United Community Financial (UCFC) 10-Q 2005 Q3 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 September 30, 2005

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 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 Federal Plaza West, 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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yesþ                      Noo

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.

31,025,908 common shares as of October 31, 2005.

TABLE OF CONTENTS

	PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of September 30, 2005 (Unaudited) and December 31, 2004		1
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2005 and 2004 (Unaudited)		2
Consolidated Statement of Shareholders’ Equity for the Nine Months ended September 30, 2005 (Unaudited)		3
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and 2004 (Unaudited)		4
Notes to Consolidated Financial Statements		5 - 11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12-20
Item 3. Quantitative and Qualitative Disclosures about Market Risk		21
Item 4. Controls and Procedures		22
Part II. OTHER INFORMATION
Item 1. Legal Proceedings		23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (None)
Item 3. Defaults Upon Senior Securities (None)
Item 4. Submission of Matters to a Vote of Security Holders (None)
Item 5. Other Information (None)
Item  6. Exhibits		23
Signatures		24
Exhibits		25-28
EX-31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-32 Certification of CEO & CFO

PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)

	September 30,			December 31,
	2005			2004
	(Dollars in thousands)
Assets:
Cash and deposits with banks	$	31,142		$	36,886
Federal funds sold and other		1,494			3,395
Total cash and cash equivalents		32,636			40,281
Securities:
Trading, at fair value		17,135			32,316
Available for sale, at fair value		172,340			198,404
Loans, net of allowance for loan losses of $15,284 and $15,877, respectively		2,015,351			1,815,976
Loans held for sale		92,480			59,099
Margin accounts		16,485			14,851
Federal Home Loan Bank stock, at cost		23,663			22,842
Premises and equipment, net		23,127			20,793
Accrued interest receivable		11,577			9,445
Real estate owned and other repossessed assets		3,522			1,682
Goodwill		33,593			33,593
Core deposit intangible		2,373			2,887
Cash surrender value of life insurance		22,043			21,406
Other assets		12,331			14,213
Total assets	$	2,478,656		$	2,287,788
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Interest bearing	$	1,528,727		$	1,437,987
Non-interest bearing		91,714			84,965
Total deposits		1,620,441			1,522,952
Federal Home Loan Bank advances		513,055			423,355
Repurchase agreements and other		57,435			60,148
Advance payments by borrowers for taxes and insurance		8,958			12,048
Accrued interest payable		2,044			1,089
Accrued expenses and other liabilities		15,107			15,844
Total liabilities		2,217,040			2,035,436
Shareholders’ Equity
Preferred stock-no par value; 1,000,000 shares authorized and unissued at September 30, 2005		—			—
Common stock-no par value; 499,000,000 shares authorized; 37,804,457 shares issued		143,369			142,337
Retained earnings		204,176			193,690
Accumulated other comprehensive income		(654	)		1,063
Unearned stock compensation		(13,564	)		(14,930	)
Treasury stock, at cost, 6,778,549 and 6,602,477 shares, respectively		(71,711	)		(69,808	)
Total shareholders’ equity		261,616			252,352
Total liabilities and shareholders’ equity	$	2,478,656		$	2,287,788

See Notes to Consolidated Financial Statements.

1

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2005			2004			2005		2004
	(Dollars in thousands, except per share data)
Interest income
Loans	$	32,152		$	26,411		$	89,760	$	76,025
Loans held for sale		420			161			1,225		605
Securities:
Trading		217			207			793		484
Available for sale		1,692			1,739			5,186		5,331
Margin accounts		312			218			876		556
Federal Home Loan Bank stock dividends		287			239			821		677
Other interest earning assets		26			11			61		32
Total interest income		35,106			28,986			98,722		83,710
Interest expense
Deposits		9,867			7,298			26,814		20,531
Federal Home Loan Bank advances		4,723			2,990			12,415		8,029
Repurchase agreements and other		454			209			1,344		492
Total interest expense		15,044			10,497			40,573		29,052
Net interest income		20,062			18,489			58,149		54,658
Provision for loan losses		702			9,226			1,753		11,053
Net interest income after provision for loan losses		19,360			9,263			56,396		43,605
Non-interest income
Brokerage commissions		4,771			4,001			13,998		12,548
Service fees and other charges		3,064			3,052			9,255		8,642
Underwriting and investment banking		153			229			761		802
Net gains (losses):
Available for sale securities		(44	)		16			195		1,089
Trading securities		157			(115	)		188		(52	)
Loans sold		777			807			1,676		2,496
Other		83			(25	)		140		(22	)
Other income		811			713			2,724		2,162
Total non-interest income		9,772			8,678			28,937		27,665
Non-interest expense
Salaries and employee benefits		12,753			11,227			37,875		35,045
Occupancy		1,012			924			3,028		2,758
Equipment and data processing		2,356			2,276			6,860		6,811
Franchise tax		468			428			1,482		1,288
Advertising		292			225			1,150		1,444
Amortization of core deposit intangible		160			213			514		699
Other expenses		2,396			2,425			7,584		6,957
Total non-interest expenses		19,437			17,718			58,493		55,002
Income before income taxes		9,695			223			26,840		16,268
Income taxes		3,304			29			9,070		5,599
Net income	$	6,391		$	194		$	17,770	$	10,669
Comprehensive income	$	5,703		$	1,918		$	16,053	$	10,366
Earnings per share
Basic	$	0.22		$	0.01		$	0.62	$	0.36
Diluted	$	0.22		$	0.01		$	0.61	$	0.36

See Notes to Consolidated Financial Statements.

2

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(Unaudited)

									Accumulated
									Other
	Shares			Common		Retained			Comprehensive			Unearned Stock			Treasury
	Outstanding			Stock		Earnings			Income/(Loss)			Compensation			Stock			Total
	(Dollars in thousands, except share data)
Balance December 31, 2004		31,202		$	142,337	$	193,690		$	1,063		$	(14,930	)	$	(69,808	)	$	252,352
Comprehensive income:
Net income							17,770												17,770
Change in net unrealized gain/(loss) on securities, net of taxes of $925										(1,717	)								(1,717	)
Comprehensive income							17,770			(1,717	)								16,053
Shares allocated to ESOP participants					1,032								1,366						2,398
Purchase of treasury stock		(232	)													(2,499	)		(2,499	)
Exercise of stock options		56					(183	)								596			413
Dividends paid, $0.2475 per share							(7,101	)											(7,101	)
Balance September 30, 2005		31,026		$	143,369	$	204,176		$	(654	)	$	(13,564	)	$	(71,711	)	$	261,616

See Notes to Consolidated Financial Statements.

3

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Nine Months Ended September 30,
	2005			2004
	(Dollars in thousands)
Cash Flows from Operating Activities
Net income	$	17,770		$	10,669
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,753			11,053
Net gains		(1,859	)		(3,563	)
Amortization of premiums and accretion of discounts		2,729			3,530
Depreciation and amortization		1,777			2,329
ESOP compensation		2,398			2,659
FHLB stock dividends		(821	)		(677	)
Decrease (increase) in trading securities		15,181			(13,227	)
(Increase) decrease in margin accounts		(1,634	)		333
Increase in interest receivable		(2,132	)		(1,013	)
Decrease (increase) in prepaid and other assets		85			(4,847	)
Increase in interest payable		955			97
Net principal disbursed on loans held for sale		(161,863	)		(105,647	)
Proceeds from sale of loans held for sale		157,958			126,163
Increase (decrease) in other liabilities		188			(5,163	)
Net cash from operating activities		32,485			22,696
Cash Flows from Investing Activities
Proceeds from principal repayments and maturities of:
Available for sale securities		42,497			40,664
Proceeds from sale of:
Available for sale securities		20,883			52,696
Real estate owned and other repossessed assets		1,862			2,002
Commercial loan participations		1,500			43,156
Non-performing loans		6,173			—
Premises and equipment		167			1
Purchases of:
Securities available for sale		(40,266	)		(56,231	)
Net principal disbursed on loans		(31,852	)		(152,384	)
Loans purchased		(209,162	)		(138,855	)
Purchases of premises and equipment		(4,174	)		(2,463	)
Net cash from investing activities		(212,372	)		(211,414	)
Cash Flows from Financing Activities
Net (decrease) increase in NOW, savings and money market accounts		(82,591	)		10,357
Net increase in certificates of deposit		180,123			70,956
Net decrease in advance payments by borrowers for taxes and insurance		(3,090	)		(4,196	)
Proceeds from FHLB advances and other long term debt		45,000			35,000
Repayment of FHLB advances and other long term debt		(19,501	)		(18,499	)
Net change in other borrowed funds		61,488			96,987
Dividends paid		(7,101	)		(6,397	)
Proceeds from the exercise of stock options		413			4,728
Purchase of treasury stock		(2,499	)		(46,192	)
Net cash from financing activities		172,242			142,744
Decrease in cash and cash equivalents		(7,645	)		(45,974	)
Cash and cash equivalents, beginning of period		40,281			81,155
Cash and cash equivalents, end of period	$	32,636		$	35,181
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest on deposits and borrowings, net of amounts capitalized	$	39,618		$	28,955
Interest capitalized on borrowings		33			11
Income taxes		5,741			9,538
Supplemental schedule of noncash activities:
Loans transferred to the loan portfolio from held for sale		37,075			39,479
Transfers from loans to loans held for sale		64,999			—
Transfers from loans to real estate owned and other repossessed assets		3,642			1,426

See Notes to Consolidated Financial Statements.

4

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 and loan association (Conversion). Upon consummation of the Conversion on July 8, 1998, United Community became the unitary savings and loan holding company for Home Savings. During 2003, Home Savings changed its charter to a state savings bank. Home Savings has 36 full service offices and six loan production offices throughout northern and central Ohio and western Pennsylvania. Butler Wick Corp. (Butler Wick) became a wholly owned subsidiary of United Community on August 12, 1999. Butler Wick is the parent company for two wholly owned subsidiaries: Butler Wick & Co., Inc. and Butler Wick Trust Company. Butler Wick has 14 office locations providing a full range of investment alternatives for individuals, companies and not-for-profit organizations 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 three and nine months ended September 30, 2005, are not necessarily indicative of the results to be expected for the year ending December 31, 2005. 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, 2004, contained in United Community’s Form 10-K for the year ended December 31, 2004.

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

     2. STOCK COMPENSATION

Employee compensation expense under stock option plans is reported if options are granted below market price at grant date. Pro forma disclosures of net income and earnings per share are shown using the fair value method of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to measure expense for options granted after 1994, using an option pricing model to estimate fair value.

Employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common shares at date of grant. As of September 30, 2005, there were no shares remaining to be granted. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123.

	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2005		2004		2005		2004
	(Dollars in thousands,				(Dollars in thousands,
	except per share data)				except per share data)
Net income as reported	$	6,391	$	194	$	17,770	$	10,669
Deduct: Stock-based compensation expense determined under fair value method		—		—		—		1,855
Pro forma net income	$	6,391	$	194	$	17,770	$	8,814
Basic earnings per share as reported	$	0.22	$	0.01	$	0.62	$	0.36
Pro forma basic earnings per share	$	0.22	$	0.01	$	0.62	$	0.30
Diluted earnings per share as reported	$	0.22	$	0.01	$	0.61	$	0.36
Pro forma diluted earnings per share	$	0.22	$	0.01	$	0.61	$	0.30

5

The pro forma effects are computed using option pricing models, employing the following weighted-average assumptions as of grant date:

	2005		2004
Dividend yield		n/a		2.27	%
Expected stock price volatility		n/a		22.73	%
Risk-free interest rate		n/a		3.18	%
Expected option life (In years)		n/a		7

     3. SECURITIES

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

	September 30, 2005							December 31, 2004
					(Dollars in thousands)
			Gross		Gross					Gross		Gross
	Fair		Unrealized		Unrealized			Fair		Unrealized		Unrealized
	Value		Gains		Losses			Value		Gains		Losses
U.S. Treasury and agency securities	$	81,256	$	20	$	(901	)	$	88,317	$	7	$	(417	)
Tax exempt municipal obligation		6		—		—			7		1		—
Equity securities		2,907		607		(1	)		7,169		1,459		—
Mortgage-related securities		88,171		202		(1,014	)		102,911		869		(364	)
Total	$	172,340	$	829	$	(1,916	)	$	198,404	$	2,336	$	(781	)

United Community’s trading securities are carried at fair value and consist of the following:

	September 30,		December 31,
	2005		2004
	(Dollars in thousands)
Debt Securities:
Obligations of U.S. Government	$	6,058	$	28,587
State and municipal obligations		4,749		1,657
Corporate bonds, debentures and notes		473		60
Mortgage-related securities		4,873		—
Mutual funds		982		2,012
Total trading securities	$	17,135	$	32,316

6

     4. LOANS

Portfolio loans consist of the following:

	September 30,		December 31,
	2005		2004
	(Dollars in thousands)
Real Estate:
One- to four-family residential	$	720,068	$	690,413
Multifamily residential		159,464		153,011
Nonresidential		317,613		289,755
Land		14,246		14,701
Construction:
One- to four-family residential		377,528		301,193
Multifamily and non-residential		57,322		47,230
Total real estate and construction		1,646,241		1,496,303
Consumer		308,104		267,646
Commercial		77,707		68,523
Total loans		2,032,052		1,832,472
Less:
Allowance for loan losses		15,284		15,877
Deferred loan fees, net		1,417		619
Total		16,701		16,496
Loans, net	$	2,015,351	$	1,815,976

Changes in the allowance for loan loss are as follows:

	September 30,			December 31,
	2005			2004
	(Dollars in thousands)
Balance, beginning of year	$	15,877		$	15,111
Provision for loan losses		1,753			9,370
Amounts charged off		(2,976	)		(9,060	)
Recoveries		630			456
Balance, end of period	$	15,284		$	15,877

Nonaccrual loans were $24.1 million and $20.9 million at September 30, 2005 and December 31, 2004, respectively. Restructured loans were $1.3 million at September 30, 2005 and December 31, 2004. Loans greater than ninety days past due and still accruing interest were $281,000 and $377,000 at September 30, 2005 and December 31, 2004, respectively.

7

Impaired loans consist of the following:

	As of or For		As of or For
	the Nine		the Year
	Months Ended		Ended
	September 30,		December 31,
	2005		2004
	(Dollars in thousands)
Impaired loans on which no specific valuation allowance was provided	$	12,265	$	7,898
Impaired loans on which a specific valuation allowance was provided		5,277		7,320
Total impaired loans at period-end	$	17,542	$	15,218
Specific valuation allowances on impaired loans at period-end	$	846	$	1,691
Average impaired loans during the period		14,589		10,683
Interest income recognized on impaired loans during the period		298		134
Interest income received on impaired loans during the period		293		307
Interest income foregone based on original contract terms of impaired loans		1,010		685

     5. MORTGAGE BANKING ACTIVITIES

Mortgage loans serviced for others, which are not reported in United Community’s assets, totaled $724.4 million at September 30, 2005 and $667.0 million at December 31, 2004.

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

	September 30,			December 31,
	2005			2004
	(Dollars in thousands)
Balance, beginning of year	$	5,533		$	5,557
Originations		1,570			1,629
Amortized to expense		(1,159	)		(1,653	)
Balance, end of period	$	5,944		$	5,533

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

	September 30,		December 31,
	2005		2004
	(Dollars in thousands)
Balance, beginning of year	$	—	$	(76	)
Impairment charges		—		—
Recoveries		—		76
Balance, end of period	$	—	$	—

Key economic assumptions used in measuring the value of mortgage servicing rights at September 30, 2005 and December 31, 2004 were as follows:

	September 30,			December 31,
	2005			2004
Weighted average prepayment rate	359 PSA			281 PSA
Weighted average life (in years)		5.06			5.41
Weighted average discount rate		8	%		8	%

8

     6. OTHER POSTRETIREMENT BENEFIT PLANS

Home Savings sponsors a defined benefit health care plan that was curtailed in 2000 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 September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
	(Dollars in thousands)						(Dollars in thousands)
Service cost	$	2		$	2		$	4		$	6
Interest cost		50			57			150			171
Expected return on plan assets		—			—			—			—
Net amortization of prior service cost		(1	)		—			(1	)		—
Recognized net actuarial gain		—			—			—			—
Net periodic benefit cost/(gain)	$	51		$	59		$	153		$	177
Assumptions used in the valuations were as follows:
Weighted average discount rate		5.75	%		6.00	%		5.75	%		6.00	%

     7. LONG-TERM INCENTIVE PLAN

On July 12, 1999, shareholders approved the United Community Financial Corp. Long-Term Incentive Plan (Incentive Plan). The purpose of the Incentive 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 and Butler Wick, by facilitating their purchase of an ownership interest in United Community.

The Incentive 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 shares at the grant date. The maximum number of common shares that may be issued under the Incentive Plan is 3,471,562, all of which have been granted. All of the options awarded become exercisable on the date of grant. The option period expires 10 years from the date of grant. A summary of activity in the Incentive Plan is as follows:

	For the Nine Months Ended September 30,
	2005					2004
				Weighted					Weighted
				average					average
	Shares			exercise price		Shares			exercise price
Outstanding at beginning of year		2,309,748		$	9.49		2,468,622		$	7.60
Granted		—			—		754,403			12.73
Exercised		(56,328	)		7.32		(887,884	)		7.01
Forfeited		—			—		—			—
Outstanding at end of period		2,253,420		$	9.55		2,335,141		$	9.47
Options exercisable at end of period		2,253,420		$	9.55		2,335,141		$	9.47
Weighted average fair value of options granted during the period					n/a				$	3.13

9

     8. SEGMENT INFORMATION

United Community has two principal segments, banking and investment services. Banking provides consumer and commercial banking services. Investment services provide investment brokerage and a network of integrated financial services. Condensed statements of income by operating segment for the three and nine months ended September 30, 2005 and 2004 are as follows:

	For the Three Months Ended September 30, 2005
	Banking		Investment
	Services		Services		Total
	(Dollars in thousands)
Interest income	$	34,550	$	556	$	35,106
Interest expense		14,833		211		15,044
Provision for loan loss		702		—		702
Net interest income after provision for loan loss		19,015		345		19,360
Non-interest income		3,341		6,431		9,772
Non-interest expense		12,925		6,512		19,437
Income before tax		9,431		264		9,695
Income tax expense		3,206		98		3,304
Net income	$	6,225	$	166	$	6,391

	For the Three Months Ended September 30, 2004
	Banking			Investment
	Services			Services		Total
	(Dollars in thousands)
Interest income	$	28,526		$	460	$	28,986
Interest expense		10,380			117		10,497
Provision for loan loss		9,226			—		9,226
Net interest income after provision for loan loss		8,920			343		9,263
Non-interest income		2,910			5,768		8,678
Non-interest expense		11,923			5,795		17,718
Income before tax		(93	)		316		223
Income tax expense		(82	)		111		29
Net income	$	(11	)	$	205	$	194

	For the Nine Months Ended September 30, 2005
	Banking		Investment
	Services		Services		Total
	(Dollars in thousands)
Interest income	$	96,967	$	1,755	$	98,722
Interest expense		39,765		808		40,573
Provision for loan loss		1,753		—		1,753
Net interest income after provision for loan loss		55,449		947		56,396
Non-interest income		9,189		19,748		28,937
Non-interest expense		39,187		19,306		58,493
Income before tax		25,451		1,389		26,840
Income tax expense		8,576		494		9,070
Net income	$	16,875	$	895	$	17,770

10

	For the Nine Months Ended September 30, 2004
	Banking		Investment
	Services		Services		Total
	(Dollars in thousands)
Interest income	$	82,607	$	1,103	$	83,710
Interest expense		28,815		237		29,052
Provision for loan loss		11,053		—		11,053
Net interest income after provision for loan loss		42,739		866		43,605
Non-interest income		9,628		18,037		27,665
Non-interest expense		36,850		18,152		55,002
Income before tax		15,517		751		16,268
Income tax expense		5,354		245		5,599
Net income	$	10,163	$	506	$	10,669

     9. EARNINGS PER SHARE

Earnings per share is 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 shares determined for the basic computation plus the dilutive effect of potential common shares that could be issued under outstanding stock options. There were stock options for 754,403 shares that were antidilutive at September 30, 2005 and September 30, 2004.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2005		2004		2005		2004
	(In thousands,				(In thousands,
	except per share data)				except per share data)
Net income applicable to common stock	$	6,391	$	194	$	17,770	$	10,669
Weighted average common shares outstanding		28,774		28,629		28,789		29,340
Dilutive effect of stock options		343		402		327		439
Weighted average common shares outstanding for dilutive computation		29,117		29,031		29,116		29,779
Earnings per share:
Basic	$	0.22	$	0.01	$	0.62	$	0.36
Diluted	$	0.22	$	0.01	$	0.61	$	0.36

     10. LOSS CONTINGENCY

United Community and its subsidiaries are involved in a number of legal proceedings arising out of their businesses and regularly face various claims, including unasserted claims that ultimately may result in litigation. Management believes that the financial position, results of operations and cash flows would not be materially affected by the outcome of any pending or threatened legal proceedings, commitments or claims.

11

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 Nine
	Months Ended						Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
Selected financial ratios and other data: (1)
Performance ratios:
Return on average assets (2)		1.05	%		0.03	%		1.00	%		0.67	%
Return on average equity (3)		9.75	%		0.31	%		9.16	%		5.55	%
Interest rate spread (4)		3.15	%		3.30	%		3.16	%		3.39	%
Net interest margin (5)		3.48	%		3.55	%		3.46	%		3.65	%
Non-interest expense to average assets		3.19	%		3.20	%		3.28	%		3.44	%
Efficiency ratio (6)		65.04	%		64.14	%		66.98	%		66.79	%
Average interest-earning assets to average interest- bearing liabilities		112.56	%		112.33	%		112.36	%		113.48	%
Capital ratios:
Average equity to average assets		10.76	%		11.25	%		10.88	%		12.03	%
Equity to assets, end of period		10.55	%		11.01	%		10.55	%		11.01	%
Tier 1 leverage ratio		8.53	%		8.05	%		8.53	%		8.05	%
Tier 1 risk-based capital ratio		10.16	%		9.41	%		10.16	%		9.41	%
Total risk-based capital ratio		10.94	%		10.66	%		10.94	%		10.66	%
Asset quality ratios:
Non-performing loans to total loans at end of period (7)		1.27	%		0.85	%		1.27	%		0.85	%
Non-performing assets to average assets (8)		1.20	%		0.73	%		1.23	%		0.77	%
Non-performing assets to total assets at end of period		1.18	%		0.73	%		1.18	%		0.73	%
Allowance for loan losses as a percent of loans		0.75	%		1.40	%		0.75	%		1.40	%
Allowance for loan losses as a percent of non-performing loans (7)		59.54	%		160.92	%		59.54	%		160.92	%
Office data:
Number of full service banking offices		36			36			36			36
Number of loan production offices		6			5			6			5
Number of brokerage offices		12			12			12			12
Number of trust offices		2			2			2			2
Per share data:
Basic earnings per share (9)	$	0.22		$	0.01		$	0.62		$	0.36
Diluted earnings per share (9)	$	0.22		$	0.01		$	0.61		$	0.36
Book value (10)	$	8.43		$	7.86		$	8.43		$	7.86
Tangible book value (11)	$	7.27		$	6.68		$	7.27		$	6.68
Market value as a percent of book value (12)		133	%		145	%		133	%		145	%

(1)	Ratios for the three and nine month periods are annualized where appropriate.
(2)	Net income divided by average total assets.
(3)	Net income divided by average total equity.
(4)	Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities.
(5)	Net interest income as a 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 and other.
(7)	Nonperforming loans consist of loans ninety days past due, loans less than ninety days past due and not accruing interest and restructured loans.
(8)	Nonperforming assets consist of nonperforming loans and real estate owned and other repossessed assets.
(9)	Earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted earnings per share are 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.
(10)	Equity divided by number of shares outstanding.
(11)	Equity minus goodwill and core deposit intangible divided by number of shares outstanding.
(12)	Market value divided by book value.

12

Forward Looking Statements

Certain statements contained in this report that are not historical facts are forward looking statements that are subject to certain risks and uncertainties. When used in this report, the terms “anticipates,” “plans,” “expects,” “believes,” and similar expressions as they relate to United Community, its subsidiaries or its management are intended to identify such forward looking statements. United Community’s actual results, performance or achievements may differ materially from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services.

Comparison of Financial Condition at September 30, 2005 and December 31, 2004

Total assets increased by $190.9 million, or 8.3%, to $2.5 billion at September 30, 2005, compared to December 31, 2004. The net change in assets was a result primarily of increases of $199.4 million in net loans and $33.4 million in loans held for sale. These increases were offset partially by decreases in securities available for sale of $26.1 million, trading securities of $15.2 million and cash and cash equivalents of $7.6 million.

Cash and cash equivalents decreased $7.6 million, or 19.0%, during the first nine months of 2005. The reduction is attributable primarily to a decrease in reserve funds on deposit at the Federal Home Loan Bank of $9.2 million. The decrease in reserves is a result of Home Savings participating in a deposit reclassification program where certain deposits are reclassified as savings deposits, reducing the need for the maintenance of additional reserves at the Federal Home Loan Bank.

Trading securities decreased $15.2 million or 47.0% to $17.1 million at September 30, 2005, from $32.3 million at December 31, 2004. The change was a result of Butler Wick taking advantage of other interest rate opportunities in the federal agency market place at the end of 2004. Also, in August of 2005, certain retention plan assets held in United Community’s trading portfolio were paid to employees of Butler Wick totaling $1.1 million.

Available for sale securities decreased $26.1 million or 13.1% from December 31, 2004 to September 30, 2005, as a result of sales aggregating $20.9 million combined with paydowns and maturities of $42.5 million. Purchases of $40.3 million in securities partially offset the decrease.

During the first quarter of 2005, Home Savings reclassified approximately $37.1 million in fixed-rate, fixed-term second mortgage loans from held for sale to held to maturity. In connection with the reclassification, a charge of $244,000 was recorded to write the loans down to their fair market value. This transfer, along with $31.9 million of loan originations net of repayments, $209.2 million of loan purchases and the sale of $6.2 million in non-performing loans and $1.5 million of commercial loan participations, resulted in net loans increasing by $199.4 million, or 11.0%, from December 31, 2004, to September 30, 2005. No gains or losses were recorded on the sale of non-performing loans. Partially offsetting the increase was the reclassification of approximately $65.0 million in fixed rate, 30-year mortgages from the held to maturity portfolio to loans held for sale. It is anticipated that the sale of these fixed rate, 30-year mortgages during the fourth quarter of 2005 will reduce the interest rate sensitivity of Home Savings in either a rising or falling interest rate environment. After all changes are taken into consideration, Home Savings had increases of $63.5 million in real estate loans, $86.4 million in construction loans, $40.5 million in consumer loans and $9.2 million in commercial loans.

Loans held for sale increased $33.4 million, or 56.5%, to $92.5 million at September 30, 2005, compared to $59.1 million at December 31, 2004. This change is due to the reclassifications discussed above, along with the net impact of loan originations, purchases and sales. Home Savings sells loans as part of its risk management strategy. Home Savings also purchases loans, both for its portfolio and to be sold in the secondary market. As interest rates continue to rise, management anticipates fewer originations, resulting in fewer loan sales and reduced gains from those sales.

The allowance for loan losses decreased to $15.3 million at September 30, 2005, from $15.9 million at December 31, 2004. The allowance for loan losses is monitored closely and may increase or decrease depending on a variety of factors such as levels and trends of delinquencies, chargeoffs and recoveries, non-performing loans, and potential risk in the portfolios. Management has developed and maintains an appropriate, systematic and consistently applied process to determine the amount of allowance and provision for loan losses. The allowance for loan losses as a percentage of net loans (coverage ratio) decreased to 0.75% at September 30, 2005, compared to 0.87% at December 31, 2004. The twelve basis point decrease in the coverage ratio is primarily a result of the allocated portion of the allowance for loan losses for marine lending decreasing as marine credit issues continue to be resolved. Also contributing to the decrease was an adjustment, based on chargeoff history, to the loan loss factors applied to outstanding multi-family real estate loans in evaluating the allowance for loan losses. See Note 4 to the financial statements for a summary of the allowance for loan losses.

13

The total outstanding balance of all impaired loans was $17.5 million at September 30, 2005 as compared to $15.2 million at December 31, 2004. Impaired loans increased primarily as a result of two loans secured by real estate aggregating $6.9 million becoming impaired, offset by the elimination of $3.5 million in marine related loans from impairment status. See Note 4 to the financial statements for a complete summary of impaired loans.

Non-performing assets include non-performing loans as well as real estate owned and other repossessed assets. Non-performing loans increased $3.5 million to $25.7 million during the first nine months of 2005. Real estate owned remained at $1.3 million and repossessed assets increased $1.8 million. Total non-performing loans were 1.27% of net loans at September 30, 2005, up from 1.22% of net loans at December 31, 2004, primarily as a result of loans past due 90 days increasing $4.7 million. The allowance for loan losses as a percentage of non-performing loans was 59.5% at September 30, 2005, compared to 71.6% at December 31, 2004. Total non-performing assets were 1.18% of total assets at September 30, 2005, compared to 1.04% at December 31, 2004.

Margin accounts at Butler Wick increased $1.6 million as a result of increased brokerage activity during the first nine months of 2005.

Premises and equipment increased $2.3 million from December 31, 2004 to September 30, 2005. The increase was due to capitalization of additional expenses related to the construction and relocation of two Home Savings branches, which opened in the first and third quarters of 2005. Land purchased for branch expansion also contributed to the increase.

Accrued interest receivable increased $2.1 million or 22.6% to $11.6 million at September 30, 2005, compared to $9.4 million at December 31, 2004. The change was due primarily to increases of accrued interest due from mortgage loans of $1.3 million, commercial loans of $1.2 million and interest due from consumer loans of $388,000. Butler Wick also contributed to the increase with an increase of $25,000 in interest receivable from investments. An increase in the reserve for uncollected commercial loan interest during the first half of 2005 of $808,000 partially offset the above mentioned increases.

Other assets decreased $1.9 million, or 13.2%, to $12.3 million at September 30, 2005 compared to $14.2 million at December 31, 2004. Butler Wick had decreases in deferred taxes of approximately $847,000. Deferred tax assets at United Community also decreased $739,000, contributing to the overall decrease in other assets. Partially offsetting the decrease were increases in Home Savings prepaid assets of $473,000 and mortgage servicing rights of $410,000.

Total deposits increased $97.5 million, or 6.3% from December 31, 2004, to September 30, 2005. This increase was due mainly to a $180.1 million increase in certificates of deposit offset by decreases of $47.2 million in demand deposit accounts and $35.4 million in savings accounts.

Federal Home Loan Bank advances increased $89.7 million during the first nine months of 2005. The increase was used to fund loan growth.

Repurchase agreements and other borrowed funds decreased $2.7 million from $60.1 million at December 31, 2004 to $57.4 million at September 30, 2005. The decrease is largely attributable to decreased borrowing needs at Butler Wick, which was using borrowings to fund security purchases. These securities, as mentioned above, were sold and the borrowings that funded the purchases of these securities were paid down.

Advance payments by borrowers for taxes and insurance decreased during the first nine months of 2005 as a result of payments for real estate taxes and property insurance being made on behalf of customers of Home Savings. Also, funds held for payments received on loans sold where servicing was retained by Home Savings decreased $1.4 million.

Shareholders’ equity increased $9.3 million, to $261.6 million at September 30, 2005, from $252.3 million at December 31, 2004. Earnings of $16.9 million from Home Savings and $895,000 from Butler Wick for the first nine months of 2005 were offset by dividend payments to shareholders’ of $7.1 million and a decrease in other comprehensive income of $1.7 million as a result of the market valuation of available for sale securities.

Comparison of Operating Results for the Three Months Ended
September 30, 2005 and September 30, 2004

Net Income.Net income for the three months ended September 30, 2005, was $6.4 million, or $0.22 per diluted share, compared to net income of $194,000, or $0.01 per diluted share, for the three months ended September 30, 2004. As previously reported, the third quarter of 2004 was negatively impacted by additional provision for loan losses. In the third quarter of 2005, net interest income increased $1.6 million and the provision for loan losses decreased $8.5 million. Noninterest income increased $1.1 million to $9.8

14

million and noninterest expense increased $1.7 million to $19.4 million. United Community’s annualized return on average assets and return on average equity were 1.05% and 9.75%, respectively, for the three months ended September 30, 2005. The annualized return on average assets and return on average equity for the comparable period in 2004 were 0.03% and 0.31%, respectively.

