United Community Financial (UCFC) 10-Q 2007 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, 2007

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

For the transition period from                      to                     

UNITED COMMUNITY FINANCIAL CORP.

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

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

275 West Federal Street, Youngstown, Ohio 44503-1203

(Address of principal executive offices) (Zip Code)

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

Not Applicable

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

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

Yes þ      No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

Large accelerated filer o                     Accelerated filer þ                    Non-accelerated filer o                     

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

Yes o     No þ     

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 30,212,969 common shares as of July 31, 2007.

TABLE OF CONTENTS

		PAGE
Part I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Financial Condition as of June 30, 2007 (Unaudited) and December 31, 2006		1
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2007 and 2006 (Unaudited)		2
	Consolidated Statement of Shareholders’ Equity for the Six Months ended June 30, 2007 (Unaudited)		3
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006 (Unaudited)		4
	Notes to Consolidated Financial Statements		5 - 13
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14-24
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		25
Item 4.	Controls and Procedures		26
Part II. OTHER INFORMATION
Item 1.	Legal Proceedings		27
Item 1A.	Risk Factors		27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		27
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		27
Signatures			28
Exhibits			29-32
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,
	2007			2006
	(Dollars in thousands)
Assets:
Cash and deposits with banks	$	32,093		$	34,129
Federal funds sold and other		2,225			1,508
Total cash and cash equivalents		34,318			35,637
Securities:
Trading, at fair value		7,631			10,786
Available for sale, at fair value		249,636			237,531
Loans, net of allowance for loan losses of $19,395 and $16,955, respectively		2,248,462			2,253,559
Loans held for sale		16,509			26,960
Federal Home Loan Bank stock, at cost		25,432			25,432
Premises and equipment, net		25,970			25,192
Accrued interest receivable		13,168			13,703
Real estate owned and other repossessed assets		9,841			3,242
Goodwill		33,593			33,593
Core deposit intangible		1,341			1,534
Cash surrender value of life insurance		23,587			23,137
Other assets		16,672			13,239
Total assets	$	2,706,160		$	2,703,545
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Interest bearing	$	1,696,819		$	1,720,426
Non-interest bearing		104,430			102,509
Total deposits		1,801,249			1,822,935
Federal Home Loan Bank advances		452,814			465,253
Repurchase agreements and other borrowings		142,139			98,511
Advance payments by borrowers for taxes and insurance		14,358			17,471
Accrued interest payable		6,217			2,842
Accrued expenses and other liabilities		14,037			15,200
Total liabilities		2,430,814			2,422,212
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		146,555			145,834
Retained earnings		223,571			220,527
Accumulated other comprehensive loss		(3,669	)		(1,296	)
Unearned employee stock ownership plan shares		(10,376	)		(11,287	)
Treasury stock, at cost, 7,591,488 and 6,827,143 shares, respectively		(80,735	)		(72,445	)
Total shareholders’ equity		275,346			281,333
Total liabilities and shareholders’ equity	$	2,706,160		$	2,703,545

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,
	2007			2006			2007			2006
				(Dollars in thousands, except per share data)
Interest income
Loans	$	37,915		$	37,961		$	76,918		$	73,071
Loans held for sale		289			480			545			988
Securities:
Trading		63			80			125			162
Available for sale		3,099			2,366			6,033			4,580
Held to maturity
Margin accounts		—			367			—			707
Federal Home Loan Bank stock dividends		412			349			812			690
Other interest earning assets		226			44			396			75
Total interest income		42,004			41,647			84,829			80,273
Interest expense
Deposits		16,828			14,153			33,550			26,573
Federal Home Loan Bank advances		5,280			5,251			10,627			9,881
Repurchase agreements and other		1,744			1,207			3,099			2,094
Total interest expense		23,852			20,611			47,276			38,548
Net interest income		18,152			21,036			37,553			41,725
Provision for loan losses		2,744			812			5,069			1,551
Net interest income after provision for loan losses		15,408			20,224			32,484			40,174
Non-interest income
Brokerage commissions		7,049			4,814			13,289			9,814
Service fees and other charges		3,770			3,209			7,343			6,407
Underwriting and investment banking		212			(4	)		245			26
Net gains (losses):
Trading securities		43			(12	)		48			32
Loans sold		524			466			1,187			1,029
Other		(379	)		(32	)		(403	)		(27	)
Other income		998			1,092			1,925			2,064
Total non-interest income		12,217			9,533			23,634			19,345
Non-interest expense
Salaries and employee benefits		14,359			13,005			28,641			26,528
Occupancy		1,208			1,106			2,356			2,214
Equipment and data processing		2,306			2,386			4,621			4,645
Franchise tax		550			530			1,114			1,071
Advertising		390			447			707			792
Amortization of core deