thousands) December 31, Real Estate Loans June 30, 2014 2013 Change Permanent One-to four-family residential $ 21,272$ 20,206$ 1,066 Multifamily residential 134 652 (518 ) Nonresidential 5,069 5,879 (810 ) Land 532 487 45 Total 27,007 27,224 (217 ) Construction Loans

One-to four-family residential 2,550 3,092



(542 )

Multifamily and nonresidential - -

- Total 2,550 3,092 (542 ) Consumer Loans Home Equity 12,158 12,550 (392 ) Auto 87 66 21 Boat 156 160 (4 ) Recreational vehicle 1,084 1,043 41 Other 6 2 4 Total 13,491 13,821 (330 ) Commercial Loans Secured 4,032 4,044 (12 ) Unsecured - - - Total 4,032 4,044 (12 ) Total Impaired Loans $ 47,080$ 48,181$ (1,101 ) 61



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



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

Modification of the terms of a debt, such as one or a combination of: Reduction of the stated interest rate for the remaining original life

of the loan; Extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk; Reduction of the face amount or maturity amount of the loan as stated in the instrument or other agreement; or Reduction of accrued interest. Transfer from the borrower to Home Savings of receivables from third



parties, real estate, or other assets to fully or partially satisfy a debt

(including a transfer resulting from foreclosure or repossession). Issuance or other granting of an equity interest to Home Savings by the



borrower to satisfy fully or partially a loan unless the equity interest

is granted pursuant to existing terms for converting the debt into an equity interest. A debt restructuring is not necessarily a TDR for purposes of this definition even if the borrower is experiencing some financial difficulties. A TDR is not involved if:



the fair value of cash, other assets, or an equity interest accepted by

Home Savings from a borrower in full satisfaction of its loan at least equals the recorded investment in the loan;



the fair value of cash, other assets, or an equity interest transferred by

a borrower to Home Savings in full settlement of its loan at least equals the carrying amount of the loan;



Home Savings reduces the effective interest rate on the loan primarily to

reflect a decrease in market interest rates in general or a decrease in

the risk so as to maintain a relationship with a borrower that can readily

obtain funds from other sources at the current market interest rate; or

Home Savings issues, in exchange for the original loan, a new marketable

loan having an effective interest rate based on its market price that is at or near the current market interest rates of loans with similar maturity dates and stated interest rates issued by other banks. 62



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The change in TDRs for the six months ended June 30, 2014 is as follows:

Troubled Debt Restructurings June 30, December 31, 2014 2013 Change (Dollars in thousands) Real Estate Loans Permanent One-to four-family $ 16,908$ 16,700$ 208 Multifamily residential - 463 (463 ) Nonresidential 890 858 32 Land 487 487 - Total 18,285 18,508 (223 ) Construction Loans One-to four-family residential 388 698



(310 )

Multifamily and nonresidential - - - Total 388 698 (310 ) Consumer Loans Home Equity 10,412 11,133 (721 ) Auto 8 10 (2 ) Marine - - - Recreational vehicle 816 836 (20 ) Other - - - Total 11,236 11,979 (743 ) Commercial Loans Secured 324 333 (9 ) Unsecured - - - Total 324 333 (9 )



Total Restructured Loans $ 30,233$ 31,518$ (1,285 )

The decrease in the level of TDR loans during the six months ended June 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 $4.3 million and $4.9 million at June 30, 2014 and December 31, 2013, respectively. Such loans are considered nonperforming loans. TDR loans that were accruing according to their terms aggregated $25.9 million at June 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 $20.3 million, or 1.87% of net loans, at June 30, 2014, compared to $23.6 million, or 2.29% of net loans, at December 31, 2013. 63



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The schedule below summarizes the change in nonperforming loans for the first six months of 2014. Nonperforming Loans (Dollars in thousands) June 30, December 31, 2014 2013 Change Real Estate Loans Permanent



One-to four-family residential $ 5,380$ 6,356 $

(976 )

Multifamily residential 133 641 (508 ) Nonresidential 4,902 5,560 (658 ) Land 532 496 36 Total 10,947 13,053 (2,106 ) Construction Loans One-to four-family residential 2,553 3,084



(531 )

Multifamily and nonresidential - - - Total 2,553 3,084 (531 ) Consumer Loans Home Equity 2,224 2,771 (547 ) Auto 64 110 (46 ) Marine 127 136 (9 ) Recreational vehicle 242 263 (21 ) Other 6 13 (7 ) Total 2,663 3,293 (630 ) Commercial Loans Secured 4,023 4,028 (5 ) Unsecured 128 130 (2 ) Total 4,151 4,158 (7 )



Total Nonperforming Loans $ 20,314$ 23,588$ (3,274 )

Loans held for sale increased $4.5 million, or 92.0%, to $9.3 million at June 30, 2014, compared to $4.8 million at December 31, 2013. The change was primarily attributable to the timing of originations and sales during the period. Home Savings continues to sell a portion of newly originated mortgage loans into the secondary market as part of its risk management strategy and anticipates continuing to do so in the future. FHLB stock decreased to $18.1 million at June 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 six months of 2014, the FHLB paid a cash dividend of $497,000 in lieu of stock dividends to its member banks. 64



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Real estate owned and other repossessed assets decreased $1.8 million, or 28.3%, during the six months ended June 30, 2014. The following table summarizes the activity in real estate owned and other repossessed assets during the period: Real Estate Repossessed Owned Assets Total (Dollars in thousands) Balance at Beginning of period $ 6,318 $ 23 $ 6,341 Acquisitions 851 2 853 Sales, net (2,185 ) (23 ) (2,208 )

Change in valuation allowance (438 ) -

(438 ) Balance at End of period $ 4,546 $ 2 $ 4,548 The following table depicts the type of property secured in the satisfaction of loans and the valuation allowance associated with each type as of June 30, 2014: Valuation Net Balance Allowance Balance (Dollars in thousands) Real estate owned One-to four-family $ 2,830$ (445 )$ 2,385 Multifamily residential 43 - 43 Nonresidential 139 (60 ) 79 One-to four-family residential construction 4,827 (2,979 ) 1,848 Land 270 (79 ) 191 Total real estate owned 8,109 (3,563 ) 4,546 Repossessed assets Auto 2 - 2 Marine - - - Recreational vehicle - - - Total repossessed assets - - -



Total real estate owned and other repossessed assets $ 8,111$ (3,563 )$ 4,548

Real estate owned and other repossessed assets are recorded at the lower of (a) the loan's acquisition balance less cost to sell or (b) the fair market value of the property secured less costs to sell. Appraisals are obtained at least annually on nonresidential real estate properties that exceed $1.0 million in value and residential real estate properties that exceed $250,000 in value. Based on current appraisals, a valuation allowance may be established to properly reflect the asset at fair value. The increase in the valuation allowance on property acquired was due to the decline in market value of those properties. Bank Owned Life Insurance (BOLI) is maintained on select officers and employees of Home Savings whereby Home Savings is the beneficiary. BOLI is recorded at its cash surrender value, or the amount currently realizable. Increases in the Home Savings' policy cash surrender value are tax exempt and death benefit proceeds received by Home Savings are tax-free. Income from these policies and changes in the cash surrender value are recorded in other income. There is no post-termination coverage, split dollar or other encumbrance provided to participants covered by the BOLI. Home Savings recognized $712,000 and $459,000, as other non-interest income based on the change in cash value of the policies in the six months ended June 30, 2014 and 2013, respectively. Other assets increased $28.1 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. 65



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As of June 30, 2014, the net deferred tax asset (DTA) was $30.2 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. As of June 30, 2014, the Company had reversed $40.3 million of the valuation allowance on its net DTA. $1.6 million of the reversal is due to current year-to-date operating income; the remaining $38.7 million is due to management's change in 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 (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 to executive searches placed on key management positions (5) evaluation of core earnings (6) adequacy of capital to fund balance sheet and future growth and (7) cost-saving initiatives triggered 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 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. 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. Total deposits decreased $16.3 million to $1.4 billion at June 30, 2014, compared to December 31, 2013. Certificates of deposit declined and were only partially offset by an increase in savings and checking deposits. As of June 30, 2014, Home Savings had no brokered deposits. Advance payments by borrowers for taxes and insurance decreased $7.4 million during the first six months of 2014. Remittance of real estate taxes and property insurance made on behalf of customers of Home Savings accounted for $2.2 million of the decrease. In addition, funds held for payments received on loans sold where servicing was retained by Home Savings decreased $5.2 million. Federal Home Loan Bank advances increased from $50.0 million at December 31, 2013 to $65.0 million at June 30, 2014. The increase partially funded the growth of the Company. 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 six months ended June 30, 2014, Home Savings incurred expenses of $25,000 associated with such repurchases. Home Savings has included in other liabilities a reserve for future make-whole settlements aggregating $973,000 at June 30, 2014. Other liabilities increased $732,000 to $10.6 million at June 30, 2014, from $9.8 million at December 31, 2013. The change was the result of the accrual of expenses associated with severance payments, incentive payments, legal and other consulting services, offset by the remittance of funds owed to the Small Business Administration after the sale of collateral secured on a foreclosed loan. Shareholders' equity increased $60.0 million to $235.0 million at June 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. 66