Net Interest Income.Net interest income for the quarter ended September 30, 2005, was $20.1 million compared to $18.5 million for the same period last year. Interest income increased $6.1 million for the third quarter of 2005 compared to the third quarter of 2004. The yield in interest earning assets increased 52 basis points to 6.09% for the three months ended September 30, 2005, compared to 5.57% for the three months ended September 30, 2004. The change was also caused by an increase in income on net loans of $5.7 million primarily as a result of an increase in the average balance of $238.0 million. Interest earned on loans held for sale increased $259,000 primarily as a result of a $12.1 million increase in the average balance of those assets. While the average balance of trading securities decreased $9.2 million, the yield on those assets increased 1.13%, or $10,000 for the quarter ended September 30, 2005 compared to the quarter ended September 30, 2004. Interest earned on margin accounts at Butler Wick increased $94,000 as the average balance of those assets grew by $1.1 million and the yield earned increased 2.02% over the same period in 2004. Lower interest earned on available for sale securities partially offset the increases mentioned above as the average balance of those assets decreased $20.5 million.

Total interest expense increased $4.5 million for the quarter ended September 30, 2005, as compared to the same quarter last year. The increase was due to rising interest expense on deposits of $2.6 million and Federal Home Loan Bank advances of $1.7 million. Interest expense on certificates of deposit was $2.3 million greater in the third quarter of 2005 compared to the same period in 2004 and was the primary reason for the increase. Home Savings had an increase in the average balance of certificates of deposit of $174.6 million as well as an increase of 38 basis points paid on those deposits. The increase in interest expense on Federal Home Loan Bank advances was due to growth in the average balance of those liabilities and an increase in the cost of those funds of 88 basis points. The $89.4 million change in the average balance of Federal Home Loan Bank advances was a result of increased demand for funds for loan originations being greater than the increase in deposits.

The following table provides specific information about interest rate and outstanding balance (volume) changes compared to the third quarter of last year. The interest rate spread for the three months ended September 30, 2005, was 3.15% compared to 3.30% for the quarter ended September 30, 2004. Net interest margin declined 7 basis points to 3.48% for the three months ended September 30, 2005 compared to 3.55% for the same quarter in 2004.

	For the Three Months Ended September 30,
	2005 vs. 2004
	Increase					Total
	(decrease) due to					increase
	Rate		Volume			(decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	2,070	$	3,671		$	5,741
Loans held for sale		116		143			259
Investment securities:
Trading		26		(16	)		10
Available for sale		227		(274	)		(47	)
Margin accounts		77		17			94
FHLB stock		37		11			48
Other interest-earning assets		16		(1	)		15
Total interest-earning assets	$	2,569	$	3,551		$	6,120
Interest-bearing liabilities:
Savings accounts		—		(35	)		(35	)
NOW and money market accounts		331		(58	)		273
Certificates of deposit		810		1,521			2,331
Federal Home Loan Bank advances		974		759			1,733
Repurchase agreements and other		250		(5	)		245
Total interest-bearing liabilities	$	2,365	$	2,182			4,547
Change in net interest income						$	1,573

15

Provision for Loan Losses.A provision for loan losses is charged to operations to bring the total allowance for loan losses to a level considered by management to be adequate to provide for probable incurred losses based on management’s evaluation of such factors as the delinquency status of loans, current economic conditions, the fair value of the underlying collateral, changes in the composition of the loan portfolio and prior loan loss experience. The provision for loan losses decreased by $8.5 million for the three months ended September 30, 2005, compared to the same period in 2004. This change was a result of a lower loan loss provision being required in the third quarter of 2005 as compared to the third quarter of 2004 due to credit issues that existed in the prior quarter concerning loans to a boat dealer and customers of that dealer.

Noninterest Income.Noninterest income increased $1.1 million, or 12.6%, from $8.7 million for the three months ended September 30, 2004, to $9.8 million for the three months ended September 30, 2005, due to increases of $770,000 in brokerage commissions, $272,000 in gains recognized on trading securities and $108,000 in other gains. The increase in brokerage commissions is a result of increased brokerage activity during the third quarter of 2005, compared to the third quarter of 2004. Gains recognized on trading securities are a result of improved market conditions in the trading portfolio during the third quarter of 2005, compared to the same period in 2004. Other gains increased primarily as a result of disposals of fixed assets at Home Savings. These changes were offset by decreases in underwriting and investment banking fee income at Butler Wick, lower gains recognized in the sale of loans at Home Savings and higher losses attributable to sales from the available for sale portfolio.

Noninterest Expense.Total noninterest expense increased $1.7 million to $19.4 million for the three months ended September 30, 2005, from $17.8 million for the three months ended September 30, 2004. The increase is due primarily to a $1.5 million increase in salaries and employee benefits. This increase is due to larger commissions paid to employees at Butler Wick as a result of increased brokerage activity as well as increased employment costs associated with the establishment of the Wholesale Lending and Non-deposit Investment departments at Home Savings. Rising healthcare costs at both subsidiaries also contributed to the increase.

Federal Income Taxes.The provision for income taxes increased $3.3 million as a result of higher pretax income for the third quarter of 2005 compared to the third quarter of 2004.

Comparison of Operating Results for the Nine Months Ended
September 30, 2005 and September 30, 2004

Net Income.Net income for the nine months ended September 30, 2005, was $17.8 million, or $0.61 per diluted share, compared to net income of $10.7 million, or $0.36 per diluted share, for the nine months ended September 30, 2004. As previously reported, the third quarter of 2004 was negatively impacted by a $9.2 million provision for loan losses. Net interest income increased $3.5 million to $58.1 million and the provision for loan losses decreased $9.3 million to $1.8 million. Noninterest income increased $1.3 million to $28.9 million and noninterest expense increased $3.5 million to $58.5 million. United Community’s annualized return on average assets and return on average equity were 1.00% and 9.16%, respectively, for the nine months ended September 30, 2005. The annualized return on average assets and return on average equity for the comparable period in 2004 were 0.67% and 5.55%, respectively.

Net Interest Income.Net interest income for the nine months ended September 30, 2005 was $58.1 million compared to $54.7 million for the same period last year. Interest income increased $15.0 million for the first nine months of 2005 compared to the first nine months of 2004. The yield in interest earning assets increased 30 basis points to 5.88% for the nine months ended September 30, 2005, compared to 5.58% for the nine months ended September 30, 2004. The change was also caused by an increase in income on net loans of $13.7 million primarily as a result of an increase in the average balance of $238.9 million. Interest earned on loans held for sale increased $620,000 primarily as a result of a $14.7 million increase in the average balance of those assets. The average balance of trading securities grew by $9.6 million, resulting in an increase in interest earned of $309,000. Interest earned on margin accounts at Butler Wick grew by $320,000 as the average balance of those assets increased $1.4 million and the yield earned rose 2.30% over the same period in 2004.

