United Community Financial (UCFC) 10-Q 2006 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, 2006

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 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer.

Large accelerated filero          Accelerated filerþ          Non-accelerated filero

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. 30,950,120 common shares as of July 31, 2006.

TABLE OF CONTENTS

	PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of June 30, 2006 (Unaudited) and December 31, 2005		1
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2006 and 2005 (Unaudited)		2
Consolidated Statement of Shareholders’ Equity for the Six Months ended June 30, 2006 (Unaudited)		3
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005 (Unaudited)		4
Notes to Consolidated Financial Statements		5-11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12-19
Item 3. Quantitative and Qualitative Disclosures about Market Risk		20
Item 4. Controls and Procedures		21
Part II. OTHER INFORMATION
Item 1. Legal Proceedings		22
Item 1A. Risk Factors (None)
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		22
Item 3. Defaults Upon Senior Securities (None)
Item 4. Submission of Matters to a Vote of Security Holders		22
Item 5. Other Information (None)
Item 6. Exhibits		23
Signatures		24
EX-31.1
EX-31.2
EX-32

PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)

	June 30,			December 31,
	2006			2005
	(Dollars in thousands)
Assets:
Cash and deposits with banks	$	29,883		$	36,043
Federal funds sold and other		1,526			1,502
Total cash and cash equivalents		31,409			37,545
Securities:
Trading, at fair value		7,031			10,812
Available for sale, at fair value		214,619			201,870
Loans, net of allowance for loan losses of $15,970 and $15,723, respectively		2,204,471			2,097,433
Loans held for sale		28,587			29,109
Margin accounts		16,677			15,705
Federal Home Loan Bank stock, at cost		24,696			24,006
Premises and equipment, net		23,784			23,771
Accrued interest receivable		13,176			12,053
Real estate owned and other repossessed assets		2,927			2,514
Goodwill		33,593			33,593
Core deposit intangible		1,858			2,118
Cash surrender value of life insurance		22,692			22,260
Other assets		15,029			16,061
Total assets	$	2,640,549		$	2,528,850
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Interest bearing	$	1,675,266		$	1,584,926
Non-interest bearing		100,931			96,918
Total deposits		1,776,197			1,681,844
Federal Home Loan Bank advances		455,785			475,549
Repurchase agreements and other		110,916			75,214
Advance payments by borrowers for taxes and insurance		13,401			14,322
Accrued interest payable		2,942			2,622
Accrued expenses and other liabilities		11,471			14,564
Total liabilities		2,370,712			2,264,115
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		144,762			143,896
Retained earnings		214,119			207,120
Accumulated other comprehensive loss		(3,888	)		(1,845	)
Unearned stock compensation		(12,197	)		(13,108	)
Treasury stock, at cost, 6,876,573 and 6,742,345 shares, respectively		(72,959	)		(71,328	)
Total shareholders’ equity		269,837			264,735
Total liabilities and shareholders’ equity	$	2,640,549		$	2,528,850

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,
	2006			2005		2006			2005
	(Dollars in thousands, except per share data)
Interest income
Loans	$	37,961		$	29,890	$	73,071		$	57,608
Loans held for sale		480			297		988			805
Securities:
Trading		80			330		162			576
Available for sale		2,366			1,741		4,580			3,495
Margin accounts		367			293		707			564
Federal Home Loan Bank stock dividends		349			281		690			534
Other interest earning assets		44			21		75			36
Total interest income		41,647			32,853		80,273			63,618
Interest expense
Deposits		14,153			8,918		26,573			16,947
Federal Home Loan Bank advances		5,251			4,074		9,881			7,692
Repurchase agreements and other		1,207			526		2,094			890
Total interest expense		20,611			13,518		38,548			25,529
Net interest income		21,036			19,335		41,725			38,089
Provision for loan losses		812			418		1,551			1,051
Net interest income after provision for loan losses		20,224			18,917		40,174			37,038
Non-interest income
Brokerage commissions		4,814			4,603		9,814			9,227
Service fees and other charges		3,209			3,073		6,407			6,190
Underwriting and investment banking		(4	)		487		26			607
Net gains (losses):
Available for sale securities		—			—		—			239
Trading securities		(12	)		249		32			31
Loans sold		466			651		1,029			899
Other		(32	)		52		(27	)		56
Other income		1,092			1,182		2,064			1,913
Total non-interest income		9,533			10,297		19,345			19,162
Non-interest expense
Salaries and employee benefits		13,005			12,510		26,528			25,122
Occupancy		1,106			968		2,214			2,015
Equipment and data processing		2,386			2,175		4,645			4,504
Franchise tax		530			488		1,071			1,014
Advertising		447			554		792			858
Amortization of core deposit intangible		127			169		260			355
Other expenses		2,525			2,535		4,973			5,187
Total non-interest expenses		20,126			19,399		40,483			39,055
Income before income taxes		9,631			9,815		19,036			17,145
Income taxes		3,381			3,317		6,654			5,766
Net income	$	6,250		$	6,498	$	12,382		$	11,379
Comprehensive income	$	4,695		$	7,495	$	10,339		$	10,350
Earnings per share
Basic	$	0.22		$	0.23	$	0.43		$	0.40
Diluted	$	0.21		$	0.22	$	0.42		$	0.39

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, 2005		31,062		$	143,896	$	207,120		$	(1,845	)	$	(13,108	)	$	(71,328	)	$	264,735
Comprehensive income:
Net income							12,382												12,382
Change in net unrealized gain/(loss) on securities, net of taxes of $1,100										(2,043	)								(2,043	)
Comprehensive income							12,382			(2,043	)								10,339
Shares allocated to ESOP participants					866								911						1,777
Purchase of treasury stock		(189	)													(2,208	)		(2,208	)
Exercise of stock options		55					(174	)								577			403
Dividends paid, $0.18 per share							(5,209	)											(5,209	)
Balance June 30, 2006		30,928		$	144,762	$	214,119		$	(3,888	)	$	(12,197	)	$	(72,959	)	$	269,837

See Notes to Consolidated Financial Statements.

3

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Six Months Ended June 30,
	2006			2005
	(Dollars in thousands)
Cash Flows from Operating Activities
Net income	$	12,382		$	11,379
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,551			1,051
Net gains		(1,010	)		(1,194	)
Amortization of premiums and accretion of discounts		1,501			1,822
Depreciation and amortization		1,364			1,188
ESOP compensation		1,777			1,584
FHLB stock dividends		(690	)		(534	)
Decrease (increase) in trading securities		3,781			(5,583	)
Increase in margin accounts		(972	)		(1,342	)
Increase in interest receivable		(1,123	)		(1,193	)
Decrease in prepaid and other assets		(223	)		(1,163	)
Increase in interest payable		320			432
Net principal disbursed on loans held for sale		(92,816	)		(89,223	)
Proceeds from sale of loans held for sale		94,432			86,939
(Decrease) increase in other liabilities		(1,993	)		1,993
Net cash from operating activities		18,281			6,156
Cash Flows from Investing Activities
Proceeds from principal repayments and maturities of:
Available for sale securities		14,369			30,370
Proceeds from sale of:
Available for sale securities		—			17,328
Real estate owned and other repossessed assets		1,436			1,064
Commercial loan participations		—			1,500
Non-performing loans		210			6,173
Premises and equipment		531			—
Purchases of:
Securities available for sale		(30,334	)		(31,320	)
Net principal repaid (disbursed) on loans		(1,735	)		(34,297	)
Loans purchased		(109,395	)		(116,936	)
Purchases of premises and equipment		(1,865	)		(3,039	)
Net cash from investing activities		(126,783	)		(129,157	)
Cash Flows from Financing Activities
Net increase (decrease) in NOW, savings and money market accounts		45,815			(56,464	)
Net increase in certificates of deposit		48,548			117,443
Net decrease in advance payments by borrowers for taxes and insurance		(921	)		(1,002	)
Proceeds from FHLB advances		287,096			292,077
Repayment of FHLB advances		(306,860	)		(236,147	)
Net change in other borrowed funds		35,702			11,569
Dividends paid		(5,209	)		(4,741	)
Proceeds from the exercise of stock options		403			302
Purchase of treasury stock		(2,208	)		(2,499	)
Net cash from financing activities		102,366			120,538
Decrease in cash and cash equivalents		(6,136	)		(2,463	)
Cash and cash equivalents, beginning of period		37,545			40,281
Cash and cash equivalents, end of period	$	31,409		$	37,818
Supplemental disclosures of cash flow information
Cash paid during the period for:	��
Interest on deposits and borrowings, net of amounts capitalized	$	38,868		$	25,097
Interest capitalized on borrowings		16			15
Income taxes		6,550			1,541
Supplemental schedule of noncash activities:
Loans transferred to the loan portfolio from held for sale		—			37,075
Transfers from loans to real estate owned and other repossessed assets		1,895			2,458

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 37 full service offices and six loan production offices throughout 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 21 office locations providing a full range of investment alternatives for individuals, businesses 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 six months ended June 30, 2006, are not necessarily indicative of the results to be expected for the year ending December 31, 2006. 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, 2005, contained in United Community’s Form 10-K for the year ended December 31, 2005.

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

     2. STOCK COMPENSATION

Prior to January 1, 2006, the Company accounted for stock-based compensation expense using the intrinsic value method as set forth in the Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and as permitted by Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation.” No compensation for stock options was reflected in net income for 2005, as all options granted had an exercise price equal to the market price of the underlying common stock at date of grant.

On January 1, 2006, the Company adopted SFAS No. 123(R) (revised version of SFAS No. 123) which requires measurement of compensation cost for all stock-based awards based on the fair value on the grant-date and recognition of compensation cost over the requisite service period of stock-based awards, which is usually the same as the period over which the award vests. As a result, the fair value of future stock options will be determined using the Black-Scholes valuation model, which is consistent with the Company’s valuation methodology used for all options granted in the Company’s initial public offering in 1998 for purposes of its footnote disclosures required under SFAS No. 123. The Company has adopted SFAS 123(R) using the modified prospective method for awards issued subsequent to the Company’s initial public offering, which provides for no retroactive application to prior periods and no cumulative adjustment to equity accounts. It also provides for expense recognition for new stock-based awards, as the required services are rendered. SFAS No. 123(R) also amends SFAS No. 95, “Statement of Cash Flows,” and requires tax benefits relating to excess stock-based compensation deductions to be presented in the statement of cash flows as financing cash inflows. The Company has adopted SFAS No. 123(R) using the prospective method for awards issued prior to the Company’s initial public offering. Awards issued prior to the initial public offering were valued for disclosure purposes using the minimum value method. No compensation cost will be recognized since the maximum number of common shares that could be granted under the original plan were granted and vested immediately upon grant.

On March 29, 2005, the Securities and Exchange Commission (SEC) published Staff Accounting Bulletin No. 107 (SAB 107), which expressed the views of the Staff regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations and provided the Staff’s views regarding the valuation of stock-based payment arrangements for public companies. SAB 107 requires that stock-based compensation be classified in the same expense category as cash compensation.

5

The adoption of SFAS 123(R) had no effect on reported amounts for the six months ended June 30, 2006 and 2005 compared with amounts that would have been reported using the intrinsic value method under previous accounting for those periods.

