ucfc-10q_20190630.htm

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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: 48,085,839 common shares as of July 31, 2019.

	June 30,			December 31,
	2019			2018
	(Dollars in thousands)
Assets:
Cash and deposits with banks	$	27,507		$	34,380
Federal funds sold		27,055			26,605
Total cash and cash equivalents		54,562			60,985
Securities:
Trading		705			364
Available for sale		319,009			241,643
Held to maturity, (fair value of $0 and $75,075, respectively)		—			77,491
Loans held for sale, at fair value		97,477			91,472
Gross loans		2,249,808			2,197,285
Allowance for loan losses		(20,482	)		(20,443	)
Loans, net		2,229,326			2,176,842
Federal Home Loan Bank stock, at cost		14,059			19,144
Premises and equipment, net		22,130			21,930
Accrued interest receivable		9,184			9,080
Real estate owned and other repossessed assets, net		955			1,088
Goodwill		20,221			20,221
Customer list intangible		2,123			2,214
Core deposit intangible		1,439			1,603
Cash surrender value of life insurance		65,002			64,220
Other assets		32,924			23,060
Total assets	$	2,869,116		$	2,811,357
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest bearing	$	398,340		$	394,208
Interest bearing
Customer deposits		1,672,764			1,528,057
Brokered deposits		188,075			290,955
Total interest bearing deposits		1,860,839			1,819,012
Total deposits		2,259,179			2,213,220
Borrowed funds:
Short-term Federal Home Loan Bank advances		233,000			243,000
Repurchase agreements and other		146			224
Total borrowed funds		233,146			243,224
Advance payments by borrowers for taxes and insurance		25,335			27,192
Accrued interest payable		1,378			1,279
Accrued expenses and other liabilities		32,524			17,108
Total liabilities		2,551,562			2,502,023
Shareholders' Equity:
Preferred stock-no par value; 1,000,000 shares authorized and no shares issued or outstanding		—			—
Common stock-no par value; 499,000,000 shares authorized; 54,138,910 shares issued and 48,068,790 and 49,128,875 shares, respectively, outstanding		177,319			177,492
Retained earnings		204,355			192,062
Accumulated other comprehensive loss		(15,180	)		(21,436	)
Treasury stock, at cost, 6,070,120 and 5,010,035 shares, respectively		(48,940	)		(38,784	)
Total shareholders’ equity		317,554			309,334
Total liabilities and shareholders’ equity	$	2,869,116		$	2,811,357

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2019			2018			2019			2018
	(Dollars in thousands, except per share data)
Interest income
Loans	$	26,373		$	23,275		$	52,229		$	46,034
Loans held for sale		991			1,012			1,998			1,870
Securities available for sale, nontaxable		236			356			544			744
Securities available for sale, taxable		1,611			1,193			2,874			2,408
Securities held to maturity, nontaxable		25			61			100			112
Securities held to maturity, taxable		118			398			497			820
Federal Home Loan Bank stock dividends		245			274			534			554
Other interest earning assets		200			92			424			169
Total interest income		29,799			26,661			59,200			52,711
Interest expense
Deposits		7,197			3,790			13,771			6,887
Federal Home Loan Bank advances		559			1,576			1,200			2,996
Total interest expense		7,756			5,366			14,971			9,883
Net interest income		22,043			21,295			44,229			42,828
Provision for loan losses		(51	)		(138	)		10			269
Net interest income after provision for loan losses		22,094			21,433			44,219			42,559
Non-interest income
Insurance agency income		545			513			1,246			1,090
Brokerage income		409			300			779			572
Deposit related fees		1,417			1,392			2,758			2,692
Mortgage servicing fees		881			813			1,754			1,625
Mortgage servicing rights valuation		(996	)		(20	)		(1,495	)		(11	)
Mortgage servicing rights amortization		(553	)		(542	)		(999	)		(1,042	)
Other service fees		21			61			59			99
Net Gains (losses):
Trading securities, including change in fair value		39			—			103			—
Securities available for sale (includes $148, $94, $292 and $233, respectively, accumulated other comprehensive income reclassifications for unrealized net gains on available for sale securities)		148			94			292			233
Mortgage banking income		2,631			1,205			4,307			2,563
Real estate owned and other repossessed assets, net		(33	)		(113	)		(64	)		(191	)
Debit/credit card fees		1,221			1,177			2,156			2,126
Trust fees		461			473			926			942
Increase in cash surrender value of life insurance		397			433			782			866
Other income		83			66			140			107
Total non-interest income		6,671			5,852			12,744			11,671
Non-interest expense
Salaries and employee benefits		9,106			8,937			19,681			18,935
Occupancy		1,028			950			2,074			2,050
Equipment and data processing		2,208			2,372			4,501			4,526
Financial institutions tax		509			495			1,018			991
Advertising		465			290			854			525
Amortization of intangible assets		127			132			255			245
FDIC insurance premiums		297			288			628			578
Other insurance premiums		76			109			151			218
Legal and consulting fees		214			147			274			446
Other professional fees		562			499			1,150			890
Supervisory fees		34			42			68			84
Real estate owned and other repossessed asset expenses		17			34			56			70
Other expenses		1,333			1,235			2,940			2,572
Total non-interest expenses		15,976			15,530			33,650			32,130
Income before income taxes		12,789			11,755			23,313			22,100
Income tax expense (includes $31, $20, $61 and $49 income tax expense from reclassification items)		2,303			2,214			4,171			4,003
Net income	$	10,486		$	9,541		$	19,142		$	18,097

	Common Shares Outstanding			Common Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
	(Dollars in thousands, except per share data)
Balance January 1, 2019		49,128,875		$	177,492		$	192,062		$	(21,436	)	$	(38,784	)	$	309,334
Net income								8,656									8,656
Other comprehensive income											3,020						3,020
Stock option exercises		33,000			(187	)								257			70
Stock option expense					6												6
Restricted stock grants		18,969			(148	)								148			—
Restricted stock forfeitures		(834	)		6									(6	)		—
Restricted stock expense					143												143
Vesting of Long-term Incentive Plan		54,463			98									425			523
Cash dividend payments ($0.07 per share)								(3,432	)								(3,432	)
Treasury stock purchases		(381,785	)											(3,611	)		(3,611	)
Balance March 31, 2019		48,852,688		$	177,410		$	197,286		$	(18,416	)	$	(41,571	)	$	314,709
Net income							$	10,486									10,486
Other comprehensive income											3,236						3,236
Stock option exercises		26,600			(157	)								209			52
Restricted stock grants		11,489			(90	)								90			—
Restricted stock expense					156												156
Cash dividend payments ($0.07 per share)								(3,417	)								(3,417	)
Treasury stock purchases		(821,987	)		—									(7,668	)		(7,668	)
Balance June 30, 2019		48,068,790		$	177,319		$	204,355		$	(15,180	)	$	(48,940	)	$	317,554

	Common Shares Outstanding			Common Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
	(Dollars in thousands, except per share data)
Balance January 1, 2018		49,800,126		$	177,458		$	167,852		$	(18,685	)	$	(32,360	)	$	294,265
Net income								8,556									8,556
Other comprehensive loss											(3,990	)					(3,990	)
Stock option exercises		68,801			(284	)								513			229
Stock option expense					13												13
Restricted stock grants		27,702			(207	)								207			—
Restricted stock forfeitures		(807	)														—
Restricted stock expense					248									(6	)		242
Vesting of Long-term Incentive Plan		36,871			69									275			344
Cash dividend payments ($0.06 per share)								(2,989	)								(2,989	)
Treasury stock purchases		(50,202	)											(475	)		(475	)
Balance March 31, 2018		49,882,491		$	177,297		$	173,419		$	(22,675	)	$	(31,846	)	$	296,195
Net income								9,541									9,541
Other comprehensive loss											(1,402	)					(1,402	)
Stock option exercises		1,300			(8	)								11			3
Stock option expense					19												19
Restricted stock grants		30,283			(226	)								226			—
Restricted stock expense					229												229
Cash dividend payments ($0.06 per share)								(2,995	)								(2,995	)
Treasury stock purchases		(10,000	)											(106	)		(106	)
Balance June 30, 2018		49,904,074		$	177,311		$	179,965		$	(24,077	)	$	(31,715	)	$	301,484

	For the Six Months Ended June 30,
	2019			2018
	(Dollars in thousands)
Cash Flows from Operating Activities
Net income	$	19,142		$	18,097
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		10			269
Mortgage banking income		(1,066	)		(4,760	)
Changes in fair value on loans held for sale		(3,241	)		2,197
Net losses on real estate owned and other repossessed assets sold		64			191
Net gain on available for sale securities sold		(292	)		(233	)
Net gain on trading securities sold and change in fair value		(103	)		—
Purchases of trading securities		(238	)		—
Amortization of premiums and accretion of discounts		3,886			2,781
Depreciation and amortization		1,474			1,359
Net change in interest receivable		(104	)		(264	)
Net change in interest payable		99			(133	)
Net change in prepaid and other assets		(11,076	)		(3,545	)
Net change in other liabilities		16,604			705
Stock based compensation		305			503
Net principal disbursed on loans originated for sale		(151,061	)		(165,861	)
Proceeds from sale of loans held for sale		147,877			143,172
Cash used in payment of operating leases		(665	)		—
Net change in right of use asset		(345	)		—
Net change in deferred tax assets		(1,298	)		3,547
Net change in cash surrender value of life insurance		(782	)		(866	)
Net cash from operating activities		19,190			(2,841	)
Cash Flows from Investing Activities
Proceeds from the principal repayments and maturities of securities available for sale		5,310			5,488
Proceeds from the principal repayments and maturities of securities held to maturity		5,661			4,428
Proceeds from the sale of securities available for sale		58,294			10,361
Proceeds from the sale of real estate owned and other repossessed assets		722			674
Proceeds from the sale of loans held for investment		650			—
Proceeds from redemption of FHLB stock		5,085			—
Purchases of available for sale securities		(59,701	)		—
Purchase of securities held to maturity		(2,000	)		(3,000	)
Purchases of premises and equipment		(1,657	)		(893	)
Principal disbursed on loans, net of repayments		(27,553	)		(82,540	)
Loans purchased		(26,509	)		(18,246	)
Net cash from investing activities		(41,698	)		(83,728	)
Cash Flows from Financing Activities
Net change in checking, savings and money market accounts		121,642			79,339
Net change in certificates of deposit		(75,616	)		99,451
Net change in advance payments by borrowers for taxes and insurance		(1,857	)		(5,785	)
Net change in short-term FHLB advances		(10,000	)		(60,000	)
Net change in repurchase agreements and other borrowed funds		(78	)		(6	)
Proceeds from the exercise of stock options		122			232
Dividends paid		(6,849	)		(5,984	)
Purchase of treasury stock		(11,279	)		(581	)
Net cash from financing activities		16,085			106,666
Change in cash and cash equivalents		(6,423	)		20,097
Cash and cash equivalents, beginning of period		60,985			46,880
Cash and cash equivalents, end of period	$	54,562		$	66,977

United Community Financial Corp. (United Community or the Company) was incorporated in the State of Ohio in February 1998 for the purpose of owning all of the outstanding capital stock of The Home Savings and Loan Company of Youngstown, Ohio (Home Savings and Loan) issued upon the conversion of Home Savings and Loan from a mutual savings association to a permanent capital stock savings association (Conversion). Upon consummation of the Conversion on July 8, 1998, United Community became the unitary thrift holding company for Home Savings and Loan. Immediately following United Community’s acquisition of Ohio Legacy Corp. (OLCB) on January 31, 2017, Home Savings and Loan was merged into Premier Bank & Trust, OLCB’s wholly-owned, state-chartered bank subsidiary (PB&T), and the surviving bank changed its name to Home Savings Bank. In connection with OLCB acquisition, United Community became a financial holding company, and Home Savings Bank, its wholly-owned bank subsidiary following the merger (Home Savings or the Bank), is now an Ohio bank.

Home Savings conducts its business from its main office located in Youngstown, Ohio and 33 retail banking offices (32 in Ohio and one in Pennsylvania). Home Savings also has residential mortgage loan centers servicing Ohio, West Virginia, western Pennsylvania, northern Kentucky, and eastern Indiana.

On January 29, 2016, United Community acquired James & Sons Insurance. James & Sons Insurance was merged into HSB Insurance, LLC, a wholly-owned subsidiary of United Community. HSB Insurance, LLC d/b/a James & Sons Insurance is an insurance agency that offers a wide variety of insurance products for business and residential customers, which include auto, homeowners, life-health, commercial, surety bonds and aviation. On February 28, 2017, James & Sons Insurance acquired Eich Brothers Insurance. Eich Brothers Insurance is an insurance agency that offers insurance products for business and residential customers, which include auto, commercial, homeowners and life-health. On July 1, 2017, James & Sons Insurance acquired Stevens Insurance Agency, which offers insurance products for business and residential customers, including auto, commercial, homeowners and life-health. On July 1, 2018, James & Sons Insurance acquired Steinhauser Insurance Agency which offers property and casualty insurance.

HSB Capital, LLC, a wholly-owned subsidiary of United Community, was formed by United Community during 2016 for the purpose of providing mezzanine funding for customers. Mezzanine loans are offered to customers in United Community’s market area and are expected to be repaid from the cash flow from the operations of the business.

HSB Insurance, Inc., a wholly-owned subsidiary of the Company which was formed and began operations on June 1, 2017, is a Delaware-based captive insurance company which insures against certain risks unique to the operations of the Company and its subsidiaries and for which insurance may not be currently available or economically feasible in today's insurance marketplace. HSB Insurance, Inc. pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. HSB Insurance, Inc. is subject to regulations of the State of Delaware and undergoes periodic examinations by the Delaware Division of Insurance.

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 six months ended June 30, 2019, are not necessarily indicative of the results to be expected for the year ending December 31, 2019. 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, 2018.