Total interest expense increased $11.5 million for the nine months ended September 30, 2005, as compared to the same period last year. The change was due to increases in interest expense on deposits of $6.3 million and Federal Home Loan Bank advances of $4.4 million. Interest expense on certificates of deposit was $23.7 million, up $5.9 million over the same period in 2004. Home Savings had an increase in the average balance of certificates of deposit of $149.2 million as well as an increase of 35 basis points paid on those deposits. The change in interest expense on Federal Home Loan Bank advances was due to an increase in the average balance of those liabilities of $114.2 million and an increase in the cost of those funds of 49 basis points. Federal Home Loan Bank advances increased as demand for funds for loan originations at Home Savings was greater than the increase in deposits.

16

The following table provides specific information about interest rate and outstanding balance (volume) changes compared to the first nine months of last year. The interest rate spread for the nine months ended September 30, 2005, was 3.16% compared to 3.39% for the nine months ended September 30, 2004. Net interest margin declined 19 basis points to 3.46% for the nine months ended September 30, 2005 compared to 3.65% for the same period in 2004.

	For the Nine Months Ended September 30,
	2005 vs. 2004
	Increase						Total
	(decrease) due to						increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	2,797		$	10,938		$	13,735
Loans held for sale		96			524			620
Investment securities:
Trading		110			199			309
Available for sale		756			(901	)		(145	)
Margin accounts		262			58			320
FHLB stock		114			30			144
Other interest-earning assets		35			(6	)		29
Total interest-earning assets	$	4,170		$	10,842		$	15,012
Interest-bearing liabilities:
Savings accounts		(61	)		(68	)		(129	)
NOW and money market accounts		672			(125	)		547
Certificates of deposit		2,102			3,763			5,865
Federal Home Loan Bank advances		1,400			2,986			4,386
Repurchase agreements and other		653			199			852
Total interest-bearing liabilities	$	4,766		$	6,755			11,521
Change in net interest income							$	3,491

Provision for Loan Losses.A provision for loan losses is charged to operations to bring the total allowance for loan losses to a level considered by management to be adequate to provide for probable incurred losses based on management’s evaluation of such factors as the delinquency status of loans, current economic conditions, the fair value of the underlying collateral, changes in the composition of the loan portfolio and prior loan loss experience. The provision for loan losses decreased $9.3 million in the first nine months of 2005, when compared to the first nine months of 2004. The change is a result of a lower loan loss provision being required in the first nine months of 2005 as compared to the first nine months of 2004 due to credit issues that existed in the third quarter of 2004 as discussed above.

Noninterest Income.Noninterest income increased $1.3 million for the nine months ended September 30, 2005 compared to the same period in 2004. This change is due primarily to increases of $1.5 million in brokerage commissions, $613,000 in service fees and other charges, $240,000 in gains recognized on trading securities and $562,000 in other income. These increases were offset by decreases in the gains on sales of available for sale securities of $894,000 and the sale of loans of $820,000.

The increase in brokerage commissions is a result of increased brokerage activity during the first nine months of 2005 compared to the first nine months of 2004. The increase in service fees and other charges was caused by a decrease at Home Savings of $110,000 in mortgage servicing rights amortization, and increases of $327,000 in loan collection fee income and $134,000 in loan broker fee income. Butler Wick also had an increase in service fees of $331,000 attributable to trust services. These changes were offset by decreases at Home Savings in fees earned on the OverdraftHonor™ program of $194,000 and in the valuation of mortgage servicing rights of $76,000.

The decrease in gains on available for sale securities is a result of United Community selling fewer securities than in the previous year. During the first nine months of 2005, United Community sold approximately $20.7 million worth of available for sale securities.

17

During the same period in 2004, sales of $52.3 million worth of available for sale securities were recorded. The decrease in gains on loans sold is attributable to a greater percentage of sales originating from wholesale operations. These sales produce smaller gains but have enabled Home Savings to maintain its overall level of loan sales even as the industry adjusts to a slowdown in origination volumes. During 2005, Home Savings sold approximately $164.1 million in loans compared to $166.8 million in 2004.

Noninterest Expense.Total noninterest expense increased $3.5 million to $58.5 million for the nine months ended September 30, 2005, from $55.0 million for the nine months ended September 30, 2004. The increase is due primarily to a $2.8 million increase in salaries and employee benefits and a $626,000 increase in other expenses. These increases were offset partially by decreases in advertising expense and amortization of the core deposit intangible.

Salaries and employee benefits expense increased as a result of increased healthcare costs at both Home Savings and Butler Wick. Also, the additional salary expenses related to the addition of two new departments, Wholesale Lending and Non-deposit Investments, at Home Savings. Bonus provisions and commissions paid to brokers at Butler Wick also contributed to the increase.

The causes of the increase in other expenses are increases in legal expenses and audit fees. The increase in legal fees is attributable to increased collection efforts on certain loans. The increase in audit fees is a result of continued compliance with the Sarbanes-Oxley Act.

Federal Income Taxes.The provision for income taxes increased $3.5 million, as a result of higher pretax income for the first nine months of 2005 compared to the first nine months of 2004. The effective tax rate for the nine months ending September 30, 2005, was 33.8% compared to 34.4% for the nine months ending September 30, 2004.

18

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 September 30, 2005 and 2004. Average balance calculations were based on daily balances.

	Three Months Ended September 30,
	2005										2004
	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)	$	2,032,602	$	32,152			6.33	%	$	1,794,576		$	26,411		5.89	%
Net loans held for sale		29,980		420			5.60	%		17,852			161		3.61	%
Investment securities:
Trading		23,911		217			3.63	%		33,152			207		2.50	%
Available for sale		175,833		1,692			3.85	%		196,372			1,739		3.54	%
Margin accounts		15,486		312			8.06	%		14,427			218		6.04	%
FHLB stock		23,379		287			4.91	%		22,364			239		4.27	%
Other interest-earning assets		3,640		26			2.86	%		4,004			11		1.10	%
Total interest-earning assets		2,304,831		35,106			6.09	%		2,082,747			28,986		5.57	%
Noninterest-earning assets		131,781								133,606
Total assets	$	2,436,612							$	2,216,353
Interest-bearing liabilities:
NOW and money market accounts	$	259,429	$	837			1.29	%	$	295,168		$	564		0.76	%
Savings accounts		281,969		293			0.42	%		315,435			328		0.42	%
Certificates of deposit		966,216		8,737			3.62	%		791,591			6,406		3.24	%
Federal Home Loan Bank advances		486,223		4,723			3.89	%		396,782			2,990		3.01	%
Repurchase agreements and other		53,891		454			3.37	%		55,149			209		1.52	%
Total interest-bearing liabilities		2,047,728		15,044			2.94	%		1,854,125			10,497		2.26	%
Noninterest-bearing liabilities		126,817								112,773
Total liabilities		2,174,545								1,966,898
Equity		262,067								249,455
Total liabilities and equity	$	2,436,612							$	2,216,353
Net interest income and Interest rate spread			$	20,062			3.15	%				$	18,489		3.30	%
Net interest margin							3.48	%							3.55	%
Average interest-earning assets to average interest- bearing liabilities							112.56	%							112.33	%

(1) Nonaccrual loans are included in the average balance.

19

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 nine months ended September 30, 2005 and September 30, 2004. Average balance calculations were based on daily balances.

	Nine Months Ended September 30,
	2005							2004
	Average		Interest					Average		Interest
	outstanding		earned/		Yield/			outstanding		earned/		Yield/
	balance		paid		rate			balance		paid		rate
			(Dollars in thousands)
Interest-earning assets:
Net loans (1)	$	1,946,456	$	89,760		6.15	%	$	1,707,583	$	76,025		5.94	%
Net loans held for sale		33,643		1,225		4.85	%		18,980		605		4.25	%
Investment securities:
Trading		35,753		793		2.96	%		26,197		484		2.46	%
Available for sale		182,206		5,186		3.79	%		204,283		5,331		3.48	%
Margin accounts		15,414		876		7.58	%		14,053		556		5.28	%
FHLB stock		23,110		821		4.74	%		22,146		677		4.08	%
Other interest-earning assets		3,580		61		2.27	%		5,331		32		0.80	%
Total interest-earning assets		2,240,162		98,722		5.88	%		1,998,573		83,710		5.58	%
Noninterest-earning assets		136,882							131,684
Total assets	$	2,377,044						$	2,130,257
Interest-bearing liabilities:
NOW and money market accounts	$	275,301	$	2,212		1.07	%	$	300,363	$	1,665		0.74	%
Savings accounts		295,146		910		0.41	%		316,382		1,039		0.44	%
Certificates of deposit		906,042		23,692		3.49	%		756,825		17,827		3.14	%
Federal Home Loan Bank advances		454,234		12,415		3.64	%		340,026		8,029		3.15	%
Repurchase agreements and other		63,008		1,344		2.84	%		47,578		492		1.38	%
Total interest-bearing liabilities		1,993,731		40,573		2.71	%		1,761,174		29,052		2.20	%
Noninterest-bearing liabilities		124,639							112,776
Total liabilities		2,118,370							1,873,950
Equity		258,674							256,307
Total liabilities and equity	$	2,377,044						$	2,130,257
Net interest income and Interest rate spread			$	58,149		3.17	%			$	54,658		3.39	%
Net interest margin						3.46	%						3.65	%
Average interest-earning assets to average interest-bearing liabilities						112.36	%						113.48	%

(1) Nonaccrual loans are included in the average balance.

20

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

Presented below are analyses of Home Savings’ interest rate risk as measured by changes in NPV and net interest income for instantaneous and sustained parallel shifts of 100 basis point increments in market interest rates. As noted, for the quarter ended September 30, 2005, 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. Home Savings continues to monitor its interest rate exposure to declining rates. See the table below for Board adopted policy limits.

Quarter ended September 30, 2005
			NPV as % of portfolio value of assets									Next 12 months net interest income
Change in rates						Internal policy									Internal policy
(Basis points)			NPV Ratio			limitations			Change in %			$ Change			limitations			% Change
	+300			12.48	%		5.00	%		(1.34	)%	$	947			(15.00	)%		1.30	%
	+200			13.11			6.00			(0.71	)		872			(10.00	)		1.20
	+100			13.59			6.00			(0.23	)		674			(5.00	)		0.93
Static				13.82			7.00			—			—			—			—
	(100	)		13.55			6.00			(0.27	)		(1,277	)		(5.00	)		(1.75	)
	(200	)		12.78			6.00			(1.04	)		(4,263	)		(15.00	)		(5.85	)
	(300	)		n/a			n/a			n/a			n/a			(20.00	)		n/a

n/a — Due to a continuing low interest environment, it is not possible to calculate results for this scenario.

21

Year ended December 31, 2004
			NPV as % of portfolio value of assets									Next 12 months net interest income
Change in rates						Internal policy									Internal policy
(Basis points)			NPV Ratio			limitations			Change in %			$ Change			limitations			% Change
	+300			13.75	%		5.00	%		(0.41	)%	$	3,028			(15.00	)%		4.22	%
	+200			14.09			6.00			(0.06	)		2,318			(10.00	)		3.23
	+100			14.27			6.00			0.11			1,506			(5.00	)		2.10
Static				14.16			7.00			—			—			—			—
	(100	)		13.22			6.00			(0.93	)		(3,856	)		(5.00	)		(5.37	)
	(200	)		n/a			n/a			n/a			n/a			(15.00	)		n/a
	(300	)		n/a			n/a			n/a			n/a			(20.00	)		n/a

n/a — Due to a continuing low interest environment, it is not possible to calculate results for this scenario.

Due to changes in the composition of Home Savings’ loan portfolio and with the prolonged period of low interest rates, Home Savings continues to be more sensitive to falling rates than rising rates. This increased sensitivity has occurred because a greater proportion of Home Savings’ loans can reprice immediately and the prepayments on fixed-rate loans dramatically increase. In addition, the value of core deposits is diminished in a falling rate environment.

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. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, expected rates of prepayment on loans and early withdrawal levels from certificates of deposit may deviate significantly from those assumed in making risk calculations.

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

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-14(c)/15d-14(c) of the Securities Exchange Act of 1934) as of September 30, 2005. 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 September 30, 2005, there were no changes in United Community’s internal controls over financial reporting that have materially affected or are reasonably likely to materially affect United Community’s internal controls over financial reporting.

22

PART II. OTHER INFORMATION

UNITED COMMUNITY FINANCIAL CORP.

ITEM 1 — Legal Proceedings

United Community and its subsidiaries are involved in a number of legal proceedings arising out of their businesses and regularly face various claims, including unasserted claims that may ultimately result in litigation. Management believes that the financial position, results of operations and cash flows would not be materially affected by the outcome of any pending or threatened legal proceedings, commitments or claims.

ITEM 6 — Exhibits

     Exhibits

Exhibit
Number	Description
3.1	Articles of Incorporation
3.2	Amended Code of Regulations
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

23

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: November 8, 2005	/s/ Douglas M. McKay
	Douglas M. McKay, Chief Executive Officer
Date: November 8, 2005	/s/ Patrick A. Kelly
	Patrick A. Kelly, Chief Financial Officer

24

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.

25