United Community Financial (UCFC) 10-Q 2009 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2009

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

For the transition period from                    to                    

UNITED COMMUNITY FINANCIAL CORP.

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

OHIO	0-024399	34-1856319
(State or other jurisdiction of incorporation)	(Commission File No.)	(IRS Employer I.D. No.)

275 West Federal Street, Youngstown, Ohio 44503-1203
(Address of principal executive offices) (Zip Code)

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

Not Applicable

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yeso Noo

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

Large accelerated filero Accelerated filerþ Non-accelerated filero Small reporting companyo

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

Yeso Noþ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 30,897,826 common shares as of July 31, 2009.

TABLE OF CONTENTS

	PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of June 30, 2009 (Unaudited) and December 31, 2008		1
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2009 and 2008 (Unaudited)		2
Consolidated Statement of Shareholders’ Equity for the Six Months ended June 30, 2009 (Unaudited)		4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008 (Unaudited)		5
Notes to Consolidated Financial Statements		6-24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25-36
Item 3. Quantitative and Qualitative Disclosures about Market Risk		37
Item 4. Controls and Procedures		38
Part II. OTHER INFORMATION
Item 1. Legal Proceedings		39
Item 1A. Risk Factors		39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		39
Item 3. Defaults Upon Senior Securities (None)
Item 4. Submission of Matters to a Vote of Security Holders		39
Item 5. Other Information (None)
Item 6. Exhibits		39
Signatures		40
Exhibits		41
Exhibit 10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

	June 30,			December 31,
	2009			2008
	(Dollars in thousands)
Assets:
Cash and deposits with banks	$	22,006		$	21,745
Federal funds sold and other		22,654			21,672
Total cash and cash equivalents		44,660			43,417
Securities:
Available for sale, at fair value		255,845			215,731
Loans held for sale		14,057			16,032
Loans, net of allowance for loan losses of $39,832 and $35,962, respectively		2,032,404			2,203,453
Federal Home Loan Bank stock, at cost		26,464			26,464
Premises and equipment, net		24,258			25,015
Accrued interest receivable		9,042			10,082
Real estate owned and other repossessed assets		33,077			29,258
Core deposit intangible		766			884
Cash surrender value of life insurance		25,611			25,090
Assets of discontinued operations—Butler Wick Corp.		—			5,562
Other assets		20,871			17,085
Total assets	$	2,487,055		$	2,618,073
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Interest bearing	$	1,711,315		$	1,779,676
Non-interest bearing		116,899			106,255
Total deposits		1,828,214			1,885,931
Borrowed funds:
Federal Home Loan Bank advances		294,152			337,603
Repurchase agreements and other borrowings		97,252			125,269
Total borrowings		391,404			462,872
Advance payments by borrowers for taxes and insurance		14,051			19,806
Accrued interest payable		2,698			3,077
Liabilities of discontinued operations—Butler Wick Corp.		—			2,388
Accrued expenses and other liabilities		16,075			9,076
Total liabilities		2,252,442			2,383,150
Shareholders’ Equity
Preferred stock-no par value; 1,000,000 shares authorized and unissued		—			—
Common stock-no par value; 499,000,000 shares authorized; 37,804,457 shares issued and 30,897,825 shares outstanding		145,873			146,439
Retained earnings		165,803			165,447
Accumulated other comprehensive income		2,624			3,635
Unearned employee stock ownership plan shares		(6,732	)		(7,643	)
Treasury stock, at cost, 6,906,632 shares		(72,955	)		(72,955	)
Total shareholders’ equity		234,613			234,923
Total liabilities and shareholders’ equity	$	2,487,055		$	2,618,073

See Notes to Consolidated Financial Statements.

1

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
	(Dollars in thousands, except per share data)
Interest income
Loans	$	30,076		$	33,935		$	61,143		$	69,743
Loans held for sale		216			88			479			276
Securities:
Trading		—			2			—			1
Available for sale		2,796			3,803			5,566			7,044
Federal Home Loan Bank stock dividends		294			348			593			680
Other interest earning assets		9			28			38			85
Total interest income		33,391			38,204			67,819			77,829
Interest expense
Deposits		12,074			14,510			24,725			31,546
Federal Home Loan Bank advances		1,569			3,191			3,427			6,883
Repurchase agreements and other		1,061			1,587			2,251			3,543
Total interest expense		14,704			19,288			30,403			41,972
Net interest income		18,687			18,916			37,416			35,857
Provision for loan losses		12,311			3,248			20,755			5,714
Net interest income after provision for loan losses		6,376			15,668			16,661			30,143
Non-interest income
Non-deposit investment income		404			432			708			910
Service fees and other charges		2,721			2,523			4,233			4,288
Net gains (losses):
Securities available for sale		1,382			57			1,382			988
Other than temporary impairment charges on securities available for sale		—			—			(150	)		—
Trading securities		—			(23	)		—			(23	)
Loans sold		1,788			395			2,928			2,579
Real estate owned and other repossessed assets sold		(1,182	)		(1,533	)		(2,320	)		(1,673	)
Other income		1,092			1,057			2,167			2,110
Total non-interest income		6,205			2,908			8,948			9,179
Non-interest expense
Salaries and employee benefits		7,764			9,011			15,787			18,061
Occupancy		899			900			1,883			1,847
Equipment and data processing		1,660			1,547			3,390			3,268
Franchise tax		555			544			1,147			1,124
Advertising		187			217			416			482
Amortization of core deposit intangible		58			74			118			151
Deposit insurance premiums		2,940			219			4,723			270
Professional fees		907			716			1,623			1,250
Real estate owned and other repossessed asset expenses		804			700			1,755			1,088
Other expenses		1,428			1,233			2,759			2,583
Total non-interest expenses		17,202			15,161			33,601			30,124
Income (loss) before income taxes and discontinued operations		(4,621	)		3,415			(7,992	)		9,198
Income taxes expense (benefit)		(1,707	)		1,111			(3,399	)		3,129
Net income (loss) before discontinued operations		(2,914	)		2,304			(4,593	)		6,069
Discontinued operations
Net income of Butler Wick Corp., net of tax		—			425			4,949			703
Net income (loss)	$	(2,914	)	$	2,729		$	356		$	6,772

(Continued)

2

(Continued)

UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
	(Dollars in thousands, except per share data)
Comprehensive income (loss)	$	(4,835	)	$	(3,731	)	$	(655	)	$	2,448
Earnings (loss) per share
Basic—continuing operations	$	(0.10	)	$	0.08		$	(0.16	)	$	0.21
Basic—discontinued operations		—			0.02			0.17			0.03
Basic		(0.10	)		0.10			0.01			0.24
Diluted—continuing operations		(0.10	)		0.08			(0.16	)		0.21
Diluted—discontinued operations		—			0.02			0.17			0.03
Diluted		(0.10	)		0.10			0.01			0.24

See notes to Consolidated Financial Statements.

3

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Unaudited)

											Unearned
								Accumulated			Employee
								Other			Stock
	Shares		Common			Retained		Comprehensive			Ownership			Treasury
	Outstanding		Stock			Earnings		Income (Loss)			Plan Shares			Stock			Total
	(Dollars in thousands, except share data)
Balance December 31, 2008		30,898	$	146,439		$	165,447	$	3,635		$	(7,643	)	$	(72,955	)	$	234,923
Comprehensive income:
Net income							356											356
Change in net unrealized gain/(loss) on securities, net of tax benefit of $544									(1,011	)								(1,011	)
Comprehensive income (loss)																		(655	)
Shares allocated to ESOP participants				(595	)							911						316
Stock based compensation				29														29
Balance June 30, 2009		30,898	$	145,873		$	165,803	$	2,624		$	(6,732	)	$	(72,955	)	$	234,613

See Notes to Consolidated Financial Statements.

4

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
	2009			2008
	(Dollars in thousands)
Cash Flows from Operating Activities
Net income	$	356		$	6,772
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		20,755			5,714
Net gains on loans sold		(2,928	)		(2,579	)
Net losses on real estate owned and other repossessed assets sold		2,337			1,674
Net losses on other assets sold		(17	)		(1	)
Other than temporary impairment of securities available for sale		150			—
Amortization of premiums and accretion of discounts		1,156			612
Depreciation and amortization		1,124			1,299
Federal Home Loan Bank stock dividends		—			(680	)
Decrease in interest receivable		1,040			1,581
Decrease in interest payable		(379	)		(2,986	)
Increase in prepaid and other assets		(4,042	)		(5,392	)
Increase in other liabilities		3,104			5,366
Decrease in trading securities		—			22
Stock based compensation		29			161
Net principal disbursed on loans originated for sale		(262,788	)		(106,334	)
Proceeds from sale of loans originated for sale		267,691			184,912
ESOP Compensation		316			922
Operating cash flows from discontinued operations		(4,949	)		(315	)
Net cash from operating activities		22,955			90,748
Cash Flows from Investing Activities
Proceeds from principal repayments and maturities of:
Securities available for sale		25,923			36,942
Proceeds from sale of:
Securities available for sale		46,051			48,411
Real estate owned and other repossessed assets		6,797			5,863
Purchases of:
Securities available for sale		(114,047	)		(157,065	)
Net change in loans		138,926			57,006
Loans purchased		(2,009	)		(54,207	)
Purchases of premises and equipment		(334	)		(522	)
Investing cash flows from discontinued operations		11,921			—
Net cash from investing activities		113,228			(63,572	)
Cash Flows from Financing Activities
Net increase in checking, savings and money market accounts		30,279			68,463
Net decrease in certificates of deposit		(87,996	)		(89,277	)
Net decrease in advance payments by borrowers for taxes and insurance		(5,755	)		(5,063	)
Proceeds from Federal Home Loan Bank advances		423,400			405,700
Repayment of Federal Home Loan Bank advances		(466,851	)		(398,744	)
Net change in repurchase agreements and other borrowed funds		(28,017	)		2,677
Cash dividends paid		—			(4,064	)
Financing cash flows from discontinued operations		—			2,334
Net cash from financing activities		(134,940	)		(17,974	)
Change in cash and cash equivalents		1,243			9,202
Cash and cash equivalents, beginning of period		43,417			33,502
Cash and cash equivalents, end of period	$	44,660		$	42,704

See Notes to Consolidated Financial Statements.