Options to acquire the Company’s shares have been granted to officers of the Company under the Long Term Incentive Plan (“LTIP”), which provided for issuance of up to 3,471,562 options, all of which were granted prior to December 31, 2004. All of the options awarded became exercisable on the date of grant. Treasury shares are used to fulfill the options exercised. A summary of option activity for the period is as follows:

	Six Months Ended June 30, 2006
	Total Options Outstanding
	(Dollars in thousands)
				Weighted		Weighted
				Average		Average Fair
	Shares			Exercise Price		Value
Options outstanding, beginning of period		2,217,216		$	9.59	$	4.52
Granted		—			—		—
Exercised		(54,572	)		7.38		4.81
Forfeited		(8,306	)		12.73		—
Options outstanding and exercisable, end of period		2,154,338		$	9.63	$	4.59

The aggregate intrinsic value of all options outstanding at June 30, 2006 was $5.1 million, or $2.37 per share. The aggregate intrinsic value of all options that were exercisable at June 30, 2006 was $5.1 million, or $2.37 per share. The intrinsic value of options exercised during the six months ended June 30, 2006 was $252,000, or $4.62 share.

     3. SECURITIES

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

	June 30, 2006							December 31, 2005
	(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	$	89,860	$	—	$	(1,915	)	$	88,799	$	—	$	(1,493	)
Tax exempt municipal obligation		3		—		—			3		—		—
Equity securities		7,906		609		(4	)		2,962		661		—
Mortgage-related securities		116,850		16		(4,768	)		110,106		73		(2,159	)
Total	$	214,619	$	625	$	(6,687	)	$	201,870	$	734	$	(3,652	)

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

	June 30,		December 31,
	2006		2005
	(Dollars in thousands)
Obligations of U.S. Government	$	1,595	$	2,531
State and municipal obligations		4,265		7,061
Corporate bonds, debentures and notes		103		224
Mutual funds, stocks and warrants		1,068		996
Total trading securities	$	7,031	$	10,812

6

     4. LOANS

Portfolio loans consist of the following:

	June 30,		December 31,
	2006		2005
	(Dollars in thousands)
Real Estate:
One- to four-family residential	$	802,820	$	749,362
Multifamily residential		157,719		154,702
Nonresidential		343,495		314,124
Land		15,991		14,979
Construction:
One- to four-family residential		423,342		389,558
Multifamily and non-residential		45,741		66,788
Total real estate		1,789,108		1,689,513
Consumer		334,560		323,515
Commercial		97,731		100,977
Total loans		2,221,399		2,114,005
Less:
Allowance for loan losses		15,970		15,723
Deferred loan fees, net		958		849
Total		16,928		16,572
Loans, net	$	2,204,471	$	2,097,433

Changes in the allowance for loan loss are as follows:

	As of or For the			As of or For the
	Six Months ending			Year Ended December
	June 30, 2006			31, 2005
	(Dollars in thousands)
Balance, beginning of year	$	15,723		$	15,877
Provision for loan losses		1,551			3,028
Amounts charged off		(1,472	)		(4,085	)
Recoveries		168			903
Balance, end of period	$	15,970		$	15,723

Nonaccrual loans were $27.2 million and $24.3 million at June 30, 2006 and December 31, 2005, respectively. Restructured loans were $1.5 million at June 30, 2006 and $825,000 at December 31, 2005. Loans greater than 90 days past due and still accruing interest were $702,000 and $563,000 at June 30, 2006 and December 31, 2005, respectively.

7

Impaired loans consist of the following:

	As of or For the		As of or For the
	Six Months		Year Ended
	Ended June 30,		December 31,
	2006		2005
	(Dollars in thousands)
Impaired loans on which no specific valuation allowance was provided	$	15,314	$	13,119
Impaired loans on which a specific valuation allowance was provided		4,788		4,573
Total impaired loans at period-end	$	20,102	$	17,692
Specific valuation allowances on impaired loans at period-end	$	838	$	667
Average impaired loans during the period		19,176		15,209
Interest income recognized on impaired loans during the period		227		386
Interest income received on impaired loans during the period		224		403
Interest income foregone based on original contract terms of impaired loans		1,071		1,503

     5. MORTGAGE BANKING ACTIVITIES

Mortgage loans serviced for others, which are not reported in United Community’s assets, totaled $854.3 million at June 30, 2006 and $816.0 million at December 31, 2005.

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

	As of or For the
	Six Months			As of or for the
	Ended			Year Ended
	June 30,			December 31,
	2006			2005
	(Dollars in thousands)
Balance, beginning of year	$	6,923		$	5,533
Originations		946			2,961
Amortized to expense		(822	)		(1,571	)
Balance, end of period	$	7,047		$	6,923

There was no valuation allowance required for mortgage servicing rights for the six months ended June 30, 2006. Fair value of mortgage servicing rights as of June 30, 2006 was $7.0 million and at December 31, 2005 was $6.9 million.

Key economic assumptions in measuring the value of mortgage servicing rights at June 30, 2006 and December 31, 2005 were as follows:

	June 30,			December 31,
	2006			2005
Weighted average prepayment rate	172 PSA			278 PSA
Weighted average life (in years)		4.82			5.11
Weighted average discount rate		8	%		8	%

8

     6. OTHER POSTRETIREMENT BENEFIT PLANS

Home Savings sponsors a defined benefit health care plan. The plan 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 June 30,
	2006			2005
	(Dollars in thousands)
Service cost	$	—		$	1
Interest cost		55			50
Expected return on plan assets		—			—
Net amortization of prior service cost		—			—
Recognized net actuarial gain		—			—
Net periodic benefit cost/(gain)	$	55		$	51
Assumptions used in the valuations were as follows:
Weighted average discount rate		5.50	%		5.75	%

	Six Months Ended June 30,
	2006			2005
	(Dollars in thousands)
Service cost	$	1		$	2
Interest cost		111			100
Expected return on plan assets		—			—
Net amortization of prior service cost		—			—
Recognized net actuarial gain		—			—
Net periodic benefit cost/(gain)	$	112		$	102
Assumptions used in the valuations were as follows:
Weighted average discount rate		5.50	%		5.75	%