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Accumulated other comprehensive income improved $15.8 million from December 31, 2013 to June 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 June 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 and the Company has the intent an ability to hold these investments until recovery. 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 June 30, 2014 was $4.66 as compared to $3.48 per common share as of December 31, 2013. Book value per share is calculated as total common equity divided by the number of common shares outstanding. Book value was impacted by the overall change in equity as mentioned above. Comparison of Operating Results for the Three Months Ended June 30, 2014 and June 30, 2013 Net Income. United Community recognized net income for the three months ended June 30, 2014, of $42.4 million, or $0.84 per diluted common share compared to net income of $3.4 million, before amortization of the discount on preferred stock for the three months ended June 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, a net loss available to common shareholders as of June 30, 2013 was ($2.5) million, or $(0.06) per diluted share. The significant increase in earnings for the second quarter 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 $38.8 million. In addition, the Company recorded a negative loan loss provision of ($1.6) million, compared to provision for loan losses of $1.1 million for the second quarter of 2013. Net interest income for the period increased $105,000. The provision for loan losses decreased $2.7 million during the same period. Additionally, non-interest income decreased $2.9 million and noninterest expense decreased $142,000. Net Interest Income. Net interest income for the three months ended June 30, 2014 and 2013 was $12.7 million and $12.6 million, respectively. Net interest margin for the three months ended June 30, 2014 and 2013 was 3.09% and 2.93%, respectively. Total interest income decreased $176,000 in the second quarter of 2014 compared to the second quarter of 2013, primarily as a result of a decrease of $70.7 million in the average balance of available for sale securities as well as a decrease in the average balance of FHLB stock. These declines were offset by an increase in the average balance of net loans of $52.9 million in the second quarter of 2014 as compared to the same quarter last year, despite a decrease in the yield on those assets of 18 basis points. 67



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Total interest expense decreased $281,000 for the quarter ended June 30, 2014, as compared to the same quarter last year. The change was due primarily to reductions of $282,000 in interest paid on deposits. The overall decrease in interest expense was partially attributable to an 11.0% growth in noninterest bearing deposits. Also contributing to the decrease between the two quarterly periods was a reduction of two basis points in the cost of certificates of deposit. The average outstanding balance of certificates of deposit in the second quarter of 2014 declined by $73.6 million as compared to the second quarter of 2013. The following table shows the impact of interest rate and outstanding balance (volume) changes compared to the second quarter of last year. The interest rate spread for the three months ended June 30, 2014, increased to 2.92% compared to 2.76% for the quarter ended June 30, 2013. The net interest margin increased 16 basis points to 3.09% for the three months ended June 30, 2014 compared to 2.93% for the same quarter in 2013. For the Three Months Ended June 30, 2014 vs. 2013 Increase Total (decrease) due to increase Rate Volume (decrease) (Dollars in thousands) Interest-earning assets: Loans $ (396 )$ 550$ 154 Loans held for sale (33 ) 29 (4 ) Investment securities: Available for sale 181 (440 ) (259 ) FHLB stock 100 (147 ) (47 ) Other interest-earning assets 5 (25 )



(20 )

Total interest-earning assets $ (143 )$ (33 )$ (176 )

Interest-bearing liabilities:

Savings accounts (17 ) 1



(16 )

NOW and money market accounts (16 ) (4 )



(20 )

Certificates of deposit (26 ) (219 )



(245 )

Federal Home Loan Bank advances - -



-

Repurchase agreements and other - -



-

Total interest-bearing liabilities $ (59 )$ (222 )

(281 )