5

UNITED COMMUNITY FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

United Community Financial Corp. (United Community) was incorporated under Ohio law in February 1998 by The Home Savings and Loan Company of Youngstown, Ohio (Home Savings) in connection with the conversion of Home Savings from an Ohio mutual savings and loan association to an Ohio capital stock savings association (Conversion). Upon consummation of the Conversion on July 8, 1998, United Community became the unitary thrift holding company for Home Savings. Home Savings, a state-chartered savings bank, conducts business from its main office located in Youngstown, Ohio, 39 full-service branches and six loan production offices located throughout Ohio and western Pennsylvania.

The accompanying consolidated financial statements of United Community have been prepared in accordance with instructions relating to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles 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 six months ended June 30, 2009, are not necessarily indicative of the results to be expected for the year ending December 31, 2009. The consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2008, contained in United Community’s Form 10-K for the year ended December 31, 2008.

Management has evaluated events occurring subsequent to the balance sheet date through August 7, 2009, determining no events require adjustment to or additional disclosure in the consolidated financial statements.

Some items in the prior year financial statements were reclassified to conform to the current presentation.

2. REGULATORY ENFORCEMENT ACTION

On August 8, 2008, the board of directors of United Community approved a Stipulation and Consent to Issuance of Order to Cease and Desist (OTS Order) with the OTS. Simultaneously, the board of directors of Home Savings approved a Stipulation and Consent to the Issuance of an Order to Cease and Desist (Bank Order) with the FDIC and the Ohio Division. Because of the consent to the Bank Order, Home Savings is deemed ‘adequately capitalized’ for regulatory capital purposes, as previously disclosed.

United Community and Home Savings are moving toward compliance with the OTS Order and Bank Order.

6

3. DISCONTINUED OPERATIONS

On August 12, 1999, United Community acquired Butler Wick Corp. (Butler Wick), the parent company for two wholly owned subsidiaries: Butler Wick & Co., Inc. and Butler Wick Trust Company. On December 31, 2008, the Company completed the sale of Butler Wick & Co., Inc., to Stifel Financial Corp. for $12.0 million. On March 31, 2009, the Company completed the sale of Butler Wick Trust to Farmers National Banc Corp. for $12.1 million. As a result, Butler Wick has been reported as a discontinued operation and consolidated financial statement information for all periods presented has been reclassified to reflect this presentation. Butler Wick’s results of operations summarized are as follows:

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2009		2008		2009		2008
	(Dollars in thousands)				(Dollars in thousands)
Income
Interest income	$	—	$	187	$	32	$	416
Brokerage commissions		—		6,629		—		12,730
Service fees and other charges		—		1,483		1,287		3,172
Underwriting and investment banking		—		206		—		235
Gain on the sale of Butler Wick Trust		—		—		7,904		—
Other income		—		138		—		164
Total income		—		8,643		9,223		16,717
Expenses
Interest expense on borrowings		—		52		—		121
Salaries and employee benefits		—		5,891		1,198		11,570
Occupancy expenses		—		385		68		773
Equipment and data processing		—		588		84		1,206
Other expenses		—		1,073		258		1,939
Total expenses		—		7,989		1,608		15,609
Income before taxes		—		654		7,615		1,108
Income tax		—		229		2,666		405
Net income	$	—	$	425	$	4,949	$	703

4. RECENT ACCOUNTING DEVELOPMENTS

In December 2007, the FASB issued SFAS No. 141(R) (revised version of SFAS No. 141),Business Combinations. SFAS No. 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, to be measured at their fair values as of that date. SFAS No. 141(R) replaces SFAS No. 141’s cost-allocation process, which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. SFAS No. 141(R) applies to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 31, 2008. The adoption of this standard had no impact on United Community’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160,Non-controlling Interests in Consolidated Financial Statements — an amendment of ARB No. 51. SFAS No. 160 amends ARB 51 to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. The adoption of this standard had no impact on United Community’s consolidated financial statements.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161,Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133. SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of this standard had no impact on United Community’s consolidated financial statements.

7

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162,The Hierarchy of Generally Accepted Accounting Principles. This statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States. This statement will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411. The adoption of SFAS No. 162 is not expected to impact United Community’s consolidated financial statements.

On February 20, 2008, the FASB issued Staff Position FAS 140-3,Accounting for Transfers of Financial Assets and Repurchase Financing Transactions, to resolve questions about the accounting for repurchase financings. This FSP is effective for repurchase financings in which the initial transfer is entered into in fiscal years beginning after November 15, 2008. The adoption of this standard had no impact on United Community’s consolidated financial statements.

On April 25, 2008, the FASB issued Staff Position FAS 142-3,Determination of the Useful Life of Intangible Assets, which amends the list of factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS No. 142,Goodwill and Other Intangible Assets. FSP FAS 140-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The adoption of FSP FAS 140-3 did not have a material impact to United Community’s consolidated financial statements.

On May 9, 2008, the FASB issued Staff Position APB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The adoption of FSP APB 14-1 did not materially affect United Community’s consolidated financial statements.

On June 16, 2008, the FASB issued Staff Position EITF 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. The FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method described in paragraphs 60 and 61 of FASB Statement No. 128, Earnings Per Share. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The adoption of FSP EITF 03-6-1 did not materially affect United Community’s consolidated financial statements.

In October 2008, the FASB issued Staff Position 157-3,Determining the Fair Value of a Financial Asset When the Market for That Asset is not Active. The provisions of FSP 157-3 are effective on issuance, or October 10, 2008. FSP 157-3 clarifies the application of SFAS No. 157, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. Application issues addressed by the FSP include (a) how management’s internal assumptions should be considered when measuring fair value when relevant observable data do not exist, (b) how observable market information in a market that is not active should be considered when measuring fair value and (c) how the use of market quotes should be considered when assessing the relevance of observable and unobservable data available to measure fair value. The adoption of FSP 157-3 did not materially affect United Community’s consolidated financial statements.

In April 2009, the FASB issued Staff Position (FSP) No. 115-2 and No. 124-2,Recognition and Presentation of Other-Than-Temporary Impairments,which amends existing guidance for determining whether impairment is other-than-temporary (OTTI) for debt securities. The FSP requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized in earnings. For securities that do not meet the aforementioned criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income. Additionally, the FSP expands and increases the frequency of existing disclosures about other-than-temporary impairments for debt and equity securities. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted the FSP effective April 1, 2009. The adoption of FSP FAS 115-2 and FAS 124-2 for the period ended June 30, 2009, did not have a material impact on the Company’s consolidated financial statements as the Company has not experienced other-than-temporary impairment within its debt securities portfolio.

8

In April 2009, the FASB issued Staff Position (FSP) No. 157-4,Determining Fair Value When the Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP emphasizes that even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants. The FSP provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity. In addition, when transactions or quoted prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value. The FSP also requires increased disclosures. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. The adoption of this FSP at June 30, 2009 did not have a material impact on the results of operations or financial position.

In April 2009, the FASB issued FSP No. 107-1 and APB 28-1,Interim Disclosures about Fair Value of Financial Instruments. This FSP amends FASB Statement No. 107,Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies that were previously only required in annual financial statements. This FSP is effective for interim reporting periods ending after June 15, 2009. The adoption of this FSP at June 30, 2009 did not have a material impact on the results of operations or financial position as it only required disclosures which are included in Note 11.

In May 2009, FASB issued SFAS No. 165,Subsequent Events, with the objective to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 sets forth: (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS No. 165 is effective for interim and annual financial periods ending after June 15, 2009. The adoption of SFAS No. 165 on June 30, 2009, did not have a material impact on the Company’s consolidated financial statements.

Recently Issued but not yet Effective Accounting Pronouncements:

In June 2009, FASB issued SFAS No. 166,Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140. The objective of SFAS No. 166 is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. SFAS No. 166 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Management is still evaluating the impact of this accounting standard.

In June 2009, FASB issued SFAS No. 167,Amendments to FASB Interpretation No. 46(R). The objective of SFAS No. 167 is to amend certain requirements of FASB Interpretation No. 46 (revised December 2003),Consolidation of Variable Interest Entities, to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. SFAS No. 167 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. Management is still evaluating the impact of this accounting standard.

5. STOCK COMPENSATION

On July 12, 1999, shareholders approved the United Community Financial Corp. 1999 Long-Term Incentive Plan (1999 Plan). The purpose of the 1999 Plan is to promote and advance the interests of United Community and its shareholders by enabling United Community to attract, retain and reward directors, directors emeritus, managerial and other key employees of United Community, including Home Savings, by facilitating their purchase of an ownership interest in United Community. The 1999 Plan terminated on May 20, 2009.

9

The 1999 Plan provides for the grant of options, which may qualify as either incentive or nonqualified stock options. The incentive plan provides that option prices will not be less than the fair market value of the share at the grant date. The maximum number of common shares that may be issued under the plan is 3,569,766. There were 336,000 stock options granted in the first six months of 2009 under the 1999 plan. As of June 30, 2009, there were 115,793 shares remaining in the 1999 Plan that could be granted. However, as of July 12, 2009, no additional options may be issued under the 1999 Plan. All of the previous options awarded became exercisable on the date of grant. For the options granted in 2009, one third of the total options granted become exercisable on December 31, 2009, 2010 and 2011. The option period for each grant expires 10 years from the date of grant.

On April 26, 2007, shareholders approved the United Community Financial Corp. 2007 Long-Term Incentive Plan (2007 Plan). The purpose of the 2007 Plan is the same as that of the 1999 Plan. The 2007 Plan provides for the issuance of up to 2,000,000 shares that are to be used for awards of restricted stock shares, stock options, performance awards, stock appreciation rights (SARs), or other forms of stock-based incentive awards. There were no stock-based incentive awards granted in the first six months of 2009 and there were 243,721 stock options granted in 2008 under the 2007 Plan. All of the options awarded in 2008 became exercisable on the date of grant. The option period for each grant expires 10 years from the date of grant.

A summary of activity in the plans is as follows:

	For the Six Months Ended June 30, 2009
						Aggregate
				Weighted		intrinsic
				average		value (in
	Shares			exercise price		thousands)
Outstanding at beginning of year		2,092,128		$	9.08
Granted		336,000			1.86
Exercised		—			—
Forfeited		(209,925	)		9.16
Outstanding at end of period		2,218,203		$	7.98	$	—
Options exercisable at end of period		1,882,203		$	9.40	$	—

Information related to the stock option plan during the year follows (dollars in thousands, except per share amount):

	June 30,
	2009
Intrinsic value of options exercised	$	—
Cash received from option exercises		—
Tax benefit realized from option exercises		—
Weighted average fair value of options granted, per share		1.07

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model that uses assumptions noted in the table below. Expected volatilities are based on historical volatilities of United Community’s common shares. United Community uses historical data to estimate option exercises and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the US Treasury yield curve in effect at the time of the grant.