The consolidated financial statements include the accounts of United Community and its subsidiaries, Home Savings, HSB Insurance, LLC, HSB Capital, LLC and HSB Insurance, Inc. All material inter-company transactions have been eliminated. Some items in the prior year financial statements were reclassified to conform to the current presentation. These reclassifications had no effect on prior year consolidated statements of operations or shareholders’ equity.

In February 2016, the FASB issued ASU 2016-02 - Leases (Topic 842). The ASU amends existing guidance that requires lessees recognize the following for all leases (with the exception of short–term leases) at the commencement date (1) A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. An entity may adopt the new guidance by either restating prior periods and recording a cumulative effect adjustment at the beginning of the earliest comparative period presented or by recording a cumulative effect adjustment at the beginning of the period of adoption. The Company used the approach of recording a cumulative effect adjustment at the beginning of the period of adoption, however, no cumulative effect adjustment was required to be recorded. The new guidance includes a number of optional transition-related practical expedients. The practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. An entity that elects to apply these practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. The Company elected to apply the practical expedients. In 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, ASU 2018-11, Leases (Topic 842): Targeted Improvements and ASU 2018-20, Leases (Topic 842): Narrow – Scope Improvements for Lessors. These ASUs amend and clarify guidance in ASU 2016-02 and were being considered by the Company in determining the proper adoption of ASU 2016-02. The adoption of this guidance on January 1, 2019, resulted in an approximate $5.2 million increase in right of use asset, $0.3 million increase in other assets and an approximate $5.5 million increase in lease liability.

In June 2016, the FASB Issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 adds a new Topic 326 to the Accounting Standards Codification (Codification) and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. The guidance in ASU 2016-13 is effective for “public business entities,” as defined, that are SEC filers for fiscal years, and for interim periods with those fiscal years, beginning after December 15, 2019. Early adoption of the guidance is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is currently evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements. Management has aggregated and verified the necessary data and addressed any data-archiving improvements necessary for the implementation of this ASU. Management has evaluated various models and parallel calculations are being performed to refine the calculation. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses. The amendment clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20 and should be accounted for in accordance with Topic 842, Leases.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 from the goodwill impairment test. Instead, under the new guidance, an entity is to perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have an impact on the Company’s consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This ASU amends the amortization period for certain purchased callable debt securities held at a premium. It shortens the amortization period for the premium to the earliest call date. Under current U.S. GAAP, premiums on callable debt securities generally are amortized to the maturity date. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2018. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In July 2017, the FASB ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 simplifies the accounting for certain financial instruments with down round features, a provision in an equity-linked financial instrument (or embedded feature) that provides a downward adjustment of the current exercise price based on the price of future equity offerings.

The new ASU will require companies to disregard the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. Companies that provide earnings per share (EPS) data will adjust their basic EPS calculation for the effect of the feature when triggered (i.e., when the exercise price of the related equity-linked financial instrument is adjusted downward because of the down round feature) and will also recognize the effect of the trigger within equity.

The provisions of the new ASU related to down rounds are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. These amendments revise and expand hedge accounting for both financial (e.g., interest rate) and commodity risks. Its provisions create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes. It also makes certain targeted improvements to simplify the application of hedge accounting guidance. This ASU is effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption, including adoption in an interim period, is permitted. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period (i.e., the initial application date). The adoption of this guidance did not have an impact on the Company’s consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07). The FASB issued ASU 2018-07 intending to reduce cost and complexity and to improve financial reporting for nonemployee share-based payments. ASU 2018-07 expands the scope of Topic 718, Compensation—Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. ASU 2018-07 supersedes Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees. The amendments in ASU 2018-07 are effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure objective paragraphs of ASU 820 to eliminate (1) “at a minimum” from the phrase “an entity shall disclose at a minimum” and (2) other similar “open ended” disclosure requirements to promote the appropriate exercise of discretion of entities. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. The Company is currently assessing the impact of ASU 2018-13 on the Company’s consolidated financial statements.

On April 30, 2015, shareholders approved the United Community Financial Corp. 2015 Long-Term Incentive Compensation Plan (the 2015 Plan). The purpose of the 2015 Plan is to provide a means through which United Community may attract and retain employees and non-employee directors, to provide incentives that align their interest with those of United Community’s shareholders and promote the success of United Community’s business. All employees and non-employee directors are eligible to participate in the 2015 Plan. The 2015 Plan provides for the issuance of up to 1,200,000 shares that are to be used for awards of stock options, stock awards, stock units, stock appreciation rights (SARs), annual bonus awards and long-term incentive awards.

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 was 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 was terminated on April 30, 2015 upon the adoption of the 2015 Plan, although the 2007 Plan survives with respect to awards issued under the 2007 Plan that remain outstanding and exercisable. The 2007 Plan provided for the issuance of up to 2,000,000 shares that were to be used for awards of restricted stock, stock options, performance awards, SARs, or other forms of stock-based incentive awards. Because the 2007 Plan terminated, no additional awards may be made under it.

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 with respect to options issued under the 1999 Plan that 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.

There were no stock options granted under the 2015 Plan in the three or six months ended June 30, 2019 and zero and 50,000 options granted in the three and six months ended June 30, 2018. Pursuant to the terms of the 2015 Plan, any options granted must be exercised within 10 years from the date of grant. Expenses related to prior stock option grants are included with salaries and employee benefits. The Company recognized $- and $6,000 in stock option expense for the three and six months ended June 30, 2019, respectively. The Company recognized $19,000 and $32,000 in stock option expense for the three and six months ended June 30, 2018, respectively. The Company expects to recognize no additional stock option expense for the remainder of 2019.

A summary of option activity for the six months ended June 30, 2019 in the 2015 Plan, the 2007 Plan and the 1999 Plan is as follows:

Information related to stock options for the six months ended June 30, 2019 and 2018 follows:

Information related to stock options granted during the six months ended June 30, 2018 were as follows:

Outstanding stock options at June 30, 2019 have a weighted average remaining life of 4.04 years and may be exercised in the range of $1.20 to $9.66 per share.

The 2007 Plan permitted and the 2015 Plan permits the issuance of restricted stock awards to eligible employees and nonemployee directors. Nonvested shares at June 30, 2019 aggregated 123,378, of which 21,953 are expected to vest during the remainder of 2019, 35,233 in 2020, 58,834 in 2021 and 7,358 in 2022. Expense related to restricted stock awards is charged to salaries and employee benefits and is recognized over the vesting period of the awards based on the fair value of the shares at the grant date. The Company recognized approximately $156,000 and $299,000 in restricted stock award expense for the three and six months ended June 30, 2019. The Company recognized approximately $229,000 and $471,000 in restricted stock award expense for the three and six months ended June 30, 2018. The Company expects to recognize additional expenses related to restricted stock awards of approximately $261,000 in 2019, $321,000 in 2020, $153,000 in 2021 and $43,000 in 2022. The total average per share fair value of shares vested during the three and six months ended June 30, 2019 was $9.36 and $9.62.

A summary of changes in the Company’s nonvested restricted shares for the six months ended June 30, 2019 is as follows:

The Annual Incentive Plan (AIP) provides incentive compensation awards to certain officers of the Company. Annual incentive awards are generally based upon the actual performance of the Company and individual participant performance for the twelve months ending December 31, compared to the actual performance of a peer group during the same twelve-month period. The target incentive awards for each year are measured as a percentage of the base salary of participating officers. Once the awards under the AIP are calculated, they are paid in cash and/or restricted stock. The restricted stock vests equally over three years, beginning on the first anniversary of the date the restricted stock is issued. The Company incurred $44,000 and $70,000 in expense for the restricted stock portion of the AIP for the three and six months ended June 30, 2019 and $217,000 and $917,000 for the cash portion of the AIP for the three and six months ended June 30, 2019. The Company incurred $95,000 and $190,000 in expense for the restricted stock portion of the AIP for the three and six months ended June 30, 2018 and $426,000 and $871,000 for the cash portion of the AIP for the six months ended June 30, 2018, respectively.

The Long-term Incentive Plan (LTIP) provides a long-term incentive compensation opportunity to certain executive officers, whose participation and target award opportunities will be approved by the Compensation Committee of the Board of Directors. Each participant in the LTIP will be granted a target number of Performance Share Units (PSUs). Target PSUs will be determined as a percentage of base salary and translated into share units based on the Company’s average stock price at the appropriate measurement date. The performance period for the annual grant for a given year will be from January 1, year 1 through December 31, year 3. The Company incurred $184,000and $366,000 for the LTIP for the three and six months ended June 30, 2019. The Company incurred $212,000 and $381,000 in expense for the LTIP for the three and six months ended June 30, 2018.

The Company recognizes 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. To achieve this result, the following five steps are applied:

Step 4: Allocate the transaction price to the performance obligations in the contract

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

The revenue guidance applies to all contracts with customers to provide goods or services in the ordinary course of business, except for loans and securities, which are specifically excluded from the scope.

Because loans and securities are outside the scope of the revenue standard, the Company does not use the new standard to account for gains and losses on its investments in securities, loans and derivatives. The Company also does not use the standard to account for interest and dividend income on financial instruments owned or those included in the Company’s lending activities.

Home Savings’ servicing of loans sold to investors requires Home Savings to provide specific administrative functions for the owner(s) of these assets. These administrative functions include collecting cash flows from borrowers and remitting them to beneficial interest holders, monitoring delinquencies and executing foreclosures. Servicing rights that relate to transferred financial assets meet the conditions for sale accounting under ASC 860. ASC 860 requires the recognition of a servicing asset or liability when the benefits of servicing obtained from the contract are respectively greater than or less than adequate compensation (as defined in ASC 860) for performing the servicing. While ASC 860 provides initial recognition and subsequent measurement guidance for recognized servicing assets and liabilities, it does not include any explicit guidance for recognizing contractually specified servicing fees when servicing income is equal to adequate compensation. Therefore, income from servicing financial assets in the scope of ASC 860 is not in the scope of ASC 606, regardless of whether a servicing asset or liability exists. ASC 606 contains an exception to its scope for contracts that fall under ASC 860.

Deposit-related fees and charges are in the scope of ASC 606, even though ASC 405 is listed as an exception to the scope of the standard. That is because ASC 405, which the Company applies to determine the appropriate liability accounting for customer deposits, does not provide a model for recognizing fees related to customer deposits (e.g., automated teller machine fees, nonsufficient funds fees, account maintenance or dormancy fees). When reviewing standard customer agreements, fees are charged as the service is rendered and therefore revenue is recognized at the time the transaction is executed as it is the point when the performance obligation has been met.

The Company records real estate owned and other repossessed assets (OREO) at fair value less costs to sell upon foreclosure. The objective is to sell OREO within a short period of time because of regulatory and capital requirements. After foreclosure, these assets are carried at the lower of their carrying amount or their fair value less selling costs, so significant gains and losses are uncommon upon sale. OREO is often sold in a transaction that, under the standard, may not be considered a contract with a customer because the sale of the asset is not an output of the entity’s ordinary activities. However, sales of nonfinancial assets, including in substance nonfinancial assets, should be accounted for using new guidance in ASC 610-20, Other Income — Gains and Losses from the Derecognition of Nonfinancial Assets, which requires entities to apply certain measurement and recognition concepts of ASC 606. Accordingly, the Company recognizes the sale of a real estate property, along with any associated gain or loss, when control of the property transfers to the buyer. For sales of existing real estate properties, this generally will occur at a point in time.

Insurance agency income is within the scope of ASC 606. The majority (75%) of the Company’s insurance agency income is derived from direct-bill customers. With this arrangement, the customer is billed directly from the insurance carrier. As a result, the insurance carrier pays a commission to the Company upon completion of the required documentation (policy application or renewal) and recognizes income at that time. Agency-billed customers account for approximately 25% of the overall insurance agency income. Premiums are collected from customers and remitted to the insurance carrier, net of commission, within a short period of time. At the time the premiums are remitted to the insurance carrier, all work is completed and revenue recognized at that time.

Debit card fee income is earned as a result of standard interchange fees contractually obligated by VISA to be paid. Fees are received when they are essentially earned, which include fees charged to a reseller for the presentment of credit/debit cards in a point-of-sale (POS) transaction (interchange). The service is considered complete upon payment in a POS transaction, when the interchange fee is earned and paid. Credit card fees are paid when earned as a result of an agreement between the Company and a third-party provider.

Trust fee income is calculated based on assets under management. Fees are recognized at the end of the month to which the service has been provided for customers billed monthly. This amounts to approximately 85% of trust fee income recognized, which is collected within a short period of time after the fee is assessed to the customer. Quarterly and annual fees are accrued and collected based on the contractual agreements with customers. Fees are assessed to these customers and paid at the end of each quarter. Quarterly and annual fees are to be recognized over the period when the fees are earned, regardless of when they are assessed to the customer.

Brokerage revenue is recognized each month as sales occur. Brokerage revenue is paid from sales to customers by a third-party. In a manner similar to that of insurance agency revenue, income is paid directly to the Bank by the third-party once the sale to the customer is complete.

During the second quarter of 2019, the Company elected to transfer it’s held to maturity securities portfolio to the available for sale portfolio. At the time of transfer, the securities had an amortized cost of $74.6 million and a fair value of $72.5 million. Due to the continued decline in interest rates, the Company elected to move the securities into available for sale to provide more opportunities to reposition the portfolio.

Components of the held to maturity securities portfolio at December 31, 2018 are as follows:

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

Securities pledged for public funds were approximately $160.1 million at June 30, 2019 and approximately $108.7 million at December 31, 2018.

Securities available for sale that have been in an unrealized loss position for less than twelve months or twelve months or more at June 30, 2019 are as follows:

	June 30, 2019
	Less than 12 months					12 months or more					Total
	Fair		Unrealized loss			Fair		Unrealized			Fair		Unrealized
	value		Loss			value		Loss			value		Loss
	(Dollars in thousands)
Description of securities:
U.S. Treasury and agency securities	$	—	$	—		$	—	$	—		$	—	$	—
States and municipalities		—		—			—		—			—		—
Corporate debt securities		503		(3	)		—		—			503		(3	)
Collateralized mortgage obligations (CMO)		7,803		(22	)		—		—			7,803		(22	)
Mortgage-backed securities (MBS)		—		—			108,254		(1,706	)		108,254		(1,706	)
Total temporarily impaired securities	$	8,306	$	(25	)	$	108,254	$	(1,706	)	$	116,560	$	(1,731	)

Securities available for sale that have been in an unrealized loss position for less than twelve months or twelve months or more at December 31, 2018 are as follows:

Securities held to maturity that have been in an unrecognized loss position for less than twelve months or twelve months or more are as follows:

During the third quarter of 2015, Home Savings transferred securities with a total amortized cost of $105.3 million with a corresponding fair value of $103.8 million from available for sale to held to maturity. The net unrealizable loss, net of taxes, on these securities at the date of transfer was $999,000. The fair value at the date of transfer becomes the securities’ new cost basis. The unrealized holding loss at the time of transfer continues to be reported in accumulated other comprehensive income, net of tax, and is amortized over the remaining lives of the securities as an adjustment of the yield. The amortization of the unamortized holding loss reported in accumulated other comprehensive income will directly offset the effect on interest income from the accretion of the reduced amortized cost for the transferred securities. Because of this transfer, the total losses less than 12 months and greater than 12 months reported in the table above for the period ending December 31, 2018, will not agree to the unrealized losses reported in the inventory of held to maturity securities. The inventory table reports unrealized gains and losses based upon the transferred securities adjusted cost basis and current fair value. The reporting of losses less than 12 months and greater than 12 months represents that actual period of time that these securities have been in an unrealized loss position and the securities amortized cost basis as if the transfer did not occur. These securities were transferred to available for sale from held to maturity in the second quarter of 2019.

All of the securities in available for sale that were temporarily impaired at June 30, 2019 were impaired due to the level of interest rates at the time of purchase compared to current interest rates. All of the securities in available for sale and held to maturity that were temporarily impaired at December 31, 2018 were also impaired due to the level of interest rates at the time of purchase compared to interest rates at that time. Unrealized losses on these securities have not been recognized into income for the three and six months ended June 30, 2019 or 2018 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. There is risk that longer term rates could rise further resulting in greater unrealized losses. The Company expects to realize all interest and principal on these securities and has no intent to sell and more than likely will not be required to sell these securities before their anticipated recovery.

Proceeds from the sale of available for sale securities were $42.6 million and $5.7 million for the three months ended June 30, 2019 and 2018, respectively. Gross gains of $180,000 and $94,000 were realized on these sales during the three months ended June 30, 2019 and 2018, respectively. Gross losses of $32,000 and $0 were realized during the three months ended June 30, 2019 and 2018, respectively.

Proceeds from the sale of available for sale securities were $58.3 million and $10.4 million, for the six months ended June 30, 2019 and 2018, respectively. Gross gains of $324,000 and $233,000 were realized on these sales during the six months ended June 30, 2019 and 2018, respectively. Gross losses of $32,000 and $0 were realized during the six months ended June 30, 2019 and 2018, respectively.

	June 30,			December 31,
	2019			2018
	(Dollars in thousands)
Commercial loans
Multifamily	$	154,630		$	134,143
Nonresidential		414,780			409,979
Land		16,955			16,830
Construction		138,043			141,686
Secured		243,044			233,306
Unsecured		6,854			6,987
Total commercial loans		974,306			942,931
Residential mortgage loans
One-to four-family		942,698			927,255
Construction		46,196			43,435
Total residential mortgage loans		988,894			970,690
Consumer loans
Home equity		184,676			185,661
Auto		82,715			78,686
Marine		1,097			1,206
Recreational vehicle		3,433			4,347
Other		7,610			7,141
Total consumer loans		279,531			277,041
Total loans		2,242,731			2,190,662
Less:
Allowance for loan losses		20,482			20,443
Deferred loan costs, net		(7,077	)		(6,623	)
Total		13,405			13,820
Loans, net	$	2,229,326		$	2,176,842

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 June 30, 2019 and December 31, 2018 and activity for the three and six months ended June 30, 2019 and 2018.

	Commercial Loans			Residential Loans			Consumer Loans			Total
	(Dollars in thousands)
For the three months ended June 30, 2019
Beginning balance	$	12,114		$	5,823		$	2,509		$	20,446
Provision (recovery)		263			(312	)		(2	)		(51	)
Charge-offs		—			(79	)		(115	)		(194	)
Recoveries		170			26			85			281
Ending balance	$	12,547		$	5,458		$	2,477		$	20,482
For the six months ended June 30, 2019
Beginning balance	$	11,875		$	5,923		$	2,645		$	20,443
Provision		444			(490	)		56			10
Charge-offs		(88	)		(99	)		(440	)		(627	)
Recoveries		316			124			216			656
Ending balance	$	12,547		$	5,458		$	2,477		$	20,482
As of June 30, 2019
Period-end amount allocated to:
Loans individually evaluated for impairment	$	857		$	669		$	290			1,816
Loans collectively evaluated for impairment		11,690			4,789			2,187			18,666
Ending balance	$	12,547		$	5,458		$	2,477		$	20,482
Period-end balances:
Loans individually evaluated for impairment		7,680			12,402			5,057			25,139
Loans collectively evaluated for impairment		966,626			976,492			274,474			2,217,592
Ending balance	$	974,306		$	988,894		$	279,531		$	2,242,731

	Commercial Loans			Residential Loans			Consumer Loans			Total
For the three months ended June 30, 2018
Beginning balance	$	13,095		$	5,701		$	2,814		$	21,610
Provision (recovery)		(263	)		180			(55	)		(138	)
Charge-offs		(75	)		(96	)		(83	)		(254	)
Recoveries		51			82			54			187
Ending balance	$	12,808		$	5,867		$	2,730		$	21,405
For the six months ended June 30, 2018
Beginning balance	$	12,542		$	5,860		$	2,800		$	21,202
Provision		133			87			49			269
Charge-offs		(75	)		(181	)		(269	)		(525	)
Recoveries		208			101			150			459
Ending balance	$	12,808		$	5,867		$	2,730		$	21,405
As of December 31, 2018
Period-end amount allocated to:
Loans individually evaluated for impairment	$	103		$	798		$	300			1,201
Loans collectively evaluated for impairment		11,772			5,125			2,345			19,242
Ending balance	$	11,875		$	5,923		$	2,645		$	20,443
Period-end balances:
Loans individually evaluated for impairment		2,017			13,086			5,491			20,594
Loans collectively evaluated for impairment		940,914			957,604			271,550			2,170,068
Ending balance	$	942,931		$	970,690		$	277,041		$	2,190,662

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required based on an analysis using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations, estimated collateral values, general economic conditions in the market area and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

Other loans not reviewed specifically by management are evaluated as a homogenous group of loans (generally single-family residential mortgage loans and all consumer credits except marine loans) using a loss factor applied to the outstanding loan balance to determine the level of reserve required. This loss factor consists of two components, a quantitative and a qualitative component. The quantitative component is based on a historical analysis of all charged-off loans, net of recoveries. In determining the qualitative factors, consideration is given to such attributes as lending policies, economic conditions, nature and volume of the portfolio, management, loan quality trend, loan review, collateral value, concentrations, economic cycles and other external factors. As of June 30, 2019, the Company evaluated 28 quarters of net charge-off history and applied this information to the current period. This component is combined with the qualitative component to arrive at the loss factor, which is applied to the outstanding balance of homogenous loans.

The following table presents loans individually evaluated for impairment by class of loans as of and for six months ended June 30, 2019:

	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
Commercial loans
Multifamily	$	155	$	—	$	—	$	57	$	1	$	1
Nonresidential		2,942		2,801		—		1,019		17		17
Land		—		—		—		—		—		—
Construction		2,446		—		—		—		—		—
Secured		235		—		—		—		—		—
Unsecured		474		—		—		—		—		—
Total commercial loans		6,252		2,801		—		1,076		18		18
Residential mortgage loans
One-to four-family		5,579		4,792		—		4,672		64		55
Construction		—		—		—		—		—		—
Total residential mortgage loans		5,579		4,792		—		4,672		64		55
Consumer loans
Home equity		1,041		926		—		912		7		6
Auto		33		25		—		19		—		—
Marine		354		105		—		118		—		—
Recreational vehicle		386		49		—		95		4		4
Other		—		—		—		—		—		—
Total consumer loans		1,814		1,105		—		1,144		11		10
Total	$	13,645	$	8,698	$	—	$	6,892	$	93	$	83
With a specific allowance recorded
Commercial loans
Multifamily	$	—	$	—	$	—	$	—	$	—	$	—
Nonresidential		—		—		—		1,301		45		37
Land		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Secured		5,654		4,879		857		1,947		137		137
Unsecured		—		—		—		—		—		—
Total commercial loans		5,654		4,879		857		3,248		182		174
Residential mortgage loans
One-to four-family		7,741		7,610		669		8,077		239		202
Construction		—		—		—		—		—		—
Total residential mortgage loans		7,741		7,610		669		8,077		239		202
Consumer loans
Home equity		3,620		3,535		274		3,680		110		97
Auto		—		—		—		—		—		—
Marine		86		86		1		89		2		2
Recreational vehicle		343		331		15		314		11		10
Other		—		—		—		—		—		—
Total consumer loans		4,049		3,952		290		4,083		123		109
Total		17,444		16,441		1,816		15,408		544		485
Total impaired loans	$	31,089	$	25,139	$	1,816	$	22,300	$	637	$	568

The following table presents loans individually evaluated for impairment by class of loans as of and for six months ended June 30, 2018:

	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
Commercial loans
Multifamily	$	28	$	—	$	—	$	—	$	—	$	—
Nonresidential		630		137		—		100		4		4
Land		706		—		—		6		—		—
Construction		2,457		—		—		—		—		—
Secured		1,115		907		—		901		—		—
Unsecured		184		—		—		—		—		—
Total commercial loans		5,120		1,044		—		1,007		4		4
Residential mortgage loans
One-to four-family		6,918		5,994		—		5,602		74		58
Construction		—		—		—		—		—		—
Total residential mortgage loans		6,918		5,994		—		5,602		74		58
Consumer loans
Home equity		1,496		1,224		—		1,087		11		10
Auto		29		22		—		33		—		—
Marine		553		181		—		181		—		—
Recreational vehicle		520		100		—		122		4		4
Other		1		—		—		6		—		—
Total consumer loans		2,599		1,527		—		1,429		15		14
Total	$	14,637	$	8,565	$	—	$	8,038	$	93	$	76
With a specific allowance recorded
Commercial loans
Multifamily	$	422	$	275	$	28	$	275	$	—	$	—
Nonresidential		1,235		1,232		13		1,356		52		44
Land		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Secured		819		568		473		579		—		—
Unsecured		—		—		—		—		—		—
Total commercial loans		2,476		2,075		514		2,210		52		44
Residential mortgage loans
One-to four-family		8,574		8,461		834		9,793		233		195
Construction		—		—		—		—		—		—
Total residential mortgage loans		8,574		8,461		834		9,793		233		195
Consumer loans
Home equity		4,282		4,201		295		4,505		123		110
Auto		—		—		—		—		—		—
Marine		95		95		1		97		2		2
Recreational vehicle		393		381		17		393		11		10
Other		—		—		—		—		—		—
Total consumer loans		4,770		4,677		313		4,995		136		122
Total		15,820		15,213		1,661		16,998		421		361
Total impaired loans	$	30,457	$	23,778	$	1,661	$	25,036	$	514	$	437

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2018:

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no specific allowance recorded
Commercial loans
Multifamily	$	443	$	170	$	—
Nonresidential		588		130		—
Land		—		—		—
Construction		2,447		—		—
Secured		806		—		—
Unsecured		474		—		—
Total commercial loans		4,758		300		—
Residential mortgage loans
One-to four-family		5,840		4,908		—
Construction		—		—		—
Total residential mortgage loans		5,840		4,908		—
Consumer loans
Home equity		1,084		957		—
Auto		25		17		—
Marine		502		145		—
Recreational vehicle		592		172		—
Other		—		—		—
Total consumer loans		2,203		1,291		—
Total	$	12,801	$	6,499	$	—
With a specific allowance recorded
Commercial loans
Multifamily	$	—	$	—	$	—
Nonresidential		1,186		1,186		12
Land		—		—		—
Construction		—		—		—
Secured		989		531		91
Unsecured		—		—		—
Total commercial loans		2,175		1,717		103
Residential mortgage loans
One-to four-family		8,298		8,178		798
Construction		—		—		—
Total residential mortgage loans		8,298		8,178		798
Consumer loans
Home equity		3,925		3,842		283
Auto		—		—		—
Marine		91		91		1
Recreational vehicle		279		267		16
Other		—		—		—
Total consumer loans		4,295		4,200		300
Total		14,768		14,095		1,201
Total impaired loans	$	27,569	$	20,594	$	1,201

The following table presents loans individually evaluated for impairment by class of loans for the three months ended June 30, 2019:

	Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With no specific allowance recorded
Commercial loans
Multifamily	$	—			$	—
Nonresidential		1,464		16		16
Land		—		—		—
Construction		—		—		—
Secured		—		—		—
Unsecured		—		—		—
Total commercial loans		1,464		16		16
Residential mortgage loans
One-to four-family		4,554		35		35
Construction		—		—		—
Total residential mortgage loans		4,554		35		35
Consumer loans
Home equity		889		6		6
Auto		20		—		—
Marine		105		—		—
Recreational vehicle		56		2		2
Other		—		—		—
Total consumer loans		1,070		8		8
Total	$	7,088	$	59	$	59
With a specific allowance recorded
Commercial loans
Multifamily	$	—	$	—	$	—
Nonresidential		1,359		—		—
Land		—		—		—
Construction		—		—		—
Secured		2,656		134		134
Unsecured		—		—		—
Total commercial loans		4,015		134		134
Residential mortgage loans
One-to four-family		8,027		92		91
Construction		—		—		—
Total residential mortgage loans		8,027		92		91
Consumer loans
Home equity		3,600		49		48
Auto		—		—		—
Marine		88		1		1
Recreational vehicle		338		5		5
Other		—		—		—
Total consumer loans		4,026		55		54
Total		16,068		281		279
Total impaired loans	$	23,156	$	340	$	338

The following table presents loans individually evaluated for impairment by class of loans for the three months ended June 30, 2018:

	Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With no specific allowance recorded
Commercial loans
Multifamily	$	—	$	—	$	—
Nonresidential		78		1		1
Land		5		—		—
Construction		—		—		—
Secured		905		—		—
Unsecured		—		—		—
Total commercial loans		988		1		1
Residential mortgage loans
One-to four-family		5,683		30		30
Construction		—		—		—
Total residential mortgage loans		5,683		30		30
Consumer loans
Home equity		1,101		6		6
Auto		42		—		—
Marine		181		—		—
Recreational vehicle		108		2		2
Other		8		—		—
Total consumer loans		1,440		8		8
Total	$	8,111	$	39	$	39
With a specific allowance recorded
Commercial loans
Multifamily	$	275	$	—	$	—
Nonresidential		1,323		22		22
Land		—		—		—
Construction		—		—		—
Secured		563		—		—
Unsecured		—		—		—
Total commercial loans		2,161		22		22
Residential mortgage loans
One-to four-family		9,340		98		96
Construction		—		—		—
Total residential mortgage loans		9,340		98		96
Consumer loans
Home equity		4,338		57		56
Auto		—		—		—
Marine		96		1		1
Recreational vehicle		387		5		5
Other		—		—		—
Total consumer loans		4,821		63		62
Total		16,322		183		180
Total impaired loans	$	24,433	$	222	$	219

Home Savings reclassifies a collateralized mortgage loan and a consumer loan secured by real estate to real estate owned and other repossessed assets once it has either obtained legal title to the real estate collateral or the borrower voluntarily conveys all interest in the real property to the Bank to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. The table below presents loans that are in the process of foreclosure at June 30, 2019 and December 31, 2018, but legal title, deed in lieu of foreclosure or similar legal agreement to the property has not yet been obtained:

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days and still on accrual by class of loans as of June 30, 2019:

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days and still on accrual by class of loans as of December 31, 2018:

The following table presents an age analysis of past-due loans, segregated by class of loans as of June 30, 2019:

	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current Loans		Total Loans
Commercial loans
Multifamily	$	—	$	—	$	—	$	—	$	154,630	$	154,630
Nonresidential		104		1,681		—		1,785		412,995		414,780
Land		—		—		—		—		16,955		16,955
Construction		—		—		—		—		138,043		138,043
Secured		24		44		427		495		242,549		243,044
Unsecured		—		—		—		—		6,854		6,854
Total commercial loans		128		1,725		427		2,280		972,026		974,306
Residential mortgage loans
One-to four-family		3,059		765		3,867		7,691		935,007		942,698
Construction		—		—		—		—		46,196		46,196
Total residential mortgage loans		3,059		765		3,867		7,691		981,203		988,894
Consumer Loans:
Home equity		1,166		319		893		2,378		182,298		184,676
Automobile		254		49		57		360		82,355		82,715
Marine		—		—		105		105		992		1,097
Recreational vehicle		59		73		34		166		3,267		3,433
Other		31		11		9		51		7,559		7,610
Total consumer loans		1,510		452		1,098		3,060		276,471		279,531
Total loans	$	4,697	$	2,942	$	5,392	$	13,031	$	2,229,700	$	2,242,731

The following table presents an age analysis of past-due loans, segregated by class of loans as of December 31, 2018:

	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current Loans		Total Loans
Commercial loans
Multifamily	$	—	$	—	$	171	$	171	$	133,972	$	134,143
Nonresidential		—		—		—		—		409,979		409,979
Land		—		—		—		—		16,830		16,830
Construction		—		—		—		—		141,686		141,686
Secured		195		—		531		726		232,580		233,306
Unsecured		—		—		—		—		6,987		6,987
Total commercial loans		195		—		702		897		942,034		942,931
Residential mortgage loans
One-to four-family		2,139		882		3,470		6,491		920,764		927,255
Construction		—		—		—		—		43,435		43,435
Total residential mortgage loans		2,139		882		3,470		6,491		964,199		970,690
Consumer Loans:
Home equity		658		295		1,147		2,100		183,561		185,661
Automobile		283		112		131		526		78,160		78,686
Marine		—		—		145		145		1,061		1,206
Recreational vehicle		548		—		145		693		3,654		4,347
Other		33		—		10		43		7,098		7,141
Total consumer loans		1,522		407		1,578		3,507		273,534		277,041
Total loans	$	3,856	$	1,289	$	5,750	$	10,895	$	2,179,767	$	2,190,662

As of June 30, 2019 and December 31, 2018, the Company has a recorded investment in troubled debt restructurings of $15.3 million and $16.6 million, respectively. The Company allocated $989,000 of specific allowance for those loans at June 30, 2019 and $1.1 million at December 31, 2018. The Company has committed to lend, to existing troubled debt restructuring relationships, additional amounts totaling up to $45,000 and $41,000 at June 30, 2019 and December 31, 2018, respectively.

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended June 30, 2019:

	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Recorded Investment
			(In thousands)
Commercial loans
Multifamily		—	$	—	$	—
Nonresidential		—		—		—
Land		—		—		—
Construction		—		—		—
Secured		1		824		824
Unsecured		—		—		—
Total commercial loans		1		824		824
Residential mortgage loans
One-to four-family		—		—		—
Construction		—		—		—
Total residential mortgage loans		—		—		—
Consumer loans
Home equity		1		40		44
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—
Total consumer loans		1		40		44
Total restructured loans		2	$	864	$	868

The troubled debt restructurings described above increased the allowance for loan losses by $1,000 and resulted in no charge-offs during the three months ended June 30, 2019.

The following table presents loans by class modified as troubled debt restructurings that occurred during the six months ended June 30, 2019:

	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Recorded Investment
			(In thousands)
Commercial loans
Multifamily		—	$	—	$	—
Nonresidential		—		—		—
Land		—		—		—
Construction		—		—		—
Secured		1		824		824
Unsecured		—		—		—
Total commercial loans		1		824		824
Residential mortgage loans
One-to four-family		1		335		355
Construction		—		—		—
Total residential mortgage loans		1		335		355
Consumer loans
Home equity		1		40		44
Auto		—		—		—
Marine		—		—		—
Recreational vehicle
Other		—		—		—
Total consumer loans		1		40		44
Total restructured loans		3	$	1,199	$	1,223

The troubled debt restructurings described above increased the allowance for loan losses by $1,000 and resulted in no charge-offs during the six months ended June 30, 2019.

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended June 30, 2018:

	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Recorded Investment
			(Dollars in thousands)
Commercial loans
Multifamily		—	$	—	$	—
Nonresidential		—		—		—
Land		—		—		—
Construction		—		—		—
Secured		—		—		—
Unsecured		—		—		—
Total commercial loans		—		—		—
Residential mortgage loans
One-to four-family		3		521		547
Construction		—		—		—
Total residential mortgage loans		3		521		547
Consumer loans
Home equity		2		113		113
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—
Total consumer loans		2		113		113
Total restructured loans		5	$	634	$	660

The troubled debt restructurings described above increased the allowance for loans losses by $3,000 and resulted in no charge-offs during the three months ended June 30, 2018.

The following table presents loans by class modified as troubled debt restructurings that occurred during the six months ended June 30, 2018:

	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Recorded Investment
			(Dollars in thousands)
Commercial loans
Multifamily		—	$	—	$	—
Nonresidential		1		124		124
Land		—		—		—
Construction		—		—		—
Secured		—		—		—
Unsecured		—		—		—
Total commercial loans		1		124		124
Residential mortgage loans
One-to four-family		3		521		547
Construction		—		—		—
Total residential mortgage loans		3		521		547
Consumer loans
Home equity		2		113		113
Auto		—		—		—
Marine		—		—		—
Recreational vehicle		—		—		—
Other		—		—		—
Total consumer loans		2		113		113
Total restructured loans		6	$	758	$	784

The troubled debt restructurings described above increased the allowance for loans losses by $3,000 and resulted in no charge-offs during the six months ended June 30, 2018.

There were no loans modified as troubled debt restructurings for which there was a payment default within a twelve-month cycle following the modification during the period ended June 30, 2019.

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 during the period ended June 30, 2018:

The troubled debt restructurings that subsequently defaulted described above resulted in no charge-offs during the three and six months ended June 30, 2018, and had no effect on the provision for loan losses.

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

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. 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 June 30, 2019 and December 31, 2018, 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
Commercial Loans
Multifamily	$	142,730	$	10,824	$	1,076	$	—	$	—	$	1,076	$	154,630
Nonresidential		389,262		15,346		10,172		—		—		10,172		414,780
Land		16,955		—		—		—		—		—		16,955
Construction		135,658		2,385		—		—		—		—		138,043
Secured		220,556		3,065		19,423		—		—		19,423		243,044
Unsecured		6,771		—		83		—		—		83		6,854
Total commercial loans		911,932		31,620		30,754		—		—		30,754		974,306
Residential mortgage loans
One-to four-family		937,532		96		5,070		—		—		5,070		942,698
Construction		46,196		—		—		—		—		—		46,196
Total residential mortgage loans		983,728		96		5,070		—		—		5,070		988,894
Consumer Loans
Home equity		183,700		—		976		—		—		976		184,676
Auto		82,658		—		57		—		—		57		82,715
Marine		992		—		105		—		—		105		1,097
Recreational vehicle		3,399		—		34		—		—		34		3,433
Other		7,597		—		13		—		—		13		7,610
Total consumer loans		278,346		—		1,185		—		—		1,185		279,531
Total loans	$	2,174,006	$	31,716	$	37,009	$	—	$	—	$	37,009	$	2,242,731

	Unclassified				Classified
	Unclassified		Special Mention		Substandard		Doubtful		Loss		Total Classified		Total Loans
Commercial Loans
Multifamily	$	133,972	$	—	$	171	$	—	$	—	$	171	$	134,143
Nonresidential		378,160		18,420		13,399		—		—		13,399		409,979
Land		16,830		—		—		—		—		—		16,830
Construction		139,540		2,146		—		—		—		—		141,686
Secured		214,924		2,184		16,198		—		—		16,198		233,306
Unsecured		6,894		—		93		—		—		93		6,987
Total commercial loans		890,320		22,750		29,861		—		—		29,861		942,931
Residential mortgage loans
One-to four-family		921,694		591		4,970		—		—		4,970		927,255
Construction		43,435		—		—		—		—		—		43,435
Total residential mortgage loans		965,129		591		4,970		—		—		4,970		970,690
Consumer Loans
Home equity		184,438		—		1,223		—		—		1,223		185,661
Auto		78,551		—		135		—		—		135		78,686
Marine		1,061		—		145		—		—		145		1,206
Recreational vehicle		4,221		—		126		—		—		126		4,347
Other		7,131		—		10		—		—		10		7,141
Total consumer loans		275,402		—		1,639		—		—		1,639		277,041
Total loans	$	2,130,851	$	23,341	$	36,470	$	—	$	—	$	36,470	$	2,190,662

The Company has purchased loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. As of June 30, 2019 and December 31, 2018 there were no outstanding purchase credit impaired loans.

For the purchased credit impaired loans disclosed above, there was no change in the allowance for loan losses for the three and six months ended June 30, 2019 and 2018.

Income is not recognized on purchased credit impaired loans if the Company cannot reasonably estimate cash flows expected to be collected. The carrying amounts of such loans are as follows:

Mortgage loans serviced for others, which are not reported in United Community’s assets, totaled $1.4 billion as of June 30, 2019 and $1.4 billion as of December 31, 2018. Mortgage banking income is comprised of gains recognized on the sale of loans and changes in fair value of mortgage banking derivatives.

Customer escrow balances with loans serviced for FHLMC, FNMA and the private investor totaled $15.1 million and $16.3 million at June 30, 2019 and December 31, 2018, 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 June 30, 2019, was approximately $10.5 million and at December 31, 2018, the fair value was approximately $12.2 million.

Key economic assumptions in measuring the value of mortgage servicing rights at June 30, 2019, and December 31, 2018, were as follows:

Real estate owned and other repossessed assets at June 30, 2019 and December 31, 2018 were as follows:

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:

Trading securities: The fair values of trading securities are determined by obtaining quoted prices from a counterparty who makes a market in the securities (Level 1 inputs). For securities where quoted prices are not available, fair value is calculated based on the market price of similar securities discounted for the price that certain bidders are willing to pay for the securities (Level 2).

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), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

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, at fair value: The Company elected the fair value option for all conventional residential one-to four-family loans held for sale originated after January 1, 2016 and all permanent construction loans held for sale originated on or after January 1, 2015. The fair value of conventional loans held for sale is determined using the current 15 day forward contract price for either 15 or 30 year conventional mortgages (Level 2).

The fair value of the Company’s permanent construction loans held for sale is determined using the current 60 day forward contract price for 30 year conventional loans which is then adjusted by extrapolating this rate to the estimated time period remaining until construction is complete. The fair value is also adjusted for unobservable market data such as estimated fall out rates and the estimated time from origination to completion of construction (Level 3).

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).