Change in net interest income



$ 105

Provision for Loan Losses. A provision for loan losses is charged to income to bring the total allowance for loan losses to a level considered by management to be adequate, based on management's evaluation of such factors as the delinquency status of loans, current economic conditions, the net realizable value of the underlying collateral, changes in the composition of the loan portfolio and prior loan loss experience. The Company recognized a negative loan loss provision of ($1.6) million in the second quarter of 2014, compared to a $1.1 million provision in the second quarter 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 $491,000 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. During 2014, chargeoffs exceeded provision primarily as a result of a large nonresidential real estate loan payoff releasing $748,000 in reserves. In addition, Home Savings individually analyzed a large portion of impaired mortgage and home equity loans in the first quarter of 2014. Many of these loans were deemed to have adequate collateral to cover any potential future losses. This analysis allowed Home Savings to release a portion of the reserves that had been set aside for potential losses on these loans. Loans that did not have adequate collateral were written down to fair value. 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. This alignment resulted in the release of approximately $794,000 in reserves. Noninterest Income. Noninterest income in the second quarter of 2014 was $3.4 million, as compared to noninterest income for the second quarter of 2013 of $6.4 million. The decrease in noninterest income was driven by decreased mortgage banking income, gains on the sale of available for sale securities and other income. As a result of a decrease of $32.4 million in mortgage originations sold, comparing the second quarter of 2014 to the second quarter of 2013, mortgage banking income declined $1.1 million. The change in gains recognized on the sale of available for sale securities was the result of sales in the second quarter of 2013 that did not reoccur in the second quarter of 2014. The change in real estate owned and other repossessed assets charges is a result of additional valuation reserves being required on select other real estate owned in the second quarter of 2013. 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 $561,000 on interest rate caps in the second quarter of 2013. 68



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Noninterest Expense. Noninterest expense was $14.2 million in the second quarter of 2014, compared to $14.4 million in the second quarter of 2013; a difference of $142,000. During the second quarter of 2014, Home Savings incurred a $923,000 charge related to cost reduction initiatives. The Company anticipates a savings of approximately $5.0 million annualized on a go-forward basis or approximately 9.0% of annualized noninterest expenses as a result of this initiative. In the second 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 $276,000 and franchise/financial institutions tax expenses of $202,000 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. These reductions were offset by an increase of $1.2 million in salaries and employee benefits, primarily due to the above mentioned cost reduction initiative. As of June 30, 2014, United Community accrued $300,000 for a legal matter that is believed to be appropriate based upon information available at that time. It is possible that the assumptions used regarding the ultimate outcome of this litigation may change, which could result in increasing or decreasing the accrual for this matter. As of June 30, 2014, management does not believe that there is a reasonable possibility that any material loss exceeding the amount already recognized for United Community's litigation claims has been incurred. However, the ultimate resolutions of these proceedings and matters are inherently unpredictable. As such, the Company's financial condition and results of operations could be adversely affected in any particular period by the unfavorable resolution of such litigation. In July, 2014, United Community and the plaintiff reached a settlement in principal, subject to final negotiation of a definitive agreement. The difference between the accrual and settlement is immaterial. Income Taxes. During the three months ended June 30, 2014, the Company recognized a tax benefit of $38.8 million on pre-tax income of $3.6 million, compared to tax expense of $150,000 on pre-tax income of $3.5 million for the three months ended June 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 June 30, 2014, the net deferred tax asset (DTA) was $30.2 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. As of June 30, 2014, the Company had reversed $40.3 million of the valuation allowance on its net DTA. $1.6 million of the reversal is due to current year-to-date operating income; the remaining $38.7 million is due to management's change in 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 (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 to executive searches placed on key management positions (5) evaluation of core earnings (6) adequacy of capital to fund balance sheet and future growth and (7) cost-saving initiatives triggered 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 periods 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 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. 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. 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. 69