10

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

	May 8, 2009			June 25, 2009
Risk-free interest rate		2.15	%		2.58	%
Expected term (years)		5			5
Expected stock volatility		67.4			67.8
Dividend yield		—	%		—	%

Outstanding stock options have a weighted average remaining life of 5.06 years and may be exercised in the range of $1.30 to $12.38.

6. SECURITIES

United Community categorizes securities as available for sale and trading. Components of the available for sale portfolio are as follows:

	June 30, 2009
	(Dollars in thousands)
			Gross		Gross
	Fair		Unrealized		Unrealized			Amortized
	Value		Gains		Losses			Cost
U.S. Treasury and government sponsored entities’ securities	$	43,974	$	698	$	(41	)	$	43,317
Equity securities		976		334		(459	)		1,101
Mortgage-related securities		210,895		3,151		(167	)		207,911
Total	$	255,845	$	4,183	$	(667	)	$	252,329

	December 31, 2008
	(Dollars in thousands)
			Gross		Gross
	Fair		Unrealized		Unrealized
	Value		Gains		Losses
U.S. Treasury and government sponsored entities’ securities	$	27,170	$	865	$	—
Equity securities		910		70		(411	)
Mortgage-related securities		187,651		4,527		(107	)
Total	$	215,731	$	5,462	$	(518	)

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The amortized cost and fair value of the investment securities portfolio are shown by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

	June 30, 2009
	(Dollars in thousands)
	Fair		Amortized
	Value		Cost
Due in one year or less	$	—	$	—
Due after one year through five years		28,397		28,062
Due after five years through ten years		15,577		15,255
Mortgage-related securities		210,895		207,911
Total	$	254,869	$	251,228

Home Savings holds in its available-for-sale securities portfolio a Fannie Mae auction rate pass through trust security with an original cost basis of $5.0 million. This security represents an interest in a trust that is collateralized with Fannie Mae non-cumulative preferred stock. The market value of the security held by the Company declined following the September 7, 2008 announcement of the appointment of a conservator for Fannie Mae. Because the effects of the conservatorship may trigger the redemption provisions of the trust, UCFC management determined it was necessary for the Company to recognize a write-down of $4.9 million in 2008 and an additional write-down of $26,000 in the first quarter of 2009. Also, a write-down of the Company’s equity investment in the common shares of three financial institutions of $1.2 million was recognized in 2008. The Company determined that in the first quarter of 2009, further deterioration of the investment in one of those financial institutions caused the need to recognize an additional loss of $124,000. The cause of the deterioration was a result of recent regulatory enforcement actions imposed on that institution by its regulatory authorities.

Securities pledged for public funds deposits were approximately $1.0 million at June 30, 2009, and $2.1 million at December 31, 2008. Securities sold under an agreement to repurchase are secured primarily by mortgage-backed securities with a fair value of approximately $120.4 million at June 30, 2009, and $131.5 million at December 31, 2008.

United Community had no securities classified as trading as of June 30, 2009 and December 31, 2008.

The following table summarizes the investment securities with unrealized losses at June 30, 2009 by aggregated major security type and length of time in a continuous unrealized loss position:

	June 30, 2009
	(Dollars in thousands)
	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
U.S. Treasury and government sponsored entities’ securities	$	7,157	$	(41	)	$	—	$	—		$	7,157	$	(41	)
Equity securities		213		(311	)		87		(148	)		300		(459	)
Mortgage-related securities		17,558		(151	)		856		(16	)		18,414		(167	)
Total	$	24,928	$	(503	)	$	943	$	(164	)	$	25,871	$	(667	)

Proceeds from sales and calls of securities available for sale were $46.1 and $10.1 million for the three months ended June 30, 2009 and 2008, respectively. Gross gains of $1.4 million and $100,000 and gross losses of $0 and $0 were realized on these sales during 2009 and 2008, respectively.

Proceeds from sales and calls of securities available for sale were $46.1 million and $48.4 million for the six months ended June 30, 2009 and 2008, respectively. Gross gains of $1.4 million and $1.0 million and gross losses of $0 and $0 were realized on these sales during 2009 and 2008, respectively.

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Other-Than-Temporary-Impairment

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities classified as available for sale or held-to-maturity are generally evaluated for OTTI under Statement of Financial Accounting Standards (“SFAS”) No. 115,Accounting for Certain Investments in Debt and Equity Securities.

In determining OTTI under the SFAS No. 115 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

The second segment of the portfolio uses the OTTI guidance provided by EITF 99-20 that is specific to purchased beneficial interests that, on the purchase date, were rated below AA. Under the EITF 99-20 model, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

As of June 30, 2009, the Company’s security portfolio consisted of 56 securities, 13 of which were in an unrealized loss position. The majority of unrealized losses are related to the Company’s mortgage-related and equity securities, as discussed below:

Mortgage-related Securities

At June 30, 2009, 100% of the mortgage-related securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-related securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2009.

Equity Securities

The issuers of the equity securities that are temporarily impaired at June 30, 2009, are all well capitalized financial institutions and each exhibit a low to moderate level of nonperforming assets.

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7. LOANS

Portfolio loans consist of the following:

	June 30,			December 31,
	2009			2008
	(Dollars in thousands)
Real Estate:
One- to four-family residential	$	852,833		$	909,567
Multifamily residential		164,376			187,711
Nonresidential		396,688			375,463
Land		23,221			23,517
Construction:
One- to four-family residential		209,610			255,355
Multifamily and non-residential		15,007			35,797
Total real estate		1,661,735			1,787,410
Consumer		322,874			348,834
Commercial		86,286			101,489
Total loans		2,070,895			2,237,733
Less:
Allowance for loan losses		39,832			35,962
Deferred loan fees, net		(1,341	)		(1,682	)
Total		38,491			34,280
Loans, net	$	2,032,404		$	2,203,453

Changes in the allowance for loan loss are as follows:

	Six Months
	Ended			Year Ended
	June 30,			December 31,
	2009			2008
	(Dollars in thousands)
Balance, beginning of year	$	35,962		$	32,006
Provision for loan losses		20,755			25,329
Amounts charged off		(17,506	)		(22,088	)
Recoveries		621			715
Balance, end of period	$	39,832		$	35,962

Non-accrual loans were $96.5 million and $98.3 million at June 30, 2009, and December 31, 2008, respectively. Restructured loans were $2.5 million at June 30, 2009 and $1.8 million at December 31, 2008. Loans greater than 90 days past due and still accruing interest were $3.0 million and $6.6 million at June 30, 2009 and December 31, 2008, respectively.

14

Impaired loans consist of the following:

	As of or for the		As of or for
	Six Months		the Year
	Ended		Ended
	June 30,		December 31,
	2009		2008
	(Dollars in thousands)
Impaired loans on which no specific valuation allowance was provided	$	46,252	$	43,256
Impaired loans on which a specific valuation allowance was provided		43,338		43,992
Total impaired loans at period-end	$	89,590	$	87,248
Specific valuation allowances on impaired loans at period-end	$	6,591	$	10,968
Average impaired loans during the period		88,419		85,812
Interest income recognized on impaired loans during the period		269		513
Interest income received on impaired loans during the period		269		513

8. MORTGAGE BANKING ACTIVITIES

Mortgage loans serviced for others, which are not reported in United Community’s assets, totaled $992.2 million at June 30, 2009, and $921.0 million at December 31, 2008.

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

	Six Months
	Ended			Year Ended
	June 30,			December 31,
	2009			2008
	(Dollars in thousands)
Balance, beginning of year	$	5,562		$	6,184
Originations		2,028			1,337
Amortized to expense		(1,463	)		(1,959	)
Balance, end of period		6,127			5,562
Less valuation allowance		(1,020	)		(2,233	)
Net balance	$	5,107		$	3,329

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

	Six Months
	Ended			Year Ended
	June 30,			December 31,
	2009			2008
	(Dollars in thousands)
Balance, beginning of year	$	(2,233	)	$	(562	)
Impairment charges		—			(2,233	)
Recoveries		1,213			562
Balance, end of period	$	(1,020	)	$	(2,233	)

Fair value of mortgage servicing rights as of June 30, 2009 was approximately $6.5 million and at December 31, 2008 was $3.9 million.

15

Key economic assumptions in measuring the value of mortgage servicing rights at June 30, 2009 and December 31, 2008 were as follows:

	June 30,	December 31,
	2009	2008
Weighted average prepayment rate	415 PSA	644 PSA
Weighted average life (in years)	3.59	3.34
Weighted average discount rate	8%	8%

9. OTHER REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS

Real estate owned and other repossessed assets at June 30, 2009 and December 31, 2008 were as follows:

	June 30,			December 31,
	2009			2008
	(Dollars in thousands)
Real estate owned and other repossessed assets	$	36,145		$	32,012
Valuation allowance		(3,068	)		(2,754	)
End of period	$	33,077		$	29,258

Activity in the valuation allowance was as follows:

	June 30,			December 31,
	2009			2008
	(Dollars in thousands)
Beginning of year	$	2,754		$	—
Additions charged to expense		1,398			3,753
Direct write-downs		(1,084	)		(999	)
End of period	$	3,068		$	2,754

Expenses related to foreclosed and repossessed assets include:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2009		2008		2009		2008
	(Dollars in thousands)				(Dollars in thousands)
Net loss on sales	$	497	$	143	$	922	$	238
Provision for unrealized losses		685		1,390		1,398		1,435
Operating expenses, net of rental income		804		700		1,755		1,088
Total expenses	$	1,986	$	2,233	$	4,075	$	2,761

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10. OTHER POSTRETIREMENT BENEFIT PLANS

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

Components of net periodic benefit cost are as follows:

	Three Months Ended June 30,
	2009			2008
	(Dollars in thousands)
Service cost	$	—		$	—
Interest cost		47			48
Expected return on plan assets		—			—
Net amortization of prior service cost		—			—
Net amortization of actuarial gain		(4	)		(3	)
Net periodic benefit cost	$	43		$	45

	Six Months Ended June 30,
	2009			2008
	(Dollars in thousands)
Service cost	$	—		$	—
Interest cost		94			96
Expected return on plan assets		—			—
Net amortization of prior service cost		—			—
Net amortization of actuarial gain		(8	)		(6	)
Net periodic benefit cost	$	86		$	90

11. FAIR VALUE MEASUREMENT

SFAS No. 157 defines fair value as the exchange price that would be received for an asset or 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. SFAS No. 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:

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 assumptions about the assumptions that market participants would use in pricing an asset or liability.