Interest rate swaps: Home Savings periodically enters into interest rate swap agreements with its commercial customers who desire a fixed rate loan term that is longer than Home Savings is willing to extend. Home Savings then enters into a reciprocal swap agreement with a 3^rd party that offsets the interest rate risk from the interest rate swap extended to the customer. The interest rate swaps are derivative instruments which are carried at fair value on the consolidated balance sheet. Home Savings uses an independent third party that performs a market valuation analysis for both swap positions (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 June 30, 2019 Using:
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	June 30,		Assets		Inputs		Inputs
	2019		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Trading securities	$	705	$	234	$	471	$	—
Available for sale securities
U.S. Treasury and agency securities		65,790		—		65,790		—
States and municipalities		36,025		—		36,025		—
Corporate debt securities		13,360		—		13,360		—
Collateralized mortgage obligations		56,107		—		56,107		—
Mortgage-backed securities		147,727		—		147,727		—
Loans held for sale, at fair value		97,477		—		27,912		69,565
Purchased certificate of deposit option		279		—		279		—
Interest rate swaps		121		—		121		—
Liabilities
Written certificate of deposit option		279		—		279		—
Interest rate swaps		133		—		133		—

			Fair Value Measurements at December 31, 2018 Using:
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
	2018		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Trading securities	$	364	$	364		—		—
Available for sale securities
U.S. Treasury and agency securities		95,581		—		95,581		—
States and municipalities		47,746		—		47,746		—
Corporate debt securities		2,004		—		2,004		—
Collateralized mortgage obligations		22,108		—		22,108		—
Mortgage-backed securities		74,204		—		74,204		—
Loans held for sale, at fair value		91,472		—		11,221		80,251
Purchased certificate of deposit option		261		—		261		—
Interest rate swaps		56		—		56		—
Liabilities
Written certificate of deposit option		261		—		261		—
Interest rate swaps		62		—		62		—

There were no transfers between Level 1 and Level 2 during the first and second quarters of 2019 or fiscal year 2018.

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended June 30, 2019 and 2018.

The following table presents quantitative information about recurring Level 3 fair value measurements at June 30, 2019:

The following table presents quantitative information about recurring Level 3 fair value measurements at December 31, 2018:

The fair value of loans held for sale, at fair value was determined using pricing from a quoted market, discounted for the length of time to the completion of the construction project.

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 June 30, 2019 Using:
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	June 30,		Assets		Inputs		Inputs
	2019		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Impaired loans:
Commercial loans
Secured Commercial		3,807		—		—		3,807
Residential loans
One-to four-family residential		241		—		—		241
Consumer loans
Marine		105		—		—		105
Recreational vehicle		4		—		—		4
Mortgage servicing rights		2,610		—		2,610		—
Other real estate owned, net
Commercial loans
Construction loans		63		—		—		63
Residential loans
One-to four-family residential		66		—		—		66

			Fair Value Measurements at December 31, 2018 Using:
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
	2018		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Impaired loans:
Commercial loans
Secured	$	419	$	—	$	—	$	419
Residential loans
One-to four-family residential		540		—		—		540
Consumer loans
Auto		8		—		—		8
Mortgage servicing rights		2,990		—		2,990		—
Other real estate owned, net
Commercial loans
Auto		181		—		—		181
Residential loans
One-to four-family residential		121		—		—		121

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 $4.2 million at June 30, 2019, that includes a specific valuation allowance of $828,000. This resulted in an increase of the provision for loan losses of $86,000 and $122,000 during the three and six months ended June 30, 2019, respectively. 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 $432,000 at June 30, 2018, which includes a specific valuation allowance of $490,000. This resulted in an increase in the provision for loan losses of $252,000 and $479,000 for the three and six months ended June 30, 2018. 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 $967,000 at December 31, 2018, that includes a specific valuation allowance of $69,000.

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 June 30, 2019, mortgage servicing rights carried at fair value totaled $2.6 million with a valuation allowance of $1.6 million. At June 30, 2018, $240,000 mortgage servicing rights were carried at fair value, resulting in a net valuation allowance of $20,000. Mortgage servicing rights are valued by an independent third party that is active in purchasing and selling these instruments. Net impairment reflected in mortgage servicing rights valuation totaled $996,000 and $1.5 million for the three and six months ended June 30, 2019. A net impairment reflected in other income totaled $20,000 and $11,000 for the three and six months ended June 30, 2018. The value reflects the characteristics of the underlying loans.

At June 30, 2019, 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 $129,000, with a valuation allowance of $158,000. This resulted in expense of $17,000 and $36,000 during the three and six months ended June 30, 2019. At June 30, 2018, 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 $286,000 with a valuation allowance of $248,000. This resulted in expense of $10,000 and $33,000 during the three and six months ended June 30, 2018. At December 31, 2018, other real estate owned had a net carrying amount of $302,000, with a valuation allowance of $308,000.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at June 30, 2019:

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, 2018:

The Company has elected the fair value option for newly originated residential mortgage and permanent construction loans held for sale. These loans are intended for sale and the Company believes that fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on loans held for investment. None of these loans are 90 or more days past due nor on nonaccrual status as of June 30, 2019 and December 31, 2018.

The total amount of gains and losses from changes in fair value included in earnings for the three and six months ended June 30, 2019 and 2018 for loans held for sale, at fair value were:

In accordance with U.S. GAAP, the carrying value and estimated fair values of financial instruments at June 30, 2019 and December 31, 2018, were as follows:

				Fair Value Measurements at June 30, 2019 Using:
	June 30,
	2019
	Carrying Value			(Level 1)			(Level 2)			(Level 3)
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	54,562		$	54,562		$	—		$	—
Trading securities		705			234			471			—
Available for sale securities		319,009			—			319,009			—
Held to maturity securities		—			—			—			—
Loans held for sale, at fair value		97,477			—			27,912			69,565
Loans, net		2,229,326			—			—			2,225,425
Purchased certificate of deposit option		279			—			279			—
Interest rate swaps		121			—			121			—
Liabilities:
Deposits:
Checking, savings and money market accounts		(1,427,080	)		(1,427,080	)		—			—
Certificates of deposit		(832,099	)		—			(832,695	)		—
FHLB advances		(233,000	)		—			(233,000	)		—
Repurchase agreements and other		(146	)		—			(143	)		—
Written certificate of deposit option		(279	)		—			(279	)		—
Interest rate swaps		(133	)		—			(133	)		—

				Fair Value Measurements at December 31, 2018 Using:
	December 31,
	2018
	Carrying Value			(Level 1)			(Level 2)			(Level 3)
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	60,985		$	60,985		$	—		$	—
Trading securities		364			364			—			—
Available for sale securities		241,643			—			241,643			—
Held to maturity securities		77,491			—			71,206			3,869
Loans held for sale, at fair value		91,472			—			11,221			80,251
Loans, net		2,176,842			—			—			2,138,319
Purchased certificate of deposit option		261			—			261			—
Interest rate swaps		56						56			—
Liabilities:
Deposits:
Checking, savings and money market accounts		(1,305,439	)		(1,305,439	)		—			—
Certificates of deposit		(907,781	)		—			(904,198	)		—
FHLB advances		(243,000	)		—			(243,000	)		—
Repurchase agreements and other		(224	)		—			(213	)		—
Written certificate of deposit option		(261	)		—			(261	)		—
Interest rate swaps		(62	)		—			(62	)		—

The Company has granted stock compensation awards with nonforfeitable dividend rights that 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. There were 50,000 stock options that were anti-dilutive for the three and six months ended June 30, 2019 and June 30, 2018.

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2019			2018			2019			2018
	(Dollars in thousands, except per share data)
Net income per consolidated statements of income	$	10,486		$	9,541		$	19,142		$	18,097
Net income allocated to participating securities		(27	)		(41	)		(66	)		(91	)
Net income allocated to common stock	$	10,459		$	9,500		$	19,076		$	18,006

Basic earnings per common share computation:
Distributed earnings allocated to common stock	$	3,407		$	2,982		$	6,827		$	5,954
Undistributed earnings allocated to common stock		7,052			6,518			12,249			12,052
Net income allocated to common stock	$	10,459		$	9,500		$	19,076		$	18,006
Weighted average common shares outstanding, including shares considered participating securities		48,589			49,906			48,805			49,877
Less: Average participating securities		(126	)		(212	)		(167	)		(250	)
Weighted average shares		48,463			49,694			48,638			49,627
Basic earnings per common share	$	0.22		$	0.19		$	0.39		$	0.36

Diluted earnings per common share computation:
Net income allocated to common stock	$	10,459		$	9,500		$	19,076		$	18,006
Weighted average common shares outstanding for basic earnings per common share		48,463			49,694			48,638			49,627
Add: Dilutive effects of assumed exercises of stock options and LTIP awards		181			250			201			262
Weighted average shares and dilutive potential common shares		48,644			49,944			48,839			49,889
Diluted earnings per common share	$	0.22		$	0.19		$	0.39		$	0.36

Other comprehensive income (loss) included in the consolidated statements of shareholders’ equity consists of unrealized gains and losses on available for sale securities, accretion of unrealized losses on held to maturity securities, the transfer of the held to maturity securities portfolio to available for sale and disproportionate tax effects. The change includes reclassification of net gains or (losses) on sales of securities of $148,000 and $94,000 for the three months ended June 30, 2019 and 2018, respectively, and $292,000 and $233,000 for the six months ended June 30, 2019 and 2018, respectively. Reclassifications also includes accretion of unrealized losses on held to maturity securities.

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

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

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 June 30, 2014, certain disproportionate tax effects are retained in accumulated other comprehensive income (loss).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 are significant amounts reclassified out of each component of accumulated comprehensive income (loss) for the three months ended June 30, 2019:

The following are significant amounts reclassified out of each component of accumulated comprehensive income (loss) for the three months ended June 30, 2018:

The following are significant amounts reclassified out of each component of accumulated comprehensive income (loss) for the six months ended June 30, 2019:

The following are significant amounts reclassified out of each component of accumulated comprehensive income (loss) for the six months ended June 30, 2018:

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. 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.

The Basel III Capital Rules establish a common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets)and a minimum Tier 1 capital to risk-based assets requirement (6% of risk-weighted assets), and assign a 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 rules also require 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. In connection with the adoption of the Basel III Capital Rules, Home Savings elected to opt-out of the requirement to include most components of accumulated other comprehensive income in Common Equity Tier 1. 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 capital conservation buffer requirement was fully phased in beginning January 1, 2019. The capital conservation buffer is now 2.50%. The capital conservation buffer for 2018 was 1.875%.

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). Home Savings’ Common Equity Tier 1 capital consists of common stock and related paid-in capital, net of treasury stock, and retained earnings. Common Equity Tier 1 for Home Savings is reduced by intangible assets, net of associated deferred tax liabilities and subject to transition provisions. Actual and regulatory required capital ratios for Home Savings, along with the dollar amount of capital implied by such ratios, are presented below.

Management believes that as of June 30, 2019 and December 31, 2018, Home Savings met all capital adequacy requirements to which it was subject. As of June 30, 2019 and December 31, 2018, Home Savings met the capital requirements to be deemed well capitalized. There are no known conditions that would change this classification subsequent to June 30, 2019.

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

As of June 30, 2019, the net deferred tax asset was $1.2 million, and as of December 31, 2018, the net deferred tax asset was $1.6 million.

The Company’s ultimate realization of the net deferred tax asset 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.

Effective tax rates differ from the statutory federal income tax rate of 21% for 2019 and 2018 due to the following:

Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. If the carrying amount of a reporting unit is zero or less than zero, a qualitative analysis of whether it is more likely than not that the reporting unit goodwill is impaired will be performed. The qualitative assessment indicated that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. The Company did not have any reporting units with a carrying amount of zero or less than zero at June 30, 2019 or December 31, 2018.

Aggregate amortization expense for the three months ended June 30, 2019 and 2018 was $127,000 and $132,000, respectively. Aggregate amortization expense for the six months ended June 30, 2019 and 2018 was $255,000 and $245,000, respectively.

Estimated amortization expense for the remainder of 2019 and the next five years is as follows:

The Company invests in qualified affordable housing projects. At June 30, 2019 and December 31, 2018, the balance of the investment for qualified affordable housing projects was $11.0 million and $8.4 million, respectively. These balances are reflected in other assets on the consolidated balance sheet. Total unfunded commitments related to the investments in qualified affordable housing projects totaled $8.5 million and $6.5 million at June 30, 2019 and December 31, 2018, respectively. The Company expects to fulfill these commitments over the next eight to ten years.

During the three months ended June 30, 2019 and 2018, the Company recognized amortization expense of $172,000 and $122,000, respectively, which was included within income tax expense on the consolidated statements of income. During the six months ended June 30, 2019 and 2018, the Company recognized amortization expense of $345,000 and $243,000, respectively.

Additionally, during the three months ended June 30, 2019 and 2018, the Company recognized tax credits and other benefits from its investment in affordable housing tax credits of $197,000 and $138,000, respectively. During the six months ended June 30, 2019 and 2018, the Company recognized tax credits and other benefits from its investment in affordable housing tax credits of $394,000 and $277,000, respectively. During the three and six months ended June 30, 2019 and 2018, the Company incurred no impairment losses.

The Company periodically enters into written and purchased option derivative instruments to facilitate an equity linked time deposit product (the Power CD). The Power CD is a time deposit that provides the purchaser a guaranteed return of principal at maturity plus a potential equity return (a written option), while Home Savings receives a known stream of funds based on the equity return (a purchased option). The written and purchased options are mirror derivative instruments which are carried at fair value on the consolidated statements of financial condition.

Purchased and written options are mirror derivative instruments and as such the changes in fair value are recorded through noninterest income, and offset each other. These options increased in value $18,000 in 2019 and decreased in value by $548,000 in 2018.

The following table reflects the fair value and location in the consolidated statement of financial condition of interest rate caps, along with purchased and written certificates of deposit options:

The Company is subject to counterparty risk. Counterparty risk is the risk to the Company that the counterparty will not live up to its contractual obligations. The ability of the Company to realize the benefit of the derivative contracts is dependent on the creditworthiness of the counterparty, which the Company expects will perform in accordance with the terms of the contracts.