9

     7. 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 six months ended June 30, 2006 and 2005 are as follows:

	For the Three Months Ended June 30, 2006
	Banking		Investment
	Services		Services		Total
	(Dollars in thousands)
Interest income	$	41,156	$	491	$	41,647
Interest expense		20,470		141		20,611
Provision for loan loss		812		—		812
Net interest income after provision for loan loss		19,874		350		20,224
Non-interest income		3,022		6,511		9,533
Non-interest expense		13,630		6,496		20,126
Income before tax		9,266		365		9,631
Income tax expense		3,253		128		3,381
Net income	$	6,013	$	237	$	6,250

	For the Three Months Ended June 30, 2005
	Banking		Investment
	Services		Services		Total
	(Dollars in thousands)
Interest income	$	32,197	$	656	$	32,853
Interest expense		13,164		354		13,518
Provision for loan loss		418		—		418
Net interest income after provision for loan loss		18,615		302		18,917
Non-interest income		3,291		7,006		10,297
Non-interest expense		12,959		6,440		19,399
Income before tax		8,947		868		9,815
Income tax expense		3,013		304		3,317
Net income	$	5,934	$	564	$	6,498

	For the Six Months Ended June 30, 2006
	Banking		Investment
	Services		Services		Total
	(Dollars in thousands)
Interest income	$	79,329	$	944	$	80,273
Interest expense		38,283		265		38,548
Provision for loan loss		1,551		—		1,551
Net interest income after provision for loan loss		39,495		679		40,174
Non-interest income		5,962		13,383		19,345
Non-interest expense		27,248		13,235		40,483
Income before tax		18,209		827		19,036
Income tax expense		6,365		289		6,654
Net income	$	11,844	$	538	$	12,382

10

	For the Six Months Ended June 30, 2005
	Banking		Investment
	Services		Services		Total
	(Dollars in thousands)
Interest income	$	62,419	$	1,199	$	63,618
Interest expense		24,932		597		25,529
Provision for loan loss		1,051		—		1,051
Net interest income after provision for loan loss		36,436		602		37,038
Non-interest income		5,846		13,316		19,162
Non-interest expense		26,262		12,793		39,055
Income before tax		16,020		1,125		17,145
Income tax expense		5,370		396		5,766
Net income	$	10,650	$	729	$	11,379

     8. 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 746,097 shares that were antidilutive for the period ending June 30, 2006 and 754,403 shares that were antidilutive for the period ending June 30, 2005.

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2006		2005		2006		2005
	(In thousands, except				(In thousands, except
	per share data)				per share data)
Net income applicable to common stock	$	6,250	$	6,498	$	12,382	$	11,379
Weighted average common shares outstanding		29,029		28,779		29,009		28,797
Dilutive effect of stock options		361		321		379		322
Weighted average common shares outstanding for dilutive computation		29,388		29,100		29,388		29,119
Basic earnings per share as reported	$	0.22	$	0.23	$	0.43	$	0.40
Diluted earnings per share as reported	$	0.21	$	0.22	$	0.42	$	0.39

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 Six
	Months Ended						Months Ended
	June 30,						June 30,
Selected financial ratios and other data: (1)	2006			2005			2006			2005
Performance ratios:
Return on average assets (2)		0.95	%		1.09	%		0.96	%		0.97	%
Return on average equity (3)		9.13	%		10.09	%		9.09	%		8.86	%
Interest rate spread (4)		2.97	%		3.15	%		3.01	%		3.17	%
Net interest margin (5)		3.38	%		3.44	%		3.41	%		3.45	%
Non-interest expense to average assets		3.07	%		3.25	%		3.14	%		3.33	%
Efficiency ratio (6)		65.33	%		65.56	%		65.87	%		67.98	%
Average interest-earning assets to average interest- bearing liabilities		112.42	%		112.25	%		112.64	%		112.26	%
Capital ratios:
Average equity to average assets		10.44	%		10.79	%		10.55	%		10.95	%
Equity to assets, end of period		10.22	%		10.62	%		10.22	%		10.62	%
Tier 1 leverage ratio		8.49	%		8.46	%		8.49	%		8.46	%
Tier 1 risk-based capital ratio		10.34	%		10.04	%		10.34	%		10.04	%
Total risk-based capital ratio		11.10	%		10.83	%		11.10	%		10.83	%
Asset quality ratios:
Non-performing loans to total loans at end of period (7)		1.33	%		1.37	%		1.33	%		1.37	%
Non-performing assets to average assets (8)		1.23	%		1.27	%		1.25	%		1.29	%
Non-performing assets to total assets at end of period		1.22	%		1.25	%		1.22	%		1.25	%
Allowance for loan losses as a percent of loans		0.72	%		0.75	%		0.72	%		0.75	%
Allowance for loan losses as a percent of non-performing loans (7)		54.42	%		55.56	%		54.42	%		55.56	%
Office data:
Number of full service banking offices		37			36			37			36
Number of loan production offices		6			6			6			6
Number of brokerage offices		20			12			20			12
Number of trust offices		2			2			2			2
Per share data:
Basic earnings per share (9)	$	0.22		$	0.23		$	0.43		$	0.40
Diluted earnings per share (9)	$	0.21		$	0.22		$	0.42		$	0.39
Book value (10)	$	8.72		$	8.30		$	8.72		$	8.30
Tangible book value (11)	$	7.58		$	7.13		$	7.58		$	7.13
Market value as a percent of book value (12)		138	%		132	%		138	%		132	%

(1)	Ratios for the three and six month periods are annualized where appropriate.
(2)	Net income divided by average total assets.
(3)	Net income divided by average total equity.
(4)	Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities.
(5)	Net interest income as a 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 June 30, 2006 and December 31, 2005

Total assets increased by $111.7 million, or 4.4%, to $2.6 billion at June 30, 2006, compared to December 31, 2005. The net change in assets was primarily a result of increases of $107.0 million in net loans and $12.7 million in available for sale securities. These increases were offset partially by decreases in cash and cash equivalents of $6.1 million, trading securities of $3.8 million and other assets of $1.0 million.