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The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally 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 appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Assets and liabilities measured at fair value on a recurring basis are summarized below:

			Fair Value Measurements at June 30, 2009 Using:
			Quoted Prices in
			Active Markets				Significant
			for Identical		Significant Other		Unobservable
	June 30,		Assets		Observable		Inputs
	2009		(Level 1)		Inputs (Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Available for sale securities
US Treasury and government sponsored entities’ securities	$	43,974	$	—	$	43,974	$	—
Equity securities		976		976		—		—
Mortgage-related securities		210,895		—		210,895		—

			Fair Value Measurements at December 31, 2008 Using:
			Quoted Prices in
			Active Markets				Significant
			for Identical		Significant Other		Unobservable
	December 31,		Assets		Observable		Inputs
	2008		(Level 1)		Inputs (Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Available for sale securities	$	215,731	$	809	$	214,922	$	—

Assets and liabilities measured at fair value on a nonrecurring basis are summarized below:

			Fair Value Measurements at June 30, 2009 Using:
			Quoted Prices in
			Active Markets				Significant
			for Identical		Significant Other		Unobservable
	June 30,		Assets		Observable		Inputs
	2009		(Level 1)		Inputs (Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Impaired loans	$	36,747		—		—	$	36,747
Mortgage servicing assets		2,220		—		2,220		—
Foreclosed assets		10,562		—		—		10,562

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			Fair Value Measurements at December 31, 2008 Using:
			Quoted Prices in
			Active Markets				Significant
			for Identical		Significant Other		Unobservable
	December 31,		Assets		Observable		Inputs
	2008		(Level 1)		Inputs (Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Impaired loans	$	33,024		—		—	$	33,024
Mortgage servicing rights		2,421		—		2,421		—

Impaired loans, carried at fair value, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $43.3 million at June 30, 2009, with a valuation allowance of $6.6 million, resulting in additional provision for loan losses of $1.6 million during the period.

Mortgage servicing rights had a carrying amount of $6.1 million with a valuation allowance of $1.0 million, and are valued by an independent third party that is active in purchasing and selling these instruments. The value reflects the characteristics of the underlying loans discounted at a market multiple.

Foreclosed assets, carried at fair value, which is measured for impairment using the fair value of the property less estimated selling costs, had a carrying amount of $13.7 million, with a valuation allowance of $3.1 million.

In accordance with FSP FAS 107-1, the carrying amounts and estimated fair values of financial instruments, at June 30, 2009 and December 31, 2008 are as follows:

	June 30, 2009						December 31, 2008
	Carrying			Fair			Carrying			Fair
	Value			Value			Value			Value
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	44,660		$	44,660		$	43,417		$	43,417
Securities:
Available for sale		255,845			255,845			215,731			215,731
Loans held for sale		14,057			14,096			16,032			16,358
Loans, net		2,032,404			2,028,432			2,203,453			2,203,606
Federal Home Loan Bank stock		26,464			n/a			26,464			n/a
Accrued interest receivable		9,042			9,042			10,082			10,082
Liabilities:
Deposits:
Checking, savings and money market accounts		(690,954	)		(690,955	)		(660,675	)		(660,675	)
Certificates of deposit		(1,137,260	)		(1,150,774	)		(1,225,256	)		(1,237,262	)
Federal Home Loan Bank advances		(294,152	)		(348,185	)		(337,603	)		(348,185	)
Repurchase agreements and other		(97,252	)		(106,934	)		(125,269	)		(138,862	)
Advance payments by borrowers for taxes and insurance		(14,051	)		(14,051	)		(19,806	)		(19,806	)
Accrued interest payable		(2,698	)		(2,698	)		(3,077	)		(3,077	)

Fair value of financial instruments:

The estimated fair values of financial instruments have been determined by United Community using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that United Community could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material affect on the estimated fair value amounts.

19

Cash and cash equivalents, accrued interest receivable and payable and advance payments by borrowers for taxes and insurance—The carrying amounts as reported in the Statements of Financial Condition are a reasonable estimate of fair value due to their short-term nature.

Securities—Fair values are based on quoted market prices, dealer quotes, and prices obtained from independent pricing services.

Loans held for sale—The fair value of loans held for sale is based on market quotes.

Loans—The fair value is estimated by discounting the future cash flows using the current market rates for loans of similar maturities with adjustments for market and credit risks.

Federal Home Loan Bank stock—It is not practical to determine the fair value of Federal Home Loan Bank stock due to restrictions placed on its transferability.

Deposits—The fair value of demand deposits, savings accounts and money market deposit accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using rates currently offered for deposits of similar remaining maturities.

Borrowed funds—For short-term borrowings, fair value is estimated to be carrying value. The fair value of other borrowings is based on current rates for similar financing.

Limitations—Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time United Community’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of United Community’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, a significant asset not considered a financial asset is premises and equipment. In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

12. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURE

Supplemental disclosures of cash flow information are summarized below.

	June 30, 2009		June 30, 2008
	(Dollars in thousands)
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest on deposits and borrowings	$	30,782	$	43,337
Income taxes		600		3,825
Supplemental schedule of noncash activities:
Transfers from loans to real estate owned and other repossessed assets		12,953		18,545

13. SEGMENT INFORMATION

United Community monitors the revenue streams of the various Company products and services. The identifiable segments are not material, operations are managed, and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company’s financial service operations are considered by management to be aggregated in one reportable operating segment, which is banking services.

20

Discontinued operations are essentially the results of operations from Butler Wick Corp which were previously reported as a separate segment, investment services. Refer to Note 3 for a discussion on discontinued operations and its impact on segment reporting.

14. EARNINGS PER SHARE

Earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares determined for the basic computation plus the dilutive effect of potential common shares that could be issued under outstanding stock options. Stock options for 2,218,203 shares were anti-dilutive for the six months ended June 30, 2009. There were 2,344,306 stock options for shares that were anti-dilutive for the six months ended June 30, 2008. Earnings per share for 2008 have been adjusted to reflect a stock dividend declared in November 2008.

	Three Months Ended
	June 30,
	2009			2008
	(Dollars in thousands,
	except per share data)
Numerator:
Income (loss) from continuing operations	$	(2,914	)	$	2,304
Income from discontinued operations		—			425
Net income	$	(2,914	)	$	2,729
Denominator:
Weighted average common shares outstanding—basic		29,727			29,424
Dilutive effect of stock options		—			21
Weighted average common shares outstanding—dilutive		29,727			29,445
Basic earnings (loss) per share:
Basic earnings (loss) per common share—continuing operations	$	(0.10	)	$	0.08
Basic earnings per common share—discontinued operations		—			0.02
Basic earnings (loss) per common share		(0.10	)		0.10
Dilutive earnings (loss) per share:
Dilutive earnings (loss) per common share—continuing operations		(0.10	)		0.08
Dilutive earnings per common share—discontinued operations		—			0.02
Dilutive earnings (loss) per common share		(0.10	)		0.10

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	Six Months Ended
	June 30,
	2009			2008
	(Dollars in thousands,
	except per share data)
Numerator:
Income (loss) from continuing operations	$	(4,593	)	$	6,069
Income from discontinued operations		4,949			703
Net income	$	356		$	6,772
Denominator:
Weighted average common shares outstanding—basic		29,645			29,361
Dilutive effect of stock options		—			5
Weighted average common shares outstanding—dilutive		29,645			29,366
Basic earnings (loss) per share:
Basic earnings (loss) per common share—continuing operations	$	(0.16	)	$	0.21
Basic earnings per common share—discontinued operations		0.17			0.03
Basic earnings (loss) per common share		0.01			0.24
Dilutive earnings (loss) per share:
Dilutive earnings (loss) per common share—continuing operations		(0.16	)		0.21
Dilutive earnings per common share—discontinued operations		0.17			0.03
Dilutive earnings (loss) per common share		0.01			0.24

15. BROKERED CERTIFICATES OF DEPOSIT

Brokered deposits represent funds which Home Savings obtained, directly or indirectly, through a deposit broker. A deposit broker places deposits from third parties with insured depository institutions or places deposits with an institution for the purpose of selling interest in those deposits to third parties. Under the terms of the Bank Order, Home Savings cannot obtain additional brokered deposits without prior consent of the FDIC and Ohio Division. Home Savings had brokered deposits of $92.2 million with a weighted average rate of 4.07% at June 30, 2009. Home Savings had brokered deposits of $145.2 million with a weighted average rate of 3.77% at December 31, 2008.

16. OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) included in the Consolidated Statements of Shareholders’ Equity consists of unrealized gains and losses on available for sale securities and changes in unrealized gains and losses on postretirement liability. The change includes reclassification of gains on sales of securities and impairment charges $150,000 at June 30, 2009, and $4.2 million at December 31, 2008.

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

	Three Months Ended
	June 30,			June 30,
	2009			2008
	(Dollars in thousands)
Unrealized holding gains (losses) on securities available for sale	$	(4,337	)	$	(9,995	)
Reclassification adjustment for gains (losses) realized in income		1,382			57
Net unrealized losses		(2,955	)		(9,938	)
Tax effect (35%)		1,034			3,478
Net of tax amount	$	(1,921	)	$	(6,460	)

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	Six Months Ended
	June 30,			June 30,
	2009			2008
	(Dollars in thousands)
Unrealized holding gains (losses) on securities available for sale	$	(2,787	)	$	(7,640	)
Reclassification adjustment for gains (losses) realized in income		1,232			988
Net unrealized losses		(1,555	)		(6,652	)
Tax effect (35%)		544			2,328
Net of tax amount	$	(1,011	)	$	(4,324	)

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

	Balance at		Current			Balance at
	December 31,		Period			June 30,
	2008		Change			2009
Unrealized gains on securities available for sale	$	3,297	$	(1,011	)	$	2,286
Unrealized gains on post-retirement benefits		338		—			338
Total	$	3,635	$	(1,011	)	$	2,624

17. REGULATORY CAPITAL REQUIREMENTS

Home Savings is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on Home Savings and United Community. The regulations require Home Savings to meet specific capital adequacy guidelines and 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, risk weightings, and other factors.