The Company maintains an interest rate protection program for commercial loan customers, which was established in 2018. Under this program, the Company provides a customer with a fixed rate loan while creating a variable rate asset for the Company by the customer entering into an interest rate swap with terms that match the loan. The Company offsets its risk exposure by entering into an offsetting interest rate swap with an unaffiliated institution. The Company had interest rate swaps associated with commercial loans with a notional value of $2.5 million and fair value of $121,000 in other assets and $133,000 in other liabilities. The difference in fair value of $12,000 between the asset and liability accounts represents a credit valuation adjustment that flows through noninterest income in the first half of 2019. At December 31, 2018 the Company had interest rate swaps associated with commercial loans with a notional value of $2.5 million and fair value of $56,000 in other assets and $62,000 in other liabilities. The difference in fair value of $6,000 between the asset and liability accounts represents a credit valuation adjustment that flows through noninterest income during 2018. These interest rate swaps did not have a material impact on the Company’s statements of operation or financial condition.

As of January 1, 2019, when the Company adopted ASU 2016-02 prospectively, operating leases are recorded as a right of use (“ROU”) asset and operating lease liability, included in other assets and other liabilities, respectively, on the consolidated balance sheet. Operating lease ROU assets represent the right to use an underlying asset during the lease term and operating lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the incremental borrowing rate at the lease commencement date. Operating lease expense, which is comprised of amortization of the amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight line basis over the lease term and is recorded primarily in net occupancy expense in the consolidated statements of comprehensive income.

Operating leases relate primarily to bank branches, office space and license agreements with remaining lease terms of generally one to 23 years, which includes options for multiple extensions, with a weighted-average lease term of 7 years. As of June 30, 2019, operating lease ROU assets and liabilities were $4.8 million and $5.2 million, respectively. During the quarter ended June 30, 2019, a new lease was signed which added $242,000 to both the ROU asset and operating lease liability. The lease expense for operating leases was $343,000 and $661,000 for the three and six months ended June 30, 2019. The weighted average discount rate was 2.68% as of June 30, 2019.

The right of use asset amortized $298,000 and $626,000 during the three and six months ended June 30, 2019. Short-term lease expense was $31,000 and $62,000 for the three and six months ended June 30, 2019.

Future minimum lease payments under non-cancellable leases with initial or remaining lease terms in excess of one year at June 30, 2019 are as follows:

Rent expense was $259,000 and $542,000 for the three and six months ended June 30, 2018. Rent commitments under noncancelable operating leases for offices were as follows as of December 31, 2018, before considering renewal options that generally are present:

	At or
	For the Three Months Ended June 30,						For the Six Months Ended June 30,
Selected financial ratios and other data:⁽¹⁾	2019			2018			2019			2018
Performance ratios:
Return on average assets ⁽²⁾		1.48	%		1.40	%		1.35	%		1.34	%
Return on average equity⁽³⁾		13.22	%		12.56	%		12.11	%		12.00	%
Interest rate spread⁽⁴⁾		3.00	%		3.12	%		3.04	%		3.19	%
Net interest margin⁽⁵⁾		3.33	%		3.36	%		3.35	%		3.41	%
Noninterest expense to average assets		2.25	%		2.28	%		2.37	%		2.38	%
Efficiency ratio ⁽⁶⁾		55.37	%		57.75	%		58.81	%		58.35	%
Average interest-earning assets to average interest-bearing liabilities		128.90	%		127.25	%		128.55	%		126.99	%
Capital ratios:
Average equity to average assets		11.17	%		11.15	%		11.16	%		11.17	%
Equity to assets, end of period		11.07	%		10.88	%		11.07	%		10.88	%
Tier 1 leverage ratio (Bank only)		10.32	%		10.23	%		10.32	%		10.23	%
Common equity Tier 1 capital (Bank only)		13.23	%		13.16	%		13.23	%		13.16	%
Tier 1 risk-based capital ratio (Bank only)		13.23	%		13.16	%		13.23	%		13.16	%
Total risk-based capital ratio (Bank only)		14.17	%		14.18	%		14.17	%		14.18	%
Asset quality ratios:
Nonperforming loans to net loans at end of period ⁽⁷⁾		0.58	%		0.51	%		0.58	%		0.51	%
Nonperforming assets to average assets⁽⁸⁾		0.49	%		0.58	%		0.49	%		0.58	%
Nonperforming assets to total assets at end of period		0.48	%		0.57	%		0.48	%		0.57	%
Allowance for loan losses as a percent of loans		0.91	%		1.01	%		0.91	%		1.01	%
Allowance for loan losses as a percent of nonperforming loans⁽⁷⁾		159.12	%		198.38	%		159.12	%		198.38	%
Total classified assets as a percent of Tier 1 Capital (Bank only)		13.10	%		17.01	%		13.10	%		17.01	%
Total classified loans as a percent of Tier 1 Capital and ALLL (Bank only)		11.93	%		14.12	%		11.93	%		14.12	%
Total classified assets as a percent of Tier 1 Capital and ALLL (Bank only)		12.24	%		15.78	%		12.24	%		15.78	%
Net (recoveries) chargeoffs as a percent of average loans		(0.02	)%		0.01	%		0.00	%		0.01	%
Total 90+ days past due as a percent of net loans		0.24	%		0.40	%		0.24	%		0.40	%
Per share data:
Basic earnings per common share ⁽⁹⁾	$	0.22		$	0.19		$	0.39		$	0.36
Diluted earnings per common share⁽⁹⁾		0.22			0.19			0.39			0.36
Book value per common share⁽¹⁰⁾		6.61			6.04			6.61			6.04
Tangible book value per common share⁽¹¹⁾		6.11			5.56			6.11			5.56
Cash dividend per common share	$	0.070		$	0.060			0.140			0.120
Dividend payout ratio⁽¹²⁾		31.82	%		31.58	%		35.90	%		33.24	%

When used in this Form 10-Q or other materials we have filed or may file with the Securities and Exchange Commission, the words or phrases “will likely result,” “are expected to,” “plan to,” “will continue,” “is anticipated,” “is intended,” “believe,” “project,” “good,” “estimate,” “project,” “goal,” “seek,” “strategy,” “future,” “may,” “should,” 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 and Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2018 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.

Available for sale securities increased $77.4 million during the first six months of 2019. The increase in the balance is primarily due to the transfer of the held to maturity securities portfolio into available for sale during the second quarter of 2019. Held to maturity balances with an amortized cost of $74.6 million and a fair value of $72.5 million were moved into the available for sale portfolio. Given the continued fall in interest rates, the Company elected to make this change to provide more opportunities to reposition the portfolio. In addition to the movement of the held to maturity portfolio, available for sale balances changed due to pay downs, amortization of premiums/discounts on the securities and sales totaling $58.3 million, offset by purchases totaling $59.7 million. In addition, the net unrealized loss in the available for sale portfolio was $4.8 million at December 31, 2018, compared to a net unrealized gain of $2.4 million at June 30, 2019. The decrease in interest rates during the first half of the year positively impacted this change.

Held to maturity securities declined $77.5 million to $0.0 million at June 30, 2019 compared to December 31, 2018. The change was primarily the result of the transfer of the portfolio to available for sale discussed above during the second quarter of 2019 in addition to pay downs and the amortization of premiums/discounts on the securities.

Net loans increased $52.5 million to $2.2 billion during the first six months of 2019, primarily as a result of growth in the commercial loan portfolio. Commercial loan balances were $974.3 million at June 30, 2019 compared to $942.9 million at December 31, 2018. Residential mortgage loans increased $18.2 million during the first six months to $988.9 million at June 30, 2019 and consumer loan balances increased $2.5 million for the same period. See Note 6 to the consolidated financial statements for additional information regarding the composition of loans.

The allowance for loan losses is a valuation allowance for probable incurred credit losses established through a provision for loan losses charged to expense. The allowance for loan losses was $20.5 million at June 30, 2019, materially unchanged from the figure reported at December 31, 2018. The allowance for loan losses as a percentage of loans was 0.91% at June 30, 2019, compared to 0.93% at December 31, 2018.

The allowance for loan losses as a percentage of nonperforming loans was 159.1% at June 30, 2019, compared to 312.6% at December 31, 2018, primarily as a result of a single credit. A substantial portion of this credit was paid off in July. 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.” As of June 30, 2019, the Company evaluated 28 quarters of net charge-off history and applied this information to the current period. This component is combined with the qualitative component to arrive at the loss factor, which is applied to the outstanding balance of homogenous loans.

A loan is considered impaired when there is a deterioration of the credit worthiness of the borrower to the extent that the collection of the full amount of principal and interest is no longer probable. The total outstanding balance of all impaired loans was $25.1 million at June 30, 2019, as compared to $20.6 million at December 31, 2018.

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 a debtor experiencing financial difficulty 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.

TDR loans aggregated to $15.3 million at June 30, 2019 compared to $16.6 million at December 31, 2018. Of the $15.3 million at June 30, 2019, $13.9 million were performing according to their modified loan terms. The remaining balance of TDR loans of $1.4 million were considered nonperforming.

Nonperforming loans consist of nonaccrual loans and loans past due 90 days and still accruing. Nonperforming loans were $12.9 million, or 0.58% of loans, at June 30, 2019, compared to $6.5 million, or 0.30% of loans, at December 31, 2018, primarily as a result of a single credit. A substantial portion of this credit was paid off in July.

Loans held for sale, carried at fair value, were $97.5 million at June 30, 2019, compared to $91.5 million at December 31, 2018. The change was primarily attributable to the increase in the balance of saleable conventional loans during the period. Home Savings continues to sell a majority of its newly originated fixed rate mortgage loans into the secondary market as part of its risk management strategy and anticipates continuing to do so in the future.

Goodwill and other intangible assets decreased $255,000 during the first six months of 2019, due to the amortization of the customer list and core deposit intangibles.

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 $782,000 as other non-interest income based on the change in cash value of the policies in the six months ended June 30, 2019 compared to $866,000 for the six months ended June 30, 2018.

Total deposits increased $46.0 million from $2.2 billion at December 31, 2018, to $2.3 billion at June 30, 2019. The increase in deposits is primarily the result of growth in customer deposits (excluding brokered certificates of deposits, which totaled $148.8 million. Non-interest bearing customer deposits grew $4.1 million during the first six months of 2019 while interest bearing customer deposits grew $144.7 million. Growth in money market accounts and certificate of deposit balances drove the majority of the increase in interest bearing deposits. Brokered deposits declined $102.9 million during the six months ended June 30, 2019 as the growth in customer deposits was used to pay down the level of brokered deposits.

FHLB advances decreased from $243.0 million at December 31, 2018 to $233.0 million at June 30, 2019. The change was primarily due to an increase in deposit balances that were used to pay down FHLB advances.

Shareholders’ equity increased $8.2 million to $317.5 million at June 30, 2019 from $309.3 million at December 31, 2018. The increase is primarily due to the $19.1 million of net income earned during the period offset by dividends paid to shareholders of $6.8 million. In addition, a positive change in accumulated other comprehensive income of $6.3 million during the six months was offset by a net increase in the treasury stock balance of $10.3 million. The Company repurchased over 1.1 million common shares during the first six months of the year.

Book value and tangible book value per common share as of June 30, 2019 was $6.61 and $6.11, respectively as compared to $6.04 and $5.56 per common share, respectively as of December 31, 2018. Book value per share is calculated as total shareholders’ equity divided by the number of common shares outstanding. Tangible book value per share is calculated as total shareholders’ equity less goodwill and other intangible assets divided by the number of common shares outstanding.

Net Income. United Community recognized net income for the three months ended June 30, 2019, of $10.5 million, or $0.22 per diluted common share compared to net income of $9.5 million for the three months ended June 30, 2018, or $0.19 per diluted share. The continued growth in net interest income from higher earning assets, solid credit performance and growth in the Company’s noninterest income offset by an increase in noninterest expense have all led to the increase in net income.

Net Interest Income. Net interest income was $22.0 million in the second quarter of 2019 up from the $21.3 million recorded in the second quarter of 2018. The growth of interest earning assets drove this increase offset by a 3 basis point decline in the net interest margin. Net interest margin was 3.33% for the second quarter of 2019 compared to 3.36% in the second quarter of 2018. The yield on interest earning assets increased 30 basis points year over year driven by an increase in the yield on total loans of 31 basis points. The yield on loans increased due to increases in market rates, the subsequent repricing of floating and adjustable rate loans. The yield on securities increased 13 basis points to 2.60% for the second quarter of 2019.

Interest income increased by $3.1 million in the second quarter of 2019 compared to the same period in 2018, to $29.8 million from $26.7 million. The increase is primarily a result of an increase in average earning assets of $108.7 million along with an increase in the yield on average interest earning assets of 30 basis points. Average total loans, net increased $124.6 million in the second quarter compared to the same period in 2018 while average securities declined $25.4 million during this same period. Interest income from total loans, net increased to $27.4 million for the quarter ended June 30, 2019 compared to $24.3 million for the same period in 2018. Income from securities remained consistent at $2.0 million for the quarters ended June 30, 2019 and June 30, 2018.

Interest expense increased by $2.4 million in the second quarter of 2019 to $7.8 million compared to the same period in 2018. This increase was primarily due to a $58.7 million increase in average interest-bearing liabilities due to growth along with a 43 basis point increase in the cost of interest-bearing liabilities. The increase in the cost of interest-bearing liabilities was primarily due to increases in market rates discussed previously. The cost of average customer interest-bearing deposits increased 49 basis points to 129 basis points for the three months ended June 30, 2019 from 80 basis points for the three months ended June 30, 2018. The cost of average brokered deposits increased 76 basis points to 2.40% and average Federal Home Loan Bank advances increased to 2.49% for the quarter ending June 30, 2019. The Company continues to utilize short term brokered deposit and short term FHLB advances interchangeably depending upon which offers the better rate.