Cash and cash equivalents decreased $6.1 million, or 16.3%, during the first six months of 2006. The reduction is attributable to decreases at Home Savings in funds due from the Federal Reserve of $3.5 million, currency to be delivered to branches of $1.6 million and cash on deposit at the Federal Reserve of $869,000. Butler Wick also had a decrease in cash and cash equivalents as a result of borrowing repayments during the period.

The trading securities portfolio decreased $3.8 million, or 35.0%, to $7.0 million at June 30, 2006, from $10.8 million at December 31, 2005. This change was a result of decreases in Butler Wick’s portfolio of $2.8 million in municipal securities and $936,000 in government securities.

Net available for sale securities increased $12.7 million, or 6.3%, from December 31, 2005 to June 30, 2006. Home Savings had purchases of $28.8 million to replace maturities and runoff within its portfolio while Butler Wick had purchases of $1.5 million. These purchases were offset by paydowns and maturities of $13.4 million at Home Savings and $1.0 million at Butler Wick. The remaining difference is a result of changes in the valuation of the portfolio, net of any amortization or accretion.

Net loans increased $107.0 million, or 5.1%, to $2.2 billion at June 30, 2006, compared to $2.1 billion at December 31, 2005. Real estate loans increased $86.9 million, construction loans increased $12.7 million and consumer loans increased $11.0 million. These increases were offset by a decrease in commercial loans of $3.2 million.

Loans held for sale decreased $522,000, or 1.8%, to $28.6 million at June 30, 2006, compared to $29.1 million at December 31, 2005. This change is due to the net impact of loan originations, purchases and sales. Home Savings sells loans as part of its risk management strategy and anticipates doing so in the future. Home Savings also purchases loans, both for its portfolio and to be sold in the secondary market. If interest rates continue to rise, management will anticipate fewer originations, which will result in fewer loan sales and reduced gains from those sales.

The allowance for loan losses increased to $16.0 million at June 30, 2006, from $15.7 million at December 31, 2005. 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) was 0.72% at June 30, 2006, compared to 0.74% at December 31, 2005. See Note 4 to the financial statements for a summary of the allowance for loan losses.

The total outstanding balance of all impaired loans was $20.1 million at June 30, 2006 as compared to $17.7 million at December 31, 2005. Impaired loans increased primarily as a result of loans aggregating $1.7 million to one commercial loan customer and a marine loan in the amount of $473,000 becoming impaired in the first quarter and a loan aggregating $2.6 million becoming impaired in the second quarter. 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 $679,000 to $29.3 million during the first six months of 2006. Real estate owned increased $355,000 to $2.1 million and repossessed assets increased $58,000 to $864,000. Total non-performing loans were 1.33% of net loans at June 30, 2006, up from 1.22% of net loans at December 31, 2005, primarily as a result of loans past due 90 days increasing $3.2 million. The allowance for

13

loan losses as a percentage of non-performing loans was 54.4% at June 30, 2006, compared to 61.3% at December 31, 2005. Total non-performing assets were 1.22% of total assets at June 30, 2006, compared to 1.11% at December 31, 2005.

Accrued interest receivable increased $1.1 million, or 9.3%, to $13.2 million at June 30, 2006, compared to $12.1 million at December 31, 2005. Home Savings had increases of accrued interest due from mortgage loans of $894,000, consumer loans of $96,000 and commercial loans of $819,000, which were offset by reserves for uncollected interest on mortgage loans of $251,000 and commercial loans of $516,000.

Other assets decreased $1.0 million, or 6.4%, to $15.0 million at June 30, 2006 compared to $16.1 million at December 31, 2005. Butler Wick had decreases in receivables due from broker/dealers of $2.8 million and receivables due from customers of $619,000. Partially offsetting the decrease were increases in Home Savings’ prepaid Ohio franchise tax of $1.1 million.

Total deposits increased $94.4 million, or 5.6% to $1.8 billion at June 30, 2006 from $1.7 billion at December 31, 2005. This increase was due mainly to a $103.5 million increase in money market accounts and a $48.5 million increase in certificates of deposit, offset by a decrease of $43.3 million in savings accounts and $14.0 million in demand deposit accounts.

Federal Home Loan Bank advances decreased $19.8 million during the first six months of 2006. The decrease was a result of the maturities of $36.0 million in term advances and other principal payments offset by increases in overnight advances of $16.6 million. Management used alternative funding sources such as repurchase agreements and other borrowings to fund the repayment of Federal Home Loan Bank advances.

Repurchase agreements and other borrowed funds increased $35.7 million to $110.9 million at June 30, 2006 from $75.2 million at December 31, 2005. The increase is largely attributable to management’s decision to use alternative funding sources to fund loan growth and purchase of securities.

Advance payments by borrowers for taxes and insurance decreased during the first six months of 2006 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 $296,000.

Accrued expenses and other liabilities decreased $3.1 million, or 21.2% from $14.6 million at December 31, 2005 to $11.5 million at June 30, 2006. Home Savings had decreases in accrued payroll expenses of $1.8 and deferred federal income tax of $1.1 million. Butler Wick had a decrease in accrued payroll expenses of $682,000. Partially offsetting these decreases were increases in other liabilities, such as accrued audit fees and accrued hospitalization expenses.

Shareholders’ equity increased $5.1 million, to $269.8 million at June 30, 2006, from $264.7 million at December 31, 2005. Earnings of $12.0 million from Home Savings and $538,000 from Butler Wick for the first six months of 2006 were offset by dividend payments to shareholders of $5.2 million and a decrease in other comprehensive income of $2.0 million as a result of the market valuation of available for sale securities.