Quantitative measures established by regulation for capital adequacy require Home Savings to maintain minimum amounts and ratios of Tier 1 (or Core) and Tangible capital (as defined in the regulations) to average total assets (as defined) and of total risk-based capital (as defined) to risk-weighted assets (as defined). Actual and statutory required capital amounts and ratios for Home Savings are presented below.

	As of June 30, 2009
											To Be Well Capitalized
											Under Prompt
						Minimum Capital					Corrective Action
	Actual					Requirements					Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(In thousands)
Total risk-based capital to risk-weighted assets	$	237,586		12.76	%	$	148,907		8.00	%	$	186,134		10.00	%
Tier 1 capital to risk-weighted assets		214,115		11.50	%		*		*			111,680		6.00	%
Tier 1 capital to average total assets		214,115		8.50	%		100,816		4.00	%		126,020		5.00	%
Tangible capital to adjusted total assets		214,115		8.50	%		37,806		1.50	%		*		*

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	As of December 31, 2008
											To Be Well Capitalized
											Under Prompt
						Minimum Capital					Corrective Action
	Actual					Requirements					Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(In thousands)
Total risk-based capital to risk-weighted assets	$	242,944		12.06	%	$	161,163		8.00	%	$	201,454		10.00	%
Tier 1 capital to risk-weighted assets		217,630		10.80	%		*		*			120,872		6.00	%
Tier 1 capital to average total assets		217,630		8.20	%		106,180		4.00	%		132,724		5.00	%
Tangible capital to adjusted total assets		217,630		8.20	%		39,817		1.50	%		*		*

* Ratio is not required under regulations.

As of June 30, 2009 and December 31, 2008, the FDIC and OTS, respectively, categorized Home Savings as adequately capitalized pursuant to the Bank Order and OTS Order, as previously disclosed. The Bank Order provided for Home Savings to increase its Tier 1 leverage ratio to 8.0% and total risk-based capital ratio to 12.0% by December 31, 2008 and to maintain those minimums going forward. As depicted in the table on the previous page, Home Savings continues to exceed this requirement.

Management believes, as of June 30, 2009, that Home Savings meets all capital requirements to which it is subject, inclusive of the Bank Order. Events beyond management’s control, such as fluctuations in interest rates or a downturn in the economy in areas in which Home Savings’ loans and securities are concentrated, could adversely affect future earnings, and consequently Home Savings’ ability to meet its future capital requirements.

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ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

UNITED COMMUNITY FINANCIAL CORP.

	At or For the Three						At or For the Six
	Months Ended						Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
Selected financial ratios and other data: (1)
Performance ratios:
Return on average assets (2)		-0.46	%		0.40	%		0.03	%		0.49	%
Return on average equity (3)		-4.74	%		3.82	%		0.29	%		4.77	%
Interest rate spread (4)		2.81	%		2.60	%		2.78	%		2.40	%
Net interest margin (5)		3.12	%		2.94	%		3.08	%		2.77	%
Non-interest expense to average assets		2.72	%		2.20	%		2.62	%		2.19	%
Efficiency ratio (6)		69.38	%		64.69	%		70.56	%		65.52	%
Average interest-earning assets to average interest-bearing liabilities		112.66	%		111.38	%		112.08	%		111.47	%
Capital ratios:
Average equity to average assets		9.74	%		10.38	%		9.58	%		10.31	%
Equity to assets, end of period		9.43	%		9.76	%		9.43	%		9.76	%
Tier 1 leverage ratio		8.50	%		7.77	%		8.50	%		7.77	%
Tier 1 risk-based capital ratio		11.50	%		9.86	%		11.50	%		9.86	%
Total risk-based capital ratio		12.76	%		11.77	%		12.76	%		11.77	%
Asset quality ratios:
Non-performing loans to total loans at end of period (7)		5.02	%		4.44	%		5.02	%		4.44	%
Non-performing assets to average assets (8)		5.35	%		4.35	%		5.26	%		4.34	%
Non-performing assets to total assets at end of period		5.43	%		4.34	%		5.43	%		4.34	%
Allowance for loan losses as a percent of loans		1.92	%		1.29	%		1.92	%		1.29	%
Allowance for loan losses as a percent of nonperforming loans (7)		39.05	%		29.45	%		39.05	%		29.45	%
Office data:
Number of full service banking offices		39			39			39			39
Number of loan production offices		6			6			6			6
Per share data:
Basic earnings (loss) from continuing operations (9)	$	(0.10	)	$	0.08		$	(0.16	)	$	0.21
Basic earnings from discontinued operations (9)		—			0.02			0.17			0.03
Basic earnings (loss) (9)		(0.10	)		0.10			0.01			0.24
Diluted earnings (loss) from continuing operations (9)		(0.10	)		0.08			(0.16	)		0.21
Diluted earnings from discontinued operations (9)		—			0.02			0.17			0.03
Diluted earnings (loss) (9)		(0.10	)		0.10			0.01			0.24
Book value (10)		7.59			8.96			7.59			8.96
Tangible book value (11)		7.57			7.81			7.57			7.81

(1)	Ratios for the three and six month periods are annualized where appropriate. Ratios for the period ending June 30, 2008 have been revised to reflect the impact of discontinued operations.
(2)	Net income divided by average total assets.
(3)	Net income divided by average total equity.
(4)	Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities.
(5)	Net interest income as a percentage of average interest-earning assets.
(6)	Noninterest expense, excluding the amortization of core deposit intangible, divided by the sum of net interest income and noninterest income, excluding gains and losses on securities, other than temporary impairment charges and other.
(7)	Nonperforming loans consist of nonaccrual loans, loans past due ninety days and still accruing, and restructured loans.
(8)	Nonperforming assets consist of nonperforming loans, real estate acquired in the settlement of loans and other repossessed assets.
(9)	Net income divided by average number of basic or diluted shares outstanding.
(10)	Shareholders’ equity divided by number of shares outstanding.
(11)	Historical per share dividends declared and paid for the period divided by the diluted earnings per share for the period.

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Forward Looking Statements

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

Comparison of Financial Condition at June 30, 2009 and December 31, 2008

Total assets decreased $131.0 million, or 5.0%, to $2.5 billion at June 30, 2009, compared to December 31, 2008. Contributing to the change were decreases in net loans of $171.0 million, loans held for sale of $2.0 million, accrued interest receivable of $1.0 million and assets of discontinued operations of $5.6 million. These decreases were partially offset by increases in cash and cash equivalents of $1.2 million, securities available for sale of $40.1 million, real estate owned and other repossessed assets of $3.8 million and other assets of $3.8 million.

Cash and cash equivalents increased $1.2 million to $44.7 million at June 30, 2009, compared to $43.4 million at December 31, 2008. This change is primarily the result of an increase in checks awaiting deposit at the Federal Reserve and cash maintained in Home Savings’ account at the Federal Reserve. These increases were partially offset by a decrease in cash prepared for delivery to Home Savings’ branch locations.

Available for sale securities increased $40.1 million, or 18.6%, from December 31, 2008, to June 30, 2009. Home Savings purchased $114.0 million in mortgage-backed and agency securities during the first six months of 2009 as part of a planned investment strategy to offset partial decreases in loan balances, described below. The investment strategy also included the sale of approximately $46.1 million of mortgage-backed securities, which generated a gain of $1.4 million. Paydowns and maturities of $25.9 million at Home Savings and other than temporary impairment charges of $150,000 at United Community also contributed to the change in available for sale securities. The remaining difference is a result of changes in the market valuation of the portfolio, net of any amortization or accretion.

Net loans decreased $171.0 million from December 31, 2008, to June 30, 2009. Real estate loans decreased $125.7 million, consumer loans decreased $26.0 million, and commercial loans decreased $15.2 million. The overall decrease in loans is attributable primarily to the strategic objective of reducing exposure to commercial and residential construction lending. Furthermore, due to a much lower interest rate environment, refinance activity accelerated, further contributing to the decline in one-to four-family loans.

The allowance for loan losses increased to $39.8 million, or 1.92% of the net loan portfolio and 39.1% of nonperforming loans as of June 30, 2009, up from $36.0 million or 1.29% of the net loan portfolio and 33.71% of nonperforming loans as of December 31, 2008. Loan loss provisions totaling $20.8 million during the six months ended June 30, 2009 were partially offset by charge-offs totaling $17.5 million. The allowance for loan losses is a valuation allowance for probable credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses. 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. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers pools of loans and is based on historical loss experience adjusted for current factors, but the entire allowance is available for any loan, or portion thereof that, in management’s judgment, should be charged-off.

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The general component of the allowance covers pools of loans not reviewed specifically by management that are evaluated as a homogeneous group of loans (e.g., performing single-family residential mortgage loans) using a historical charge-off experience ratio applied to each pool of loans. The historical charge-off experience ratio considers historical loss rates adjusted for certain environmental factors.

	Allowance For Loan Losses
	(Dollars in thousands)
	December 31,										June 30,
Real Estate Loans	2008		Provision			Recovery		Chargeoff			2009
Permanent
One-to four-family residential	$	4,986	$	2,487		$	10	$	(2,364	)	$	5,119
Multifamily residential		2,344		1,158			3		(2,036	)		1,469
Nonresidential		4,870		1,548			3		(2,348	)		4,073
Land		585		65			—		—			650
Total		12,785		5,258			16		(6,748	)		11,311
Construction Loans
One-to four-family residential		10,620		12,173			9		(6,091	)		16,711
Multifamily and nonresidential		722		(435	)		—		—			287
Total		11,342		11,738			9		(6,091	)		16,998
Consumer Loans
Home Equity		1,386		1,473			1		(906	)		1,954
Auto		242		14			10		(72	)		194
Marine		1,504		216			331		(806	)		1,245
Recreational vehicle		1,425		948			82		(1,015	)		1,440
Other		313		139			172		(341	)		283
Total		4,870		2,790			596		(3,140	)		5,116
Commercial Loans
Secured		3,355		938			—		(946	)		3,347
Unsecured		3,610		31			—		(581	)		3,060
Total		6,965		969			—		(1,527	)		6,407
Total	$	35,962	$	20,755		$	621	$	(17,506	)	$	39,832

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Nonperforming loans consist of loans past due 90 days or more, loans past due less than 90 days that are on nonaccrual status, and restructured loans. Nonperforming loans were $102.0 million, or 5.02% of net loans, at June 30, 2009, compared to $106.7 million, or 4.84% of net loans, at December 31, 2008. The schedule below summarizes the change in nonperforming loans for the first six months of 2009.