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Table of Contents Comparison of Operating Results for the Six Months Ended June 30, 2014 and June 30, 2013 Net Income. United Community recognized net income for the six months ended June 30, 2014, of $44.5 million, or $0.88 per diluted common share compared to net income of $6.1 million, before amortization of the discount on preferred stock for the six months ended June 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, a net loss available to common shareholders as of June 30, 2013 was $680,000, or $(0.02) per diluted share. The significant increase in earnings for the first half 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 $38.7 million. In addition, the Company recorded a negative loan loss provision of ($1.6) million, compared to provision for loan losses of $3.2 million for the first half of 2013. Net interest income for the period decreased $210,000. The provision for loan losses decreased $4.8 million during the same period. Additionally, non-interest income decreased $5.4 million and noninterest expense decreased $463,000. United Community's annualized return on average assets and return on average equity were 5.09% and 46.18%, respectively, for the six months ended June 30, 2014. The annualized return on average assets and return on average equity for the comparable period in 2013 were 0.67% and 6.31%, respectively. Net Interest Income. Net interest income for the six months ended June 30, 2014 and 2013 was $25.3 million and $25.6 million, respectively. Net interest margin for the six months ended June 30, 2014 and 2013 was 3.08% and 2.97%, respectively. Total interest income decreased $907,000 in the first six months of 2014 compared to the first six months of 2013, primarily as a result of a decrease of $78.4 million in the average balance of available for sale securities as well as a decrease in the yield on net loans of 18 basis points. These declines were offset by an increase in the average balance of net loans of $23.9 million in the first six months of 2014 as compared to the same period last year. Total interest expense decreased $697,000 for the six months ended June 30, 2014, as compared to the same period last year. The change was due primarily to reductions of $692,000 in interest paid on deposits. 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 5 basis points in the cost of certificates of deposit. The average outstanding balance of certificates of deposit in the first half of 2014 declined by $71.3 million as compared to the first half of 2013. Furthermore, the average balance of non-time deposits decreased $6.0 million and the cost of non-time deposits decreased 4 basis points. 70



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The following table shows the impact of interest rate and outstanding balance (volume) changes compared to the first six months of last year. The interest rate spread for the six months ended June 30, 2014, increased to 2.92% compared to 2.81% for the six months ended June 30, 2013. The net interest margin increased 11 basis points to 3.08% for the six months ended June 30, 2014 compared to 2.97% for the same period in 2013. For the Six Months Ended June 30, 2014 vs. 2013 Increase Total (decrease) due to increase Rate Volume (decrease) (Dollars in thousands) Interest-earning assets: Loans $ (963 )$ 612$ (351 ) Loans held for sale 928 (972 ) (44 ) Investment securities: Available for sale 613 (1,059 ) (446 ) FHLB stock 107 (170 ) (63 ) Other interest-earning assets 12 (15 )



(3 )

Total interest-earning assets $ 697$ (1,604 )$ (907 )

Interest-bearing liabilities:

Savings accounts (61 ) 2



(59 )

NOW and money market accounts (71 ) (11 )



(82 )

Certificates of deposit (126 ) (425 )



(551 )

Federal Home Loan Bank advances (51 ) 46



(5 )

Repurchase agreements and other - -



-

Total interest-bearing liabilities $ (309 )$ (388 )

(697 )

Change in net interest income



$ (210 )

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 ($1.6) million in the first six months of 2014, compared to a $3.2 million expense in the first six 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 $794,000 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 an anticipated resolution balance. Noninterest Income. Noninterest income in the first six months of 2014 was $6.7 million, as compared to noninterest income for the second quarter of 2013 of $12.1 million. The decrease in noninterest income was driven by decreases mortgage banking income, gains on the sale of available for sale securities and other income. The decrease in mortgage banking income was caused by an $81.2 million reduction in mortgage originations sold which resulted in a $2.1 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 half of 2013 that did not reoccur in the first half 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 $700,000 on interest rate caps in the first six months of 2013. Noninterest Expense. Noninterest expense was $27.8 million in the first six months of 2014, compared to $28.2 million in the first six months of 2013; a difference of $463,000. In the first half of 2014, other expenses decreased primarily because of lower expenses incurred on loans sold in the secondary market. Reduced FDIC premiums of $577,000 and franchise/financial institutions tax expenses of $435,000 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. These reductions were offset by an increase of $1.9 million in salaries and employee benefits, primarily due to the above mentioned cost reduction initiative. 71



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Income Taxes. During the six months ended June 30, 2014 the Company recognized a tax benefit of $38.7 million on pre-tax income of $5.8 million, compared to tax expense of $150,000 on pre-tax income of $6.2 million for the six months ended June 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 June 30, 2014, the net deferred tax asset (DTA) was $30.2 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. As of June 30, 2014, the Company had reversed $40.3 million of the valuation allowance on its net DTA. $1.6 million of the reversal is due to current year-to-date operating income; the remaining $38.7 million is due to management's change in 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 (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 to executive searches placed on key management positions (5) evaluation of core earnings (6) adequacy of capital to fund balance sheet and future growth and (7) cost-saving initiatives triggered 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 periods 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 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. 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. 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. 72