Comparison of Operating Results for the Three Months Ended
June 30, 2006 and June 30, 2005

Net Income.Net income for the three months ended June 30, 2006, was $6.3 million, or $0.21 per diluted share, compared to net income of $6.5 million, or $0.22 per diluted share, for the three months ended June 30, 2005. During the second quarter of 2006, net interest income increased $1.7 million. This increase was offset by increases in non-interest expenses and the provision for loan losses and decreases in non-interest income. United Community’s annualized return on average assets and return on average equity were 0.95% and 9.13%, respectively, for the three months ended June 30, 2006. The annualized return on average assets and return on average equity for the comparable period in 2005 were 1.09% and 10.09%, respectively.

Net Interest Income.Net interest income for the quarter ended June 30, 2006, was $21.0 million compared to $19.3 million for the same period last year. Interest income increased $8.8 million for the second quarter of 2006 compared to the second quarter of 2005. The increase in interest income was primarily due to an increase in income on net loans of $8.1 million as a result of an increase in the average balance of outstanding loans of $224.3 million and an increase in the yield earned on those loans. The average yield in interest earning assets increased 85 basis points to 6.70% for the three months ended June 30, 2006, compared to 5.85% for the three months ended June 30, 2005. Interest earned on loans held for sale increased minimally as a result of a lower yield received on a greater level of held for sale loans. Interest earned on available for sale securities increased $625,000 as the average balance of those assets grew by $34.6 million and the yield earned on those securities increased 54 basis points.

14

Total interest expense increased $7.1 million for the quarter ended June 30, 2006, as compared to the same quarter last year. The increase was due primarily to rising interest expense on deposits of $5.2 million and Federal Home Loan Bank advances of $1.2 million. Interest expense on certificates of deposit was $3.5 million greater in the second quarter of 2006 compared to the same period in 2005 and was the primary reason for the increase in deposit expense. Home Savings had an increase in the average balance of certificates of deposit of $194.9 million as well as an increase of 67 basis points paid on those deposits. The increase in interest expense on Federal Home Loan Bank advances was due primarily to an increase in the cost of those funds of 101 basis points. Interest expense on repurchase agreements and other borrowed funds increased primarily as a result of an increase of 179 basis points paid for those funds. Additionally, the average balance of repurchase agreements and other liabilities increased as management has decided to use these as alternative funding sources, as previously discussed.

The following table provides specific information about 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, 2006, was 2.97% compared to 3.15% for the quarter ended June 30, 2005. Net interest margin declined 6 basis points to 3.38% for the three months ended June 30, 2006 compared to 3.44% for the same quarter in 2005.

	For the Three Months Ended June 30,
	2006 vs. 2005
	Increase						Total
	(decrease) due to						increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	4,418		$	3,653		$	8,071
Loans held for sale		(30	)		213			183
Investment securities:
Trading		619			(869	)		(250	)
Available for sale		267			358			625
Margin accounts		55			19			74
FHLB stock		52			16			68
Other interest-earning assets		15			8			23
Total interest-earning assets	$	5,396		$	3,398		$	8,794
Interest-bearing liabilities:
Savings accounts		—			(77	)		(77	)
NOW and money market accounts		1,591			173			1,764
Certificates of deposit		1,672			1,876			3,548
Federal Home Loan Bank advances		1,140			37			1,177
Repurchase agreements and other		423			258			681
Total interest-bearing liabilities	$	4,826		$	2,267			7,093
Change in net interest income							$	1,701

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 increased by $394,000, to $812,000 for the three months ended June 30, 2006, compared to $418,000 for the same period in 2005.

Non-interest Income.Non-interest income decreased $764,000, or 7.46%, to $9.5 million for the three months ended June 30, 2006, from $10.3 million for the three months ended June 30, 2005, due to decreases of $491,000 in underwriting and investment banking, $261,000 in gains recognized on trading securities and $185,000 in gains on loans sold. The decrease in underwriting and investment banking is a result of Butler Wick recording a loss on a bond that had been repurchased from a client. Losses recognized on trading securities are a result of adjusting the trading portfolio to reflect current market prices. Lower gains recognized on loans sold is a result of reduced spreads earned on sales.

Non-interest Expense.Total non-interest expense increased $727,000 to $20.1 million for the three months ended June 30, 2006, from $19.4 million for the three months ended June 30, 2005. The increase is due primarily to increases of $495,000 in salaries and

15

employee benefits and $211,000 in equipment and data processing charges. The increase in salaries and employee benefits is a result of changes to employment costs such as wages, employment taxes, healthcare costs and contributions to the Company’s 401(k) and ESOP plans.

Comparison of Operating Results for the Six Months Ended
June 30, 2006 and June 30, 2005

Net Income.Net income for the six months ended June 30, 2006, was $12.4 million, or $0.42 per diluted share, compared to net income of $11.4 million, or $0.39 per diluted share, for the six months ended June 30, 2005. During the first six months of 2006, net interest income increased $3.6 million and non-interest income increased $183,000. These increases were offset partially by an increase in non-interest expenses. United Community’s annualized return on average assets and return on average equity were 0.96% and 9.09%, respectively, for the six months ended June 30, 2006. The annualized return on average assets and return on average equity for the comparable period in 2005 were 0.97% and 8.86%, respectively.

Net Interest Income.Interest income for the six months ended June 30, 2006, was $80.3 million compared to $63.6 million for the same period last year, an increase of $16.7 million. The increase in interest income was primarily due to an increase in income on net loans of $15.5 million as a result of an increase in the average balance of outstanding loans of $237.4 million and an increase in the yield earned on those loans. Interest earned on loans held for sale increased slightly as a result of a higher yield being earned on a greater outstanding balance of loans. Interest earned on available for sale securities increased $1.1 million as the average balance of those assets grew by $27.5 million. The average yield in interest earning assets increased 80 basis points to 6.56% for the six months ended June 30, 2006, compared to 5.76% for the six months ended June 30, 2005.