	Nonperforming Loans
	(Dollars in thousands)
	June 30,		December 31,
Real Estate Loans	2009		2008		Change
Permanent
One-to four-family residential	$	23,081	$	21,669	$	1,412
Multifamily residential		5,349		8,724		(3,375	)
Nonresidential		15,046		15,246		(200	)
Land		5,169		4,840		329
Total		48,645		50,479		(1,834	)
Construction Loans
One-to four-family residential		36,806		43,167		(6,361	)
Multifamily and nonresidential		555		816		(261	)
Total		37,361		43,983		(6,622	)
Consumer Loans
Home Equity		2,931		2,312		619
Auto		119		154		(35	)
Marine		1,736		2,614		(878	)
Recreational vehicle		1,068		756		312
Other		35		33		2
Total		5,889		5,869		20
Commercial Loans
Secured		6,488		3,496		2,992
Unsecured		1,126		1,057		69
Total		7,614		4,553		3,061
Restructured Loans		2,494		1,797		697
Total Nonperforming Loans	$	102,003	$	106,681	$	(4,678	)

The $1.4 million increase in nonperforming loans secured by one-to four-family properties was primarily a result of an increase in the number of loans that have become 90 days or more past due. During the first half of the year, Home Savings has experienced an increase in the number of one-to four-family mortgage loans that became delinquent and subsequently went into nonaccrual status. The $6.4 million decrease in nonperforming construction loans was substantially the result of Home Savings taking into possession two properties located in western Pennsylvania in the second quarter of 2009. A large portion of the decrease in nonperforming multifamily residential loans can also be attributable to Home Savings taking into possession one property located in Michigan. The increase in nonperforming commercial secured loans was primarily a result of the Company placing a loan on nonaccrual status that was not yet ninety or more days past due.

In the fourth quarter of 2008, Home Savings adopted the practice of determining the past due status of loans based on the number of days the loan is past due, rather than the number of calendar months the loan is past due. In the second quarter of 2009, this practice was changed back to the number of calendar months, which is more consistent with industry practice.

28

A loan is considered impaired when, based on current information and events, it is probable that Home Savings will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement and the loan is non-homogeneous in nature. Factors considered by management in determining impairment include payment status, collateral value, the strength of guarantors (if any), and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the facts and circumstances surrounding the loans and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the fair value of the collateral if the loan is collateral dependent, the present value of expected future cash flows discounted at the loan’s effective interest rate, or the market value of the loan. As shown in the following table, impaired loans increased to $89.6 million, or 2.7% at the end of June 2009, from December 2008. The largest increase was $6.0 million in one-to four-family mortgage loans.

	Impaired Loans
	(Dollars in thousands)
	June 30,		December 31,
Real Estate Loans	2009		2008		Change
Permanent
One-to four-family residential	$	18,709	$	12,675	$	6,034
Multifamily residential		5,349		8,724		(3,375	)
Nonresidential		14,903		14,855		48
Land		5,168		4,757		411
Total		44,129		41,011		3,118
Construction Loans
One-to four-family residential		34,570		36,903		(2,333	)
Multifamily and nonresidential		555		816		(261	)
Total		35,125		37,719		(2,594	)
Consumer Loans
Home Equity		1,895		1,657		238
Auto		—		—		—
Boat		1,736		2,614		(878	)
Recreational vehicle		327		—		327
Other		8		—		8
Total		3,966		4,271		(305	)
Commercial Loans
Secured		5,330		3,496		1,834
Unsecured		1,040		751		289
Total		6,370		4,247		2,123
Total Impaired Loans	$	89,590	$	87,248	$	2,342

Other nonperforming assets, consisting of real estate and other consumer property acquired in the settlement of loans, totaled $33.1 million at June 30, 2009, compared to $29.3 million at December 31, 2008. The $3.8 million increase is primarily attributable to the acquisition of two properties having an estimated market value of $4.0 million that collateralized commercial construction loans primarily in southwestern Pennsylvania, ten properties having an estimated market value of $2.5 million in northern Ohio, one property with an estimated market value of $1.7 million that secured a commercial real estate loan in Michigan and four properties with an estimated value of $1.5 million that secured ten commercial real estate loans in northern Ohio. Home Savings disposed of property with a value of $6.3 million in the first six months of 2009, partially offsetting the increase. Other consumer property, such as boats, recreational vehicles, and automobiles that were received by Home Savings in the satisfaction of loans, makes up the remainder of the change.

29

Loans held for sale decreased $2.0 million, or 12.3%, to $14.1 million at June 30, 2009, compared to $16.0 million at December 31, 2008. The change in loans held for sale was due largely to the increase in volume of loan originations and sales during the period because of the lower interest rate environment. Home Savings sells a portion of newly originated loans into the secondary market as part of its risk management strategy and anticipates continuing to do so in the future.

Federal Home Loan Bank stock remained at $26.5 million for June 30, 2009, and December 31, 2008. During the first six months of 2009, the Federal Home Loan Bank paid a cash dividend in lieu of a stock dividend to its member banks.

Home Savings maintains a contra account for uncollected interest for loans on non-accrual status. This account represents the reduction in interest income from the time the borrower stopped making payments until the loan is either repaid, charged off or the default is cured and performance resumes. The increases in these reserves, from $14.8 million at December 31, 2008, to $15.8 million at June 30, 2009, and the impact of the reduction in loan balances mentioned above, were the primary reasons that accrued interest receivable decreased $1.0 million to $9.0 million at June 30, 2009, compared to $10.1 million at December 31, 2008.

Other assets increased $3.8 million to $20.9 million at June 30, 2009, compared to $17.1 million at December 31, 2008. Home Savings had increases in mortgage servicing rights of $1.8 million, prepaid Ohio franchise tax of $1.1 million, and a current federal income tax benefit of $364,000. These increases were offset by cash due on payments of mortgage-backed securities of $1.4 million and $767,000 in other prepaid assets.

Total deposits decreased $57.7 million to $1.8 billion at June 30, 2009, compared to $1.9 billion at December 31, 2008. This change was due primarily to a decrease of $52.9 million in brokered certificates of deposit and a $35.1 million decrease in retail certificates of deposit offset by a $16.8 million increase in savings accounts and a $13.5 million increase in money market accounts and other demand deposit accounts. To supplement its funding needs, United Community obtained brokered certificates of deposit in 2007 and 2008. Such deposits have maturities ranging from six months to two years from the date they were issued. The total balance of brokered certificates of deposit was $92.2 million at June 30, 2009 and $145.0 million at December 31, 2008. At this time, regulatory approval would be required to replace these brokered deposits with additional brokered deposits as they mature. The Company does not anticipate on seeking approval to replace brokered deposits at this time.

Federal Home Loan Bank advances decreased $43.5 million during the first six months of 2009, reflecting a decrease in overnight advances of $13.1 million and a decrease in term advances of $30.4 million. Home Savings had approximately $247.2 million in unused borrowing capacity at the FHLB at June 30, 2009. Repurchase agreements and other borrowed funds, including United Community’s line of credit with JP Morgan Chase Bank, N.A. (JP Morgan Chase), decreased $28.0 million to $97.3 million at June 30, 2009 from $125.3 million at December 31, 2008. United Community’s line of credit with JP Morgan Chase was paid in full with proceeds from the sale of Butler Wick Trust on March 31, 2009.

Advance payments by borrowers for taxes and insurance decreased $5.8 million during the first six months of 2009. Remittance of real estate taxes and property insurance made on behalf of customers of Home Savings account for $3.6 million of the decrease. In addition, funds held for payments received on loans sold where servicing was retained by Home Savings decreased $2.2 million.

Accrued expenses and other liabilities increased $7.0 million, to $16.1 million at June 30, 2009 from $9.1 million at December 31, 2008. United Community had an increase in accrued liabilities for taxes related to the net income from Butler Wick and sale of Butler Wick Trust in the first quarter of 2009. Home Savings had an increase in liabilities of $2.9 million due to issuing official checks for customers and accounts payable remittances. Home Savings also experienced increases in deferred income taxes related to the valuation of the securities available for sale portfolio of $575,000, along with accrued payroll and related expenses of $514,000.

Shareholders’ equity decreased $310,000 to $234.6 million at June 30, 2009, from $234.9 million at December 31, 2008. An after-tax gain of $4.7 million from the sale of Butler Wick Trust and net operating income of $238,000 from Butler Wick for the first six months of 2009 were partially offset by a $4.0 million net loss recognized by Home Savings in the period. A decrease in other comprehensive income resulting from changes in available for sale securities, net of tax, of $1.0 million also contributed to the decrease.

30

Comparison of Operating Results for the Three Months Ended
June 30, 2009 and June 30, 2008

Net Income.United Community recognized a net loss for the three months ended June 30, 2009, of $2.9 million, or $(0.10) per diluted share, compared to net income of $2.7 million, or $0.10 per share, for the three months ended June 30, 2008. Compared with the second quarter of 2008, net interest income decreased $229,000, the provision for loan losses increased $9.1 million, non-interest income increased $3.3 million, and non-interest expense increased $2.0 million. United Community’s annualized return on average assets and return on average equity were (0.46)% and (4.74)%, respectively, for the three months ended June 30, 2009. The annualized return on average assets and return on average equity for the comparable period in 2008 were 0.40% and 3.82%, respectively.

Net Interest Income.Net interest income for the three months ended June 30, 2009, was $18.7 million, compared to $18.9 million for the same period last year. Both interest income and interest expense decreased, with a smaller decline in interest expense. Interest income decreased $4.8 million in the second quarter of 2009 compared to the second quarter of 2008. The change in interest income was due primarily to decreases in interest earned on net loans. Home Savings had a decrease in the average balance of net loans of $13.6 million and a reduction of 34 basis points in the rate earned on those loans during the second quarter of 2009 as compared to the same quarter in 2008. Also contributing to the change in interest income was a decrease in interest earned on available for sale securities, as the average balance of those assets declined by $60.4 million and the yield earned on those securities decreased by 43 basis points.