	For the Three Months Ended June 30,
	2019 vs. 2018
	Increase						Total
	(decrease) due to						increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest earning assets:
Loans	$	1,576		$	1,531		$	3,107
Loans held for sale		94			(115	)		(21	)
Securities:
Available for sale-taxable		196			222			418
Available for sale-nontaxable		5			(151	)		(146	)
Held to maturity-taxable		(106	)		(174	)		(280	)
Held to maturity-nontaxable		(20	)		(27	)		(47	)
Federal Home Loan Bank stock		43			(72	)		(29	)
Other interest earning assets		44			64			108
Total interest earning assets	$	1,832		$	1,278		$	3,110
Interest bearing liabilities:
Interest bearing deposits:
Savings accounts	$	—		$	—		$	—
Checking accounts		1,030			160			1,190
Customer certificates of deposit		951			137			1,088
Brokered certificates of deposit		409			720			1,129
Federal Home Loan Bank advances:
Long-term advances		—			(493	)		(493	)
Short-term advances		727			(1,251	)		(524	)
Repurchase agreements and other		—			—			—
Total interest bearing liabilities	$	3,117		$	(727	)		2,390
Change in net interest income							$	720

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 $51,000 in the second quarter of 2019 compared to a negative loan loss provision of $138,000 in the second quarter of 2018. The negative provision expense in the second quarter of 2019 was primarily driven by net recoveries on loans during the period along with a lower level of required allowance for loan losses. Net recoveries in the second quarter of 2019 were $87,000.

Noninterest Income. Non-interest income was $6.7 million in the second quarter of 2019 compared to $5.9 million in the second quarter of 2018. The increase was primarily driven by an increase in mortgage banking income of $1.4 million along with increases in brokerage income of $109,000, trading security gains of $39,000 and lower losses on the sale of real estate owned of $80,000. Offsetting this was a negative change in the valuation of mortgage servicing rights which amounted to $996,000. The drop in mortgage rates during the last two quarters and a subsequent increase in prepayment speeds on mortgages was the driver of the valuation charge on mortgage servicing rights.

Noninterest Expense. Non-interest expense increased to $16.0 million during the second quarter of 2019 compared to $15.5 million during the second quarter of 2018. The increase is primarily due to an increase of $169,000 in salary and benefit cost during the second quarter of 2019. Increased expense in occupancy, advertising, legal and other professional fees and other expenses also contributed to the increase year over year offset by a decline in equipment and data processing expense.

Income Taxes. During the three months ended June 30, 2019, the Company recognized tax expense of $2.3 million on pre-tax income of $12.8 million, compared to tax expense of $2.2 million on pre-tax income of $11.8 million for the three months ended June 30, 2018. The increased pre-tax income discussed above was the primary reason for the increased income tax. See Note 14 to the consolidated financial statements for additional information regarding the composition of income taxes.

Net Income. United Community recognized net income for the six months ended June 30, 2019, of $19.1 million, or $0.39 per diluted common share compared to net income of $18.1 million for the six months ended June 30, 2018, or $0.36 per diluted share. The continued growth in net interest income from higher earning assets and reduced loan loss provision, along with improvement in noninterest income all contributed to the increase in net income, which was partially offset by an increase in noninterest expense.

Net Interest Income. Net interest income was $44.2 million in the first six months of 2019, up from the $42.8 million recorded in the first six months of 2018. The growth of interest earning assets drove this increase, which was partially offset by a 6 basis point decline in the net interest margin. Net interest margin was 3.35% for the first six months of 2019 compared to 3.41% in the first six months of 2018. The yield on interest earning assets increased 30 basis points year over year driven by an increase in yield on total loans of 29 basis points. The yield on loans increased due to increases in market rates and the subsequent repricing of floating and adjustable rate loans. The yield on securities also increased 13 basis points compared to a year ago.

Interest income increased by $6.5 million in the first six months of 2019 compared to the same period in 2018, to $59.2 million from $52.7 million. The increase is primarily a result of an increase in average earning assets of $130.9 million along with an increase in the yield on average interest earning assets of 30 basis points. Average total loans net increased $147.1 million in the first six months of 2019 compared to the same period in 2018 while average securities declined $26.5 million during this same period. Interest income from total loans, net increased to $54.2 million for the six months ended June 30, 2019 compared to $47.9 million for the same period in 2018. Income from securities decreased to $4.0 million for the six months ended June 30, 2019 compared to $4.1 million for the six months ended June 30, 2018.

Interest expense increased by $5.1 million in the first six months of 2019 to $15.0 million compared to the same period in 2018. This increase was primarily due to a $77.8 million increase in average interest-bearing liabilities due to growth along with a 45 basis point increase in the cost of interest-bearing liabilities. The increase in the cost of interest-bearing liabilities was primarily due to increases in market rates interest rates. The cost of average interest-bearing customer deposits increased 46 basis points to 120 basis points for the six months ended June 30, 2019 from 74 basis points for the six months ended June 30, 2018. The cost of average borrowed funds increased to 2.49% for the six months ending June 30, 2019 compared to 2.02% for the six months ended June 30, 2018.

	For the Six Months Ended June 30,
	2019 vs. 2018
	Increase						Total
	(decrease) due to						increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest earning assets:
Loans	$	2,764		$	3,447		$	6,211
Loans held for sale		164			(36	)		128
Securities:
Available for sale-taxable		318			148			466
Available for sale-nontaxable		(6	)		(246	)		(252	)
Held to maturity-taxable		(67	)		(256	)		(323	)
Held to maturity-nontaxable		(10	)		(7	)		(17	)
Federal Home Loan Bank stock		113			(133	)		(20	)
Other interest earning assets		133			122			255
Total interest earning assets	$	3,409		$	3,039		$	6,448
Interest bearing liabilities:
Interest bearing deposits:
Savings accounts	$	4		$	(2	)	$	2
Checking accounts		1,738			204			1,942
Customer certificates of deposit		1,837			259			2,096
Brokered certificates of deposit		952			1,892			2,844
Federal Home Loan Bank advances:
Long-term advances		—			(924	)		(924	)
Short-term advances		3,998			(4,870	)		(872	)
Repurchase agreements and other		—			—			—
Total interest bearing liabilities	$	8,529		$	(3,441	)		5,088
Change in net interest income							$	1,360

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 loan loss provision of $10,000 in the first six months of 2019, compared to $269,000 in the first six months of 2018. Provision expense in the first six months of 2019 was primarily driven by net recoveries totaling $29,000 while there were $66,000 in net charge-offs during the first six months of 2018. Improving credit quality continues to drive the low levels of loan loss provision.

Noninterest Income. Non-interest income was $12.7 million in the first six months of 2019 compared to $11.7 million in the first six months of 2018. The primary drivers of the increase were a year over year increase in mortgage banking income of $1.7 million, an increase in agency income of $156,000, an increase in brokerage income of $207,000, an increase in trading and security gains of $103,000 and an increase in mortgage servicing fees of $129,000. A $1.5 million increase in the mortgage servicing rights valuation partially offset these increases.

Noninterest Expense. Non-interest expense increased to $33.7 million during the first six months of 2019 compared to $32.1 million during the first six months of 2018. The change is due to a $746,000 increase in salaries and benefits, a $329,000 increase in advertising expense, a $260,000 increase in other professional fees and a $368,000 increase in other expenses. A decrease in legal expenses partially offset these increases.

Income Taxes. During the six months ended June 30, 2019, the Company recognized tax expense of $4.2 million on pre-tax income of $23.3 million, compared to tax expense of $4.0 million on pre-tax income of $22.1 million for the six months ended June 30, 2018. The increased pre-tax income discussed above was the primary reason for the increased income tax. See Note 14 to the consolidated financial statements for additional information regarding the composition of income taxes.

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

The principal source 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 June 30, 2019, approximately $413.3 million of Home Savings’ customer 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 June 30, 2019, United Community had total on-hand liquidity, defined as cash and cash equivalents, unencumbered securities and additional FHLB borrowing capacity, of $644.3 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 June 30, 2019 and 2018. Average balance calculations were based on daily balances.

	For the Three Months Ended June 30,
	2019							2018
	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⁾⁽²⁾	$	2,207,554	$	26,382		4.79	%	$	2,075,307	$	23,275		4.49	%
Loans held for sale		84,210		991		4.71	%		91,836		1,012		4.42	%
Total loans, net		2,291,764		27,373		4.79	%		2,167,143		24,287		4.48	%
Securities:
Available for sale-taxable		243,895		1,611		2.64	%		207,908		1,193		2.30	%
Available for sale-nontaxable ⁽²⁾		33,068		283		3.42	%		50,710		429		3.38	%
Held to maturity-taxable		31,498		118		1.50	%		70,406		398		2.26	%
Held to maturity-nontaxable ⁽²⁾		6,406		31		1.94	%		11,265		78		2.77	%
Total securities		314,867		2,043		2.60	%		340,289		2,098		2.47	%
Federal Home Loan Bank stock		15,408		245		6.36	%		19,324		274		5.67	%
Other interest earning assets		37,240		200		2.15	%		23,831		92		1.55	%
Total interest earning assets		2,659,279		29,861		4.50	%		2,550,587		26,751		4.20	%
Non-interest earning assets		181,268							174,270
Total assets	$	2,840,547						$	2,724,857
Interest bearing liabilities:
Deposits:
Checking accounts	$	734,458		2,138		1.16	%	$	638,910		948		0.60	%
Savings accounts		293,784		26		0.04	%		307,250		26		0.03	%
Certificates of deposit
Customer certificates of deposit		645,115		3,231		2.00	%		608,079		2,143		1.41	%
Brokered certificates of deposit		299,747		1,802		2.40	%		164,400		673		1.64	%
Total certificates of deposit		944,862		5,033		2.14	%		772,479		2,816		1.46	%
Total interest bearing deposits		1,973,104		7,197		1.46	%		1,718,639		3,790		0.88	%
Federal Home Loan Bank advances
Long-term advances		—		—		0.00	%		48,799		493		4.05	%
Short-term advances		89,879		559		2.49	%		236,747		1,083		1.83	%
Total Federal Home Loan Bank advances		89,879		559		2.49	%		285,546		1,576		2.21	%
Repurchase agreements and other		142		—		0.00	%		195		—		0.00	%
Total borrowed funds		90,021		559		2.49	%		285,741		1,576		2.21	%
Total interest bearing liabilities	$	2,063,125		7,756		1.50	%	$	2,004,380		5,366		1.07	%
Non-interest bearing liabilities
Noninterest-bearing deposits		405,535							376,905
Other noninterest-bearing liabilities		54,622							39,839
Total noninterest bearing liabilities		460,157							416,744
Total liabilities	$	2,523,282						$	2,421,124
Shareholders’ equity		317,265							303,733
Total liabilities and equity	$	2,840,547						$	2,724,857
Net interest income and interest rate spread			$	22,105		3.00	%			$	21,385		3.12	%
Net interest margin						3.33	%						3.36	%
Average interest earning assets to average interest bearing liabilities						128.90	%						127.25	%

	For the Six Months Ended June 30,
	2019							2018
	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⁾	$	2,199,694	$	52,246		4.77	%	$	2,050,922	$	46,035		4.49	%
Loans held for sale		84,569		1,998		4.73	%		86,289		1,870		4.37	%
Total loans, net		2,284,263		54,244		4.77	%		2,137,211		47,905		4.48	%
Securities:
Available for sale-taxable		222,112		2,874		2.59	%		209,611		2,408		2.30	%
Available for sale-nontaxable ⁽²⁾		38,240		649		3.39	%		52,712		901		3.42	%
Held to maturity-taxable		47,497		497		2.09	%		71,511		820		2.29	%
Held to maturity-nontaxable ⁽²⁾		9,708		124		2.55	%		10,252		141		2.75	%
Total securities		317,557		4,144		2.61	%		344,086		4,270		2.48	%
Federal Home Loan Bank stock		16,702		534		6.39	%		19,324		554		5.73	%
Other interest earning assets		36,119		424		2.37	%		23,159		169		1.47	%
Total interest earning assets		2,654,641		59,346		4.49	%		2,523,780		52,898		4.19	%
Non-interest earning assets		179,102							175,520
Total assets	$	2,833,743						$	2,699,300
Interest bearing liabilities:
Deposits:
Checking accounts	$	692,595		3,577		1.03	%	$	622,221		1,635		0.53	%
Savings accounts		295,587		55		0.04	%		305,455		53		0.03	%
Certificates of deposit
Customer certificates of deposit		632,007		6,056		1.92	%		595,041		3,960		1.34	%
Brokered certificates of deposit		348,173		4,083		2.35	%		164,782		1,239		1.52	%
Total certificates of deposit		980,180		10,139		2.07	%		759,823		5,199		1.38	%
Total interest bearing deposits		1,968,362		13,771		1.40	%		1,687,499		6,887		0.82	%
Federal Home Loan Bank advances
Long-term advances		—		—		0.00	%		48,702		924		3.83	%
Short-term advances		96,569		1,200		2.49	%		250,956		2,072		1.66	%
Total Federal Home Loan Bank advances		96,569		1,200		2.49	%		299,658		2,996		2.02	%
Repurchase agreements and other		187		—		0.00	%		204		—		0.00	%
Total borrowed funds		96,756		1,200		2.49	%		299,862		2,996		2.01	%
Total interest bearing liabilities	$	2,065,118		14,971		1.45	%	$	1,987,361		9,883		1.00	%
Non-interest bearing liabilities
Noninterest-bearing deposits		403,218							370,138
Other noninterest-bearing liabilities		49,265							40,280
Total noninterest bearing liabilities		452,483							410,418
Total liabilities	$	2,517,601						$	2,397,779
Shareholders’ equity		316,142							301,521
Total liabilities and equity	$	2,833,743						$	2,699,300
Net interest income and interest rate spread			$	44,375		3.04	%			$	43,015		3.19	%
Net interest margin						3.35	%						3.41	%
Average interest earning assets to average interest bearing liabilities						128.55	%						126.99	%

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 set exposure limits annually 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 quarter ended June 30, 2019 and the year ended December 31, 2018, 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 June 30, 2019
NPV as % of portfolio value of assets													Next 12 months net interest income
													(Dollars in thousands)
Change in rates (Basis points)	NPV Ratio			Internal policy limitations			NPV Ratio Change %			Internal policy limitations on NPV Change			$ Change			Internal policy limitations			% Change
400		11.01	%		6.00	%		(0.27	)%		(10.00	)%	$	(4,290	)		(9.00	)%		(4.96	)%
300		11.27	%		6.00	%		2.08	%		(8.00	)%		(3,055	)		(7.00	)%		(3.53	)%
200		11.45	%		7.00	%		3.71	%		(6.00	)%		(1,852	)		(5.00	)%		(2.14	)%
100		11.46	%		7.00	%		3.86	%		(4.00	)%		(875	)		(3.00	)%		(1.01	)%
Static		11.04	%		9.00	%		—	%		—	%		—			—	%		—	%
-100		10.57	%		7.00	%		(4.27	)%		(4.00	)%		(92	)		(3.00	)%		(0.11	)%
-200		11.85	%		7.00	%		7.38	%		(6.00	)%		(1,992	)		(5.00	)%		(2.30	)%

Year Ended December 31, 2018
NPV as % of portfolio value of assets													Next 12 months net interest income
													(Dollars in thousands)
Change in rates (Basis points)	NPV Ratio			Internal policy limitations			NPV Ratio Change %			Internal policy limitations on NPV Change			$ Change			Internal policy limitations			% Change
400		11.50	%		6.00	%		(0.63	)%		(20.00	)%	$	(3,055	)		(15.00	)%		(3.46	)%
300		11.80	%		6.00	%		(0.33	)%		(15.00	)%		(2,266	)		(10.00	)%		(2.56	)%
200		12.02	%		7.00	%		(0.11	)%		(10.00	)%		(1,486	)		(7.00	)%		(1.68	)%
100		12.16	%		7.00	%		0.04	%		(5.00	)%		(816	)		(3.00	)%		(0.92	)%
Static		12.13	%		9.00	%		—	%		—	%		—			—	%		—	%
-100		11.71	%		7.00	%		(0.41	)%		(10.00	)%		(184	)		(5.00	)%		(0.21	)%
-200		11.57	%		7.00	%		(0.55	)%		(15.00	)%		(2,139	)		(10.00	)%		(2.42	)%

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.

United Community’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of United Community’s disclosure controls and procedures as of June 30, 2019, as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based on this evaluation, United Community’s Chief Executive Officer and Chief Financial Officer concluded that United Community’s disclosure controls and procedures as of June 30, 2019 were effective.

There were no changes in United Community’s internal control over financial reporting that occurred during the quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, United Community’s internal control over financial reporting.

United Community and its subsidiaries may, from time-to-time, be 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.

There have been no material changes in United Community’s risk factors as outlined in United Community’s Annual Report on Form 10-K for the year ended December 31, 2018.

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.

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common shares, no par value	UCFC	Nasdaq Global Market

			PAGE

Part I. FINANCIAL INFORMATION			3
	Item 1.	Financial Statements	3
	Condensed Consolidated Statements of Financial Condition as of June 30, 2019 (Unaudited) and December 31, 2018		3
	Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)		4
	Condensed Consolidated Statement of Shareholders’ Equity for the Three and Six Months ended June 30, 2019 and 2018 (Unaudited)		6
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 (Unaudited)		7
	Notes to Consolidated Financial Statements (Unaudited)		8-54
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	55-63
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	64
	Item 4.	Controls and Procedures	65
Part II. OTHER INFORMATION			66
	Item 1.	Legal Proceedings	66
	Item 1A.	Risk Factors	66
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66
	Item 3.	Defaults Upon Senior Securities (None)	66
	Item 4.	Mine Safety Disclosures (None)	66
	Item 5.	Other Information (None)	66
	Item 6.	Exhibits	67
Signatures			68

	For the six months ended
	June 30, 2019
				Weighted		Aggregate
				average		intrinsic value
	Shares			exercise price		(in thousands)
Outstanding at beginning of year		223,432		$	3.93
Granted		—			—
Exercised		(59,600	)		2.03
Forfeited and expired		—			—
Outstanding at end of period		163,832			4.63	$	815
Shares subject to options exercisable at end of period		163,832			4.63	$	815

	June 30, 2019		June 30, 2018
Intrinsic value of options exercised	$	438,540	$	450,486
Cash received from option exercises		122,000		232,000
Tax benefit realized from option exercises		15,565		67,298
Weighted average fair value of options granted, per share	$	—	$	1.54

	Six Months Ended
	June 30, 2018
Risk-free interest rate		2.69	%
Expected term (years)		5
Expected stock volatility		19.86	%
Dividend yield		2.48	%

	June 30, 2019
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(Dollars in thousands)
Available for Sale
U.S. Treasury and agency securities	$	64,337	$	1,453				$	65,790
States and municipalities		35,085		940					36,025
Corporate debt securities		13,204		159		(3	)		13,360
Collateralized mortgage obligations (CMO)		54,773		1,356		(22	)		56,107
Mortgage-backed securities (MBS)		149,168		265		(1,706	)		147,727
Total	$	316,567	$	4,173	$	(1,731	)	$	319,009

	December 31, 2018
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(Dollars in thousands)
Available for Sale
U.S. Treasury and agency securities	$	97,785	$	—	$	(2,204	)	$	95,581
States and municipalities		48,167		107		(528	)		47,746
Corporate debt securities		2,000		4		—			2,004
Collateralized mortgage obligations (CMO)		21,979		143		(14	)		22,108
Mortgage-backed securities (MBS)		76,495		23		(2,314	)		74,204
Total	$	246,426	$	277	$	(5,060	)	$	241,643

	June 30, 2019
	Amortized cost		Fair value
	(Dollars in thousands)
Due in one year or less	$	2,000	$	2,021
Due after one year through five years		19,010		19,349
Due after five years through ten years		60,026		61,309
Due after ten years		31,590		32,496
MBS and CMO		203,941		203,834
Total	$	316,567	$	319,009

	Nonaccrual		Loans past due over 90 days and still accruing
	(Dollars in thousands)
Commercial loans
Multifamily	$	—	$	—
Nonresidential		2,688		—
Land		—		—
Construction		—		—
Secured		4,678		—
Unsecured		—		—
Total commercial loans		7,366		—
Residential mortgage loans
One-to four-family		4,365		—
Construction		—		—
Total residential mortgage loans		4,365		—
Consumer Loans
Home equity		936		—
Auto		57		—
Marine		105		—
Recreational vehicle		34		—
Other		9		—
Total consumer loans		1,141		—
Total nonaccrual loans and loans past due over 90 days and still accruing	$	12,872	$	—

	Number of loans		Recorded Investment
			(Dollars in thousands)
Commercial loans
Multifamily		—	$	—
Nonresidential		1		121
Land		—		—
Construction		—		—
Secured		—		—
Unsecured		—		—
Total commercial loans		1		121
Residential mortgage loans
One-to four-family		2		357
Construction		—		—
Total residential mortgage loans		2		357
Consumer loans
Home equity		—		—
Auto		—		—
Marine		—		—
Recreational vehicle		—		—
Other		—		—
Total consumer loans		—		—
Total restructured loans		3	$	478

	Three Months Ended		Three Months Ended		For the six months ended		For the six months ended
	June 30, 2019		June 30, 2018		June 30, 2019		June 30, 2018
	(Dollars in thousands)				(Dollars in thousands)
Beginning of period	$	—	$	110	$	—	$	110
Accretion of income		—		6		—		6
Balance at end of period	$	—	$	104	$	—	$	104

	June 30, 2019	December 31, 2018
Weighted average prepayment rate	266 PSA	145 PSA
Weighted average life (in years)	5.27	7.26
Weighted average discount rate	11.00%	11.00%

			Valuation	Unobservable
	Fair Value		Technique(s)	Input(s)	Range
Construction loans held for sale	$	69,565	Comparable sales	Time discount	0.00-0.39%

	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
Impaired loans:
Commercial loans
Secured Commercial		3,807	Sales comparison approach	Adjustment for differences between comparable sales	0.00-35.00% (15.00%)
Residential loans
One-to four-family residential		241	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-10.77% (4.27%)
Consumer loans
Marine		105	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-17.85% (8.93%)
Recreational vehicle		4	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-17.85% (8.93%)
Other real estate owned, net
Commercial loans
Construction loans		63	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-50.00% (45.85%)
Residential loans
One-to four-family residential		66	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-14.22% (14.22%)

	For the Three Months Ended				For the six months ended
	June 30, 2019		June 30, 2018		June 30, 2019		June 30, 2018
	(Dollars in thousands)
Interest income	$	—	$	—	$	—	$	—
Interest expense		—		—		—		—
Change in fair value		2,162		285		3,241		(2,197	)
Total change in fair value	$	2,162	$	285	$	3,241	$	(2,197	)

	Unrealized Gains (Losses) on Securities Available for Sale			Disproportionate Tax Effect from Securities Available for Sale			Losses on Securities Transferred From Available for Sale to Held to Maturity			Total
June 30, 2019	(Dollars in thousands)
Balances at beginning of period, net of tax	$	(785	)	$	(17,110	)	$	(521	)	$	(18,416	)
Other comprehensive income before reclassifications		3,344			—			—			3,344
Accretion of unrealized losses of securities transferred from available for sale to held to maturity recognized in other comprehensive income		—			—			9			9
Transfer of held to maturity securities to available for sale		(512	)		—			512			—
Reclassification adjustment for gains realized in income		(117	)		—			—			(117	)
Net current period other comprehensive income		2,715			—			521			3,236
Balances at end of period, net of tax	$	1,930		$	(17,110	)	$	—		$	(15,180	)

	Amount Reclassified			Affected Line Item on
	From Accumulated			the Statement Where
Details About Accumulated Other Comprehensive	Other Comprehensive			Net Income is
Income Components	Income			Presented
	(Dollars in thousands)
Realized net gains on the sale of available for sale securities	$	(148	)	Net gains on securities available for sale
		31		Tax expense
Total reclassification during the period	$	(117	)	Net of tax, increase to net income

	June 30, 2019
											To Be Well Capitalized
						Minimum Capital					Under Prompt
						Requirements					Corrective Action
	Actual					Per Regulation					Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total capital (to risk-weighted assets)	$	310,134		14.17	%	$	175,147		8.00	%	$	218,934		10.00	%
Tier 1 capital (to risk-weighted assets)		289,697		13.23	%		131,360		6.00	%		175,147		8.00	%
Common equity Tier 1 capital (to risk-weighted assets)		289,697		13.23	%		98,520		4.50	%		142,307		6.50	%
Tier 1 capital (to average assets)**		289,697		10.32	%		112,334		4.00	%		140,418		5.00	%

	June 30, 2019			December 31, 2018
Total shareholders' equity	$	295,306		$	281,006
Add (deduct)
Accumulated other comprehensive income		15,195			21,450
Intangible assets		(20,804	)		(20,981	)
Tier 1 Capital		289,697			281,475
Allowance for loan losses and allowance for unfunded lending commitments limited to 1.25% of total risk-weighted assets		20,437			20,389
Total risk-based capital	$	310,134		$	301,864

Remainder of 2019	$	255,000
2020		510,000
2021		510,000
2022		510,000
2023		510,000
2024		510,000

Year	(Dollars in thousands)
Remainder of 2019	$	667
2020		1,231
2021		994
2022		779
2023		424
2024 and thereafter		1,626
Total lease payments		5,721
Less: Interest		(519	)
Present value of lease liabilities	$	5,202

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 that may yet be purchased under the plan⁽³⁾
April 1 through April 31, 2019		84,224	$	9.29		84,224		1,460,980
May 1 through May 31, 2019 ⁽¹⁾		429,756		9.27		427,724		1,033,256
June 1 through June 30, 2019 ⁽²⁾		308,007		9.42		305,545		727,711
Total		821,987	$	9.33		817,493		727,711

Exhibit Number		Description

2.1		Agreement and Plan of Merger by and among United Community Financial Corp., The Home Savings and Loan Company of Youngstown, Ohio, Ohio Legacy Corp. and Premier Bank & Trust, dated September 8, 2016, incorporated by reference to Exhibit 2.1 in the Third Quarter Form 10-Q filed by United Community on November 8, 2016 with the SEC, film number 161981248.

3.1		Articles of Incorporation (reflecting all amendments filed with the Ohio Secretary of State) [for purposes of SEC reporting compliance only – not filed with the Ohio Secretary of State], incorporated by reference to Exhibit 3.1 in the Second Quarter 2016 Form 10-Q filed by United Community on August 5, 2016 with the SEC, film number 161811451.

3.2		Amended Code of Regulations, incorporated by reference to Exhibit 3.2 in the 1998 Form 10-K filed by United Community on March 31, 1999 with the SEC, film number 99582343.

31.1		Section 302 Certification by Chief Executive Officer

31.2		Section 302 Certification by Chief Financial Officer

32		Section 1350 Certifications by Chief Executive Officer and Chief Financial Officer

101		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) the Consolidated Statements of Changes in Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Unaudited Consolidated Financial Statements.

			UNITED COMMUNITY FINANCIAL CORP.
Date: August 8, 2019			/s/ Gary M. Small
			Gary M. Small President and Chief Executive Officer
			(Principal Executive Officer)
Date: August 8, 2019			/s/ Timothy W. Esson
			Timothy W. Esson Executive Vice President and Chief Financial Officer
			(Principal Financial Officer)