Total interest expense increased $13.0 million for the six months ended June 30, 2006, as compared to the same period last year. The increase was primarily due to rising interest expense on deposits of $9.6 million and Federal Home Loan Bank advances of $2.2 million. Interest expense on certificates of deposit was $7.1 million greater in the first six months of 2006 compared to the same period in 2005 and was the primary reason for the increase in deposits. Home Savings had an increase in the average balance of certificates of deposit of $217.1 million as well as an increase of 61 basis points paid on those deposits. The increase in interest expense on Federal Home Loan Bank advances was due primarily to an increase in the cost of those funds of 94 basis points. Interest expense on repurchase agreements and other increased primarily as a result of an increase of 173 basis points paid for those funds. Additionally, the average balance of repurchase agreements and other liabilities increased as a result of management’s decision to use these alternative funding sources.

The following table provides specific information about 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, 2006, was 3.01% compared to 3.17% for the six months ended June 30, 2005. Net interest margin declined 4 basis points to 3.41% for the six months ended June 30, 2006 compared to 3.45% for the same period in 2005.

16

	For the Six Months Ended June 30,
	2006 vs. 2005
	Increase						Total
	(decrease) due to						increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	7,821		$	7,642		$	15,463
Loans held for sale		29			154			183
Investment securities:
Trading		756			(1,170	)		(414	)
Available for sale		528			557			1,085
Margin accounts		120			23			143
FHLB stock		126			29			155
Other interest-earning assets		33			7			40
Total interest-earning assets	$	9,413		$	7,242		$	16,655
Interest-bearing liabilities:
Savings accounts		(3	)		(137	)		(140	)
NOW and money market accounts		2,572			113			2,685
Certificates of deposit		2,985			4,096			7,081
Federal Home Loan Bank advances		2,078			111			2,189
Repurchase agreements and other		735			469			1,204
Total interest-bearing liabilities	$	8,367		$	4,652			13,019
Change in net interest income							$	3,636

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 increased by $500,000, to $1.5 million for the six months ended June 30, 2006, compared to $1.1 million for the same period in 2005.

Non-interest Income.Non-interest income increased $183,000, or 1.0%, , to $19.3 million for the six months ended June 30, 2006, from $19.2 million for the six months ended June 30, 2005, due to increases of $587,000 in brokerage commissions and $217,000 in service fees and other charges. The increase in brokerage commissions is a result of increased brokerage activity during the first six months of 2006, compared to the first six months of 2005. The increase in service fees and other charges is primarily a result of increased trust and brokerage activity at Butler Wick.

Non-interest Expense.Total non-interest expense increased $1.4 million to $40.5 million for the six months ended June 30, 2006, from $39.1 million for the six months ended June 30, 2005. The increase is due primarily to a $1.4 million increase in salaries and employee benefits as a result of changes to employment costs such as wages, employment taxes and contributions to the Company’s 401(k) and ESOP plans. Rising healthcare costs also contributed to the increase.

Federal Income Taxes.The provision for income taxes increased $888,000 as a result of higher pretax income for the first six months of 2006 compared to the first six months of 2005.

17

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, 2006 and 2005. Average balance calculations were based on daily balances.

	Three Months Ended June 30,
	2006							2005
	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)	$	2,175,424	$	37,961		6.98	%	$	1,951,085	$	29,890		6.13	%
Net loans held for sale		42,931		480		4.47	%		23,435		297		5.07	%
Investment securities:
Trading		7,359		80		4.35	%		48,716		330		2.71	%
Available for sale		216,544		2,366		4.37	%		181,947		1,742		3.83	%
Margin accounts		16,366		367		8.97	%		15,432		293		7.59	%
FHLB stock		24,350		349		5.73	%		23,099		281		4.87	%
Other interest-earning assets		4,596		44		3.83	%		3,425		20		2.34	%
Total interest-earning assets		2,487,570		41,647		6.70	%		2,247,139		32,853		5.85	%
Noninterest-earning assets		135,647							140,804
Total assets	$	2,623,217						$	2,387,943
Interest-bearing liabilities:
NOW and money market accounts	$	330,408	$	2,466		2.99	%	$	273,570	$	702		1.03	%
Savings accounts		223,236		229		0.41	%		297,999		306		0.41	%
Certificates of deposit		1,099,823		11,458		4.17	%		904,932		7,910		3.50	%
Federal Home Loan Bank advances		453,654		5,251		4.63	%		449,577		4,074		3.62	%
Repurchase agreements and other		105,633		1,207		4.57	%		75,740		526		2.78	%
Total interest-bearing liabilities		2,212,754		20,611		3.73	%		2,001,818		13,518		2.70	%
Noninterest-bearing liabilities		136,572							128,425
Total liabilities		2,349,326							2,130,243
Equity		273,891							257,700
Total liabilities and equity	$	2,623,217						$	2,387,943
Net interest income and Interest rate spread			$	21,036		2.97	%			$	19,335		3.15	%
Net interest margin						3.38	%						3.44	%
Average interest-earning assets to average interest- bearing liabilities						112.42	%						112.25	%

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

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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 months ended June 30, 2006 and June 30, 2005. Average balance calculations were based on daily balances.