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Table of Contents UNITED COMMUNITY FINANCIAL CORP. AVERAGE BALANCE SHEETS The following table presents the total dollar amounts of interest income and interest expense on the indicated amounts of average interest-earning assets or interest-bearing liabilities, together with the weighted average interest rates for the three month periods ended June 30, 2014 and 2013. Average balance calculations were based on daily balances. Three Months Ended June 30, 2014 2013 Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Balance Paid Cost Balance Paid Cost (Dollars in thousands) Interest-earning assets: Net loans (1) $ 1,069,690$ 12,361 4.62 % $ 1,016,810$ 12,207 4.80 % Net loans held for sale 5,514 74 5.37 % 7,683 78 4.06 % Investment securities: Available for sale 518,553 3,125



2.41 % 589,284 3,384 2.30 % Federal Home Loan Bank stock

18,068 230 5.09 % 26,464 277 4.19 % Other interest-earning assets 38,469 21 0.22 % 83,535 41 0.20 % Total interest-earning assets 1,650,294 15,811 3.84 % 1,723,776 15,987 3.71 % Noninterest-earning assets 103,976 99,246 Total assets $ 1,754,270$ 1,823,022 Interest-bearing liabilities: NOW and money market accounts $ 463,786$ 226 0.19 % $ 470,704$ 246 0.21 % Savings accounts 279,004 43 0.06 % 274,238 59 0.09 % Certificates of deposit 457,945 1,358



1.19 % 531,553 1,604 1.21 % Federal Home Loan Bank advances

50,385 524 4.16 % 50,000 524 4.19 % Repurchase agreements and other 90,570 919 4.06 % 90,591 918 4.05 %



Total interest-bearing liabilities 1,341,690 3,070 0.92 % 1,417,086 3,351 0.95 %

Noninterest-bearing liabilities 212,664 195,991 Total liabilities 1,554,354 1,613,077 Equity 199,916 209,945 Total liabilities and equity $ 1,754,270$ 1,823,022 Net interest income and interest rate spread $ 12,741 2.92 % $ 12,636 2.76 % Net interest margin 3.09 % 2.93 % Average interest-earning assets to average interest-bearing liabilities 123.00 % 121.64 %



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

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Table of Contents UNITED COMMUNITY FINANCIAL CORP. AVERAGE BALANCE SHEETS The following table presents the total dollar amounts of interest income and interest expense on the indicated amounts of average interest-earning assets or interest-bearing liabilities, together with the weighted average interest rates for the three month periods ended June 30, 2014 and 2013. Average balance calculations were based on daily balances. Six Months Ended June 30, 2014 2013 Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Balance Paid Cost Balance Paid Cost (Dollars in thousands) Interest-earning assets: Net loans (1) $ 1,056,054$ 24,483 4.64 % $ 1,032,150$ 24,834 4.81 % Net loans held for sale 4,986 123 4.93 % 10,015 167 3.33 % Investment securities: Available for sale 517,297 6,366



2.46 % 595,696 6,812 2.29 % Federal Home Loan Bank stock

20,619 497 4.82 % 26,464 560 4.23 % Other interest-earning assets 45,898 47 0.20 % 55,827 50 0.18 % Total interest-earning assets 1,644,854 31,516 3.84 % 1,720,152 32,423 3.77 % Noninterest-earning assets 104,682 101,736 Total assets $ 1,749,536$ 1,821,888 Interest-bearing liabilities: NOW and money market accounts $ 464,295$ 456 0.20 % $ 473,855$ 538 0.23 % Savings accounts 275,468 87 0.06 % 271,874 146 0.11 % Certificates of deposit 467,680 2,761



1.18 % 538,995 3,312 1.23 % Federal Home Loan Bank advances

50,193 1,042



4.15 % 57,740 1,047 3.63 % Repurchase agreements and other

90,572 1,827



4.03 % 90,594 1,827 4.03 %

Total interest-bearing liabilities 1,348,208 6,173 0.92 % 1,433,058 6,870 0.96 %

Noninterest-bearing liabilities 208,592 196,373 Total liabilities 1,556,800 1,629,431 Equity 192,736 192,457 Total liabilities and equity $ 1,749,536$ 1,821,888 Net interest income and interest rate spread $ 25,343 2.92 % $ 25,553 2.81 % Net interest margin 3.08 % 2.97 % Average interest-earning assets to average interest-bearing liabilities 122.00 % 120.03 %



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

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