Total interest expense decreased $4.6 million for the quarter ended June 30, 2009, as compared to the same quarter last year. The change was due primarily to reductions of $2.4 million in interest paid on deposits, $1.6 million in interest paid on Federal Home Loan Bank advances and $526,000 in interest paid on repurchase agreements and other borrowings. The overall decrease in interest expense is attributable to a decline in the average outstanding balances of interest bearing checking accounts of $101.2 million, as well as a reduction of 110 basis points in the cost of those liabilities. Furthermore, Home Savings experienced a decline in the cost of certificates of deposit of 55 basis points despite an increase in the average balance of those deposits of $65.5 million. These declines were partially offset by an increase in the average balance of savings accounts of $12.3 million, along with an increase in the cost of those deposits of 3 basis points.

The primary cause of the decrease in interest expense on Federal Home Loan Bank advances was a decrease in the average balance of those funds of $117.7 million, as well as a rate decrease on those borrowings of 97 basis points in the second quarter of 2009 compared to the same quarter in 2008. The rate on short term advances from the Federal Home Loan Bank has decreased due to the Federal Reserve’s action to keep the Federal Funds rate low over the past year. The decrease in interest expense on repurchase agreements and other borrowings was due primarily to a decrease in the average balances of $45.3 million and a decline in the rate paid on these alternative borrowings of 21 basis points.

31

The following table shows the impact of interest rate and outstanding balance (volume) changes compared to the second quarter of last year. The interest rate spread for the three months ended June 30, 2009, grew to 2.81% compared to 2.60% for the quarter ended June 30, 2008. The net interest margin increased 18 basis points to 3.12% for the three months ended June 30, 2009 compared to 2.94% for the same quarter in 2008.

	For the Three Months Ended June 30,
	2009 vs. 2008
	Increase						Total
	(decrease) due to						increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	(1,832	)	$	(2,027	)	$	(3,859	)
Loans held for sale		41			87			128
Investment securities:
Trading		(1	)		(1	)		(2	)
Available for sale		(313	)		(694	)		(1,007	)
Federal Home Loan Bank stock		(64	)		10			(54	)
Other interest earning assets		(67	)		48			(19	)
Total interest earning assets	$	(2,236	)	$	(2,577	)	$	(4,813	)
Interest bearing liabilities:
Savings accounts		14			14			28
Checking accounts		(1,114	)		(467	)		(1,581	)
Certificates of deposit		(1,676	)		793			(883	)
Federal Home Loan Bank advances		(854	)		(768	)		(1,622	)
Repurchase agreements and other		(79	)		(447	)		(526	)
Total interest bearing liabilities	$	(3,709	)	$	(875	)		(4,584	)
Change in net interest income							$	(229	)

Provision for Loan Losses.A provision for loan losses is charged to income to bring the total allowance for loan losses to a level considered by management to be adequate, based on management’s evaluation of such factors as the delinquency status of loans, current economic conditions, the net realizable value of the underlying collateral, changes in the composition of the loan portfolio and prior loan loss experience. The provision for loan losses increased by $9.1 million, to $12.3 million for the three months ended June 30, 2009, compared to $3.2 million for the same period in 2008. The $12.3 million provision was primarily the result of the recurring assessments of the portfolio.

Non-interest Income.Non-interest income increased $3.3 million to $6.2 million for the three months ended June 30, 2009, from $2.9 million for the three months ended June 30, 2008, primarily as a result of higher gains recognized on the sale of securities available for sale, and higher gains recognized on the sale of loans. The gains recognized on the sale of available for sale securities were the result of the sale of approximately $46.1 million in mortgage-backed securities for a gain of $1.4 million. The Company used the proceeds of the sale to partially fund the purchase of $72.0 million of mortgage-backed securities and agency securities. The $1.4 million increase in gains on loans sold is primarily a result of the volume of originations during the period, as customers continued to take advantage of low interest rates.

Non-interest Expense.Total non-interest expense increased $2.0 million for the three months ended June 30, 2009, compared to the three months ended June 30, 2008. The increase is due primarily to increased Federal deposit insurance premiums of $2.7 million, due largely to a one-time special assessment, which amounted to $1.2 million for Home Savings, passed along to member banks by the FDIC and the enforcement actions of the OTS, the FDIC, and the Ohio Division. Contributing to the increase in non-interest expenses were expenses required to maintain real estate owned and other repossessed assets during the second quarter of 2009 as compared to the second quarter of 2008. Expenses to maintain other real estate owned are expected to remain high through the rest of 2009 due to the increase in the number of properties acquired by Home Savings in resolving nonperforming loans, as well as legal expenses and other collection expenses associated with Home Savings’ nonperforming loans.

32

Comparison of Operating Results for the Six Months Ended
June 30, 2009 and June 30, 2008

Net Income.United Community recognized net income for the six months ended June 30, 2009, of $356,000 million, or $0.01 per diluted share, compared to net income of $6.8 million, or $0.24 per share, for the six months ended June 30, 2008. Compared with the first half of 2008, net interest income increased $1.6 million, the provision for loan losses increased $15.0 million, non-interest income decreased $231,000, and non-interest expense increased $3.5 million. United Community’s annualized return on average assets and return on average equity were 0.03% and 0.29%, respectively, for the six months ended June 30, 2009. The annualized return on average assets and return on average equity for the comparable period in 2008 were 0.49% and 4.77%, respectively.

Net Interest Income.Net interest income for the six months ended June 30, 2009, was $37.4 million compared to $35.9 million for the same period last year. Both interest income and interest expense decreased with a smaller decline in interest income. Interest income decreased $10.0 million in the first six months of 2009 compared to the first six months of 2008. The change in interest income was due primarily to a decrease in interest earned on net loans. Home Savings had a decrease in the average balance of net loans of $126.2 million and a reduction of 44 basis points in the rate earned on those loans during the first half of 2009 as compared to the same period in 2008. Also contributing to the change in interest income was a decrease in interest earned on available for sale securities, as the average balance of those assets declined by $42.2 million and the yield earned on those securities decreased 36 basis points.

Total interest expense decreased $11.6 million for the six months ended June 30, 2009, as compared to the same period last year. The change was primarily due to reductions of $6.8 million in interest paid on deposits, $3.5 million in interest paid on Federal Home Loan Bank advances and $1.3 million in interest paid on repurchase agreements and other borrowings. The overall decrease in interest expense is attributable to a decline in the average balances of interest bearing checking accounts of $79.6 million as well as a reduction of 130 basis points in the cost of those liabilities. Furthermore, Home Savings experienced a decline in the cost of certificates of deposit of 74 basis points despite an increase in the average balance of those deposits of $36.3 million. These declines were offset partially by an increase in the average balance of savings accounts of $11.7 million along with an increase in the cost of those deposits of seven basis points.

The primary cause of the decrease in interest expense on Federal Home Loan Bank advances was a decrease in the average balance of those funds of $78.6 million, as well as a rate decrease on those borrowings of 131 basis points in the first six months of 2009 compared to the first six months of 2008. The rate on short term advances from the Federal Home Loan Bank has decreased due to the Federal Reserve’s action to keep the Federal Funds rate low over the past year. The decrease in interest expense on repurchase agreements and other borrowings was due primarily to a decrease in the average balances of $40.2 million and a decline in the rate paid on these alternative borrowings of 66 basis points.

33

The following table shows the impact of interest rate and outstanding balance (volume) changes compared to the first six months of last year. The interest rate spread for the six months ended June 30, 2009, grew to 2.78% compared to 2.40% for the six months ended June 30, 2008. The net interest margin increased 31 basis points to 3.08% for the six months ended June 30, 2009, compared to 2.77% for the same period in 2008.

	For the Six Months Ended June 30,
	2009 vs. 2008
	Increase						Total
	(decrease) due to						increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	(4,799	)	$	(3,801	)	$	(8,600	)
Loans held for sale		10			193			203
Investment securities:
Trading		—			(1	)		(1	)
Available for sale		(493	)		(985	)		(1,478	)
Federal Home Loan Bank stock		(111	)		24			(87	)
Other interest earning assets		(92	)		45			(47	)
Total interest earning assets	$	(5,485	)	$	(4,525	)	$	(10,010	)
Interest bearing liabilities:
Savings accounts		64			26			90
Checking accounts		(2,579	)		(858	)		(3,437	)
Certificates of deposit		(4,331	)		857			(3,474	)
Federal Home Loan Bank advances		(2,286	)		(1,170	)		(3,456	)
Repurchase agreements and other		(467	)		(825	)		(1,292	)
Total interest bearing liabilities	$	(9,599	)	$	(1,970	)		(11,569	)
Change in net interest income							$	1,559

Provision for Loan Losses.A provision for loan losses is charged to income to bring the total allowance for loan losses to a level considered by management to be adequate, based on management’s evaluation of such factors as the delinquency status of loans, current economic conditions, the net realizable value of the underlying collateral, changes in the composition of the loan portfolio and prior loan loss experience. The provision for loan losses increased by $15.0 million to $20.8 million for the six months ended June 30, 2009, compared to $5.7 million for the same period in 2008. The $20.8 million provision was primarily the result of management’s recurring assessment of the portfolio.

Non-interest Income.Non-interest income decreased $231,000 to $8.9 million for the six months ended June 30, 2009, from $9.2 million for the six months ended June 30, 2008, primarily as a result of higher losses attributable to real estate owned and other repossessed assets acquired in the settlement of loans, lower fees earned in Home Savings’ non-deposit investment income program, the additional write down of $26,000 for the Fannie Mae auction rate pass through trust security held by Home Savings and the write down of $124,000 on equity securities owned by United Community.

Non-interest Expense.Total non-interest expense increased $3.5 million for the six months ended June 30, 2009, compared to the six months ended June 30, 2008. The increase is primarily due to increased Federal deposit insurance premiums of $4.5 million, due largely to a special assessment of $1.2 million for Home Savings, imposed by the FDIC on member banks in the second quarter of 2009 as well as the enforcement actions of the OTS, the FDIC, and the Ohio Division. Contributing to the increase in non-interest expenses were expenses required to maintain real estate owned and other repossessed assets during the first six months of 2009 as compared to the first six months of 2008. Federal deposit insurance premiums are expected to aggregate $8.3 million for all of 2009, based in part on the enforcement actions and recent legislation. Expenses to maintain other real estate owned are expected to remain high through the rest of 2009 due to the increase in the number of properties acquired by Home Savings in resolving nonperforming loans, as well as legal expenses and other collection expenses associated with Home Savings’ nonperforming loans.

34

UNITED COMMUNITY FINANCIAL CORP.

AVERAGE BALANCE SHEETS

The following table presents the total dollar amounts of interest income and interest expense on the indicated amounts of average interest-earning assets or interest-bearing liabilities together with the weighted average interest rates for the three month periods ended June 30, 2009 and 2008. Average balance calculations were based on daily balances.

	Three Months Ended June 30,
	2009							2008
	Average		Interest					Average		Interest
	Outstanding		Earned/		Yield/			Outstanding		Earned/		Yield/
	Balance		Paid		Cost			Balance		Paid		Cost
	(Dollars in thousands)
Interest-earning assets:
Net loans (1)	$	2,075,751	$	30,076		5.80	%	$	2,211,825	$	33,935		6.14	%
Net loans held for sale		17,658		216		4.89	%		9,867		88		3.57	%
Investment securities:
Trading		—		—		—	%		297		2		2.69	%
Available for sale		250,655		2,796		4.46	%		311,102		3,803		4.89	%
Federal Home Loan Bank stock		26,464		294		4.44	%		25,768		348		5.40	%
Other interest-earning assets		21,696		9		0.17	%		13,828		28		0.81	%
Total interest-earning assets		2,392,224		33,391		5.58	%		2,572,687		38,204		5.94	%
Noninterest-earning assets		133,688							156,459
Assets of discontinued operations		512							22,068
Total assets	$	2,526,424						$	2,751,214
Interest-bearing liabilities:
Checking accounts	$	376,696	$	1,012		1.07	%	$	477,881	$	2,593		2.17	%
Savings accounts		194,703		223		0.46	%		182,425		195		0.43	%
Certificates of deposit		1,144,895		10,839		3.79	%		1,079,399		11,722		4.34	%
Federal Home Loan Bank advances		298,538		1,569		2.10	%		416,205		3,191		3.07	%
Repurchase agreements and other		108,563		1,061		3.91	%		153,893		1,587		4.12	%
Total interest-bearing liabilities		2,123,395		14,704		2.77	%		2,309,803		19,288		3.34	%
Noninterest-bearing liabilities		152,622							149,638
Liabilities of discontinued operations		4,311							6,130
Total liabilities		2,280,328							2,465,571
Equity		246,096							285,643
Total liabilities and equity	$	2,526,424						$	2,751,214
Net interest income and interest rate spread			$	18,687		2.81	%			$	18,916		2.60	%
Net interest margin						3.12	%						2.94	%
Average interest-earning assets to average interest-bearing liabilities						112.66	%						111.38	%

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

35

UNITED COMMUNITY FINANCIAL CORP.

AVERAGE BALANCE SHEETS

The following table presents the total dollar amounts of interest income and interest expense on the indicated amounts of average interest-earning assets or interest-bearing liabilities together with the weighted average interest rates for the six month periods ended June 30, 2009 and 2008. Average balance calculations were based on daily balances.

	Six Months Ended June 30,
	2009							2008
	Average		Interest					Average		Interest
	Outstanding		Earned/		Yield/			Outstanding		Earned/		Yield/
	Balance		Paid		Cost			Balance		Paid		Cost
	(Dollars in thousands)
Interest-earning assets:
Net loans (1)	$	2,117,111	$	61,143		5.78	%	$	2,243,330	$	69,743		6.22	%
Net loans held for sale		20,897		479		4.58	%		12,443		276		4.44	%
Investment securities:
Trading		—		—		—	%		305		1		0.66	%
Available for sale		245,185		5,566		4.54	%		287,433		7,044		4.90	%
Federal Home Loan Bank stock		26,464		593		4.48	%		25,603		680		5.31	%
Other interest-earning assets		20,320		38		0.37	%		15,334		85		1.11	%
Total interest-earning assets		2,429,977		67,819		5.58	%		2,584,448		77,829		6.02	%
Noninterest-earning assets		135,426							150,473
Assets of discontinued operations		2,069							21,304
Total assets	$	2,567,472						$	2,756,225
Interest-bearing liabilities:
Checking accounts	$	375,909	$	2,214		1.18	%	$	455,511	$	5,651		2.48	%
Savings accounts		191,154		468		0.49	%		179,441		378		0.42	%
Certificates of deposit		1,160,376		22,043		3.80	%		1,124,077		25,517		4.54	%
Federal Home Loan Bank advances		324,339		3,427		2.11	%		402,967		6,883		3.42	%
Repurchase agreements and other		116,391		2,251		3.87	%		156,561		3,543		4.53	%
Total interest-bearing liabilities		2,168,169		30,403		2.80	%		2,318,557		41,972		3.62	%
Noninterest-bearing liabilities		149,911							148,146
Liabilities of discontinued operations		3,541							5,312
Total liabilities		2,321,621							2,472,015
Equity		245,851							284,210
Total liabilities and equity	$	2,567,472						$	2,756,225
Net interest income and interest rate spread			$	37,416		2.78	%			$	35,857		2.40	%
Net interest margin						3.08	%						2.77	%
Average interest-earning assets to average interest-bearing liabilities						112.08	%						111.47	%

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

36

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Qualitative Aspects of Market Risk.The principal market risk affecting United Community is interest rate risk. United Community is subject to interest rate risk to the extent that its interest-earning assets reprice differently than its interest-bearing liabilities. Interest rate risk is defined as the sensitivity of a company’s earnings and net asset values to changes in interest rates. As part of its efforts to monitor and manage the interest rate risk, Home Savings, which accounts for most of the assets and liabilities of United Community, 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 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) 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 a 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. Due to the current low level of treasury rates, values for a decline in rates of 100, 200 and 300 basis points are not calculated for the quarter ended June 30, 2009. As noted, for the quarter ended June 30, 2009, 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, 2009
NPV as % of portfolio value of assets										Next 12 months net interest income
													(Dollars in thousands)
Change													Internal policy
in rates				Internal policy									limitations on
(Basis				limitations as			Change in						maximum			%
points)	NPV Ratio			to minimum %			%			$ Change			change			Change
+300		6.83	%		6.00	%		(2.48	)%	$	(4,553	)		(15.00	)%		(5.80	)%
+200		8.18			7.00			(1.13	)		(2,510	)		(10.00	)		(3.20	)
+100		9.05			7.00			(0.26	)		(830	)		(5.00	)		(1.06	)
Static		9.31			8.00			—			—			—			—

37

Year Ended December 31, 2008
NPV as % of portfolio value of assets										Next 12 months net interest income
Change													(Dollars in thousands)
in rates				Internal policy			Change in						Internal policy			%
(Basis points)	NPV Ratio			limitations			%			$ Change			limitations			Change
+300		7.37	%		5.00	%		(1.38	)%	$	(1,879	)		(15.00	)%		(2.48	)%
+200		8.35			6.00			(0.40	)		(734	)		(10.00	)		(0.97	)
+100		8.99			6.00			0.24			60			(5.00	)		0.08
Static		8.75			7.00			—			—			—			—

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

As with any method of measuring interest rate risk, certain shortcomings are inherent in the NPV 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. In addition, 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.

In the last twelve months, Home Savings has experienced the positive impact of a steeper yield curve. The net interest margin continues to improve as certificates of deposit reprice at lower levels supported by loan yields that have stabilized.

ITEM 4. Controls and Procedures

An evaluation was carried out by United Community’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of United Community’s disclosure controls and procedures (as defined in Rules 13a-15(e)/15d-15(e) of the Securities Exchange Act of 1934) as of June 30, 2009. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that United Community’s disclosure controls and procedures are effective. During the quarter ended June 30, 2009, there were no changes in United Community’s internal controls over financial reporting that have materially affected or are reasonably likely to affect materially United Community’s internal controls over financial reporting.

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PART II. OTHER INFORMATION

UNITED COMMUNITY FINANCIAL CORP.

ITEM 1. Legal Proceedings

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

ITEM 1A. Risk Factors

There have been no significant changes in United Community’s risk factors as outlined in United Community’s Form 10-K for the period ended December 31, 2008.

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

There have been no purchases of treasury shares during the quarter ended June 30, 2009.

ITEM 4. Submission of Matters to a Vote of Security Holders

On April 23, 2009, United Community held its Annual Meeting of Shareholders. At the Annual Meeting, two matters were submitted to shareholders for a vote. First, shareholders elected two directors with terms expiring in 2012 by the following votes:

Director	For		Withheld
Douglas M. McKay		21,053,777		2,146,632
Donald J. Varner		18,894,268		4,306,141

The following directors’ terms continued after the Annual Meeting: Eugenia C. Atkinson, Richard J. Buoncore, Richard J. Schiraldi, Clarence R. Smith, Jr., and David C. Sweet.

The shareholders also ratified the selection of Crowe Horwath LLP as auditors for the 2009 fiscal year by the following vote:

For	Against	Abstain
21,860,718	844,897		494,794

ITEM 6. Exhibits

Exhibits

Exhibit Number		Description
	3.1	Articles of Incorporation
	3.2	Amended Code of Regulations
	10	Material Contracts
	31.1	Section 302 Certification by Chief Executive Officer
	31.2	Section 302 Certification by Chief Financial Officer
	32	Certification of Statements by Chief Executive Officer and Chief Financial Officer

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UNITED COMMUNITY FINANCIAL CORP.

SIGNATURES

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

	UNITED COMMUNITY FINANCIAL CORP.
Date: August 7, 2009	/S/Douglas M. McKay
	Douglas M. McKay
	Chairman, President and Chief Executive Officer
Date: August 7, 2009	/S/James R. Reske
	James R. Reske, CFA
	Treasurer and Chief Financial Officer

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UNITED COMMUNITY FINANCIAL CORP.

Exhibit 3.1

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

Exhibit 3.2

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

EXHIBIT INDEX

Exhibit Number		Description
	3.1	Articles of Incorporation
	3.2	Amended Code of Regulations
	10	Material Contracts
	31.1	Section 302 Certification by Chief Executive Officer
	31.2	Section 302 Certification by Chief Financial Officer
	32	Certification of Statements by Chief Executive Officer and Chief Financial Officer

41