	Six Months Ended June 30,
	2006							2005
	Average		Interest					Average		Interest
	outstanding		earned/		Yield/			outstanding		earned/		Yield/
	balance		paid		rate			balance		paid		rate
					(Dollars In thousands)
Interest-earning assets:
Net loans (1)	$	2,140,079	$	73,071		6.83	%	$	1,902,669	$	57,608		6.06	%
Net loans held for sale		42,114		988		4.69	%		35,505		805		4.53	%
Investment securities:
Trading		7,676		162		4.22	%		41,677		576		2.76	%
Available for sale		212,989		4,580		4.30	%		185,447		3,495		3.77	%
Margin accounts		15,996		707		8.84	%		15,378		564		7.34	%
FHLB stock		24,181		689		5.70	%		22,972		534		4.65	%
Other interest-earning assets		4,174		76		3.64	%		3,552		36		2.03	%
Total interest-earning assets		2,447,209		80,273		6.56	%		2,207,200		63,618		5.76	%
Noninterest-earning assets		134,890							139,464
Total assets	$	2,582,099						$	2,346,664
Interest-bearing liabilities:
NOW and money market accounts	$	305,081	$	4,060		2.66	%	$	283,369	$	1,375		0.97	%
Savings accounts		234,800		478		0.41	%		301,844		618		0.41	%
Certificates of deposit		1,092,551		22,035		4.03	%		875,454		14,954		3.42	%
Federal Home Loan Bank advances		444,231		9,881		4.45	%		437,976		7,692		3.51	%
Repurchase agreements and other		95,869		2,094		4.37	%		67,538		890		2.64	%
Total interest-bearing liabilities		2,172,532		38,548		3.55	%		1,966,181		25,529		2.60	%
Noninterest-bearing liabilities		137,281							123,530
Total liabilities		2,309,813							2,089,711
Equity		272,286							256,953
Total liabilities and equity	$	2,582,099						$	2,346,664
Net interest income and Interest rate spread			$	41,725		3.01	%			$	38,089		3.17	%
Net interest margin						3.41	%						3.45	%
Average interest-earning assets to average interest-bearing liabilities						112.64	%						112.26	%

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

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

Presented below are analyses of Home Savings’ interest rate risk as measured by changes in NPV and net interest income for instantaneous and sustained parallel shifts of 100 basis point increments in market interest rates. As noted, for the quarter ended June 30, 2006, 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, 2006
	NPV as % of portfolio value of assets									Next 12 months net interest income
Change
in rates
(basis				Internal policy									Internal policy
points)	NPV ratio			limitations			Change in %			$ Change			limitations			% Change
+300		9.58	%		5.00	%		(2.42	)%	$	(4,202	)		(15.00	)%		(5.53	)%
+200		10.39			6.00			(1.61	)		(2,746	)		(10.00	)		(3.61	)
+100		11.15			6.00			(0.85	)		(1,299	)		(5.00	)		(1.71	)
Static		12.00			7.00			—			—			—			—
(100)		12.18			6.00			0.18			1,377			(5.00	)		1.81
(200)		12.26			6.00			0.26			2,289			(15.00	)		3.01
(300)		11.77			5.00			(0.23	)		1,609			(20.00	)		2.12

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	Year ended December 31, 2005
	NPV as % of portfolio value of assets									Next 12 months net interest income
Change
in rates
(basis				Internal policy									Internal policy
points)	NPV ratio			limitations			Change in %			$ Change			limitations			% Change
+300		11.90	%		5.00	%		(1.35	)%	$	322			(15.00	)%		0.43	%
+200		12.45			6.00			(0.80	)		390			(10.00	)		0.52
+100		12.88			6.00			(0.36	)		(276	)		(5.00	)		(0.37	)
Static		13.24			7.00			—			—			—			—
(100)		13.08			6.00			(0.16	)		(649	)		(5.00	)		(0.87	)
(200)		12.38			6.00			(0.86	)		(3,638	)		(15.00	)		(4.89	)
(300)		10.98			5.00			(2.26	)		(10,678	)		(20.00	)		(14.37	)

Due to changes in the composition of Home Savings’ funding mix and with the continued rise in short term interest rates, Home Savings has become more sensitive to rising rates than falling rates. This increased sensitivity is still within Board approved limitations. Management is comfortable with Home Savings’ interest rate risk position and with its outlook for interest rates over the next year.

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.

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 June 30, 2006. 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, 2006, 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.

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PART II. OTHER INFORMATION

UNITED COMMUNITY FINANCIAL CORP.

ITEM 1 — Legal Proceedings

United Community and its subsidiaries are not parties to any material litigation other than 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 2 — Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities
					Total Number of		Maximum Number of
					Shares Purchased as		Shares that May Yet Be
					Part of Publicly		Purchased Under the
	Total Number of		Average Price		Announced Plans or		Plans
Period	Shares Purchased		Paid per Share		Programs		or Programs
4/1 to 4/30/2006		—	$	—		—		624,347	(1)
5/1 to 5/31/2006		74,800		11.62		74,800		549,547
6/1 to 6/30/2006		114,000		11.74		114,000		435,547
Total		188,800	$	11.69		188,800		435,547

(1) On April 21, 2003, United Community announced that its Board of Directors had approved a plan to repurchase 1,000,000 shares of stock.

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

On April 27, 2006, United Community held its Annual Meeting of Shareholders. At the Annual Meeting, two matters were submitted to shareholders for a vote. First, shareholders elected three directors with terms expiring in 2009 by the following votes:

Director	For		Withheld
Richard M. Barrett		24,474,442		455,072
Thomas J. Cavalier		24,321,949		607,565
Douglas M. McKay		24,519,446		410,068

The following directors terms continued after the Annual Meeting: Eugenia C. Atkinson, David G. Lodge, Clarence R. Smith, Jr., Richard J. Schiraldi, Herbert F. Schuler, Sr., and David C. Sweet.

The shareholders also ratified the selection of Crowe Chizek and Company LLC as auditors for the 2006 fiscal year by the following vote:

For	Against	Abstain
24,649,719	143,833	135,962

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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

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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 8, 2006	/s/ Douglas M. McKayDouglas M. McKay, Chief Executive Officer
Date: August 8, 2006	/s/ Patrick A. KellyPatrick 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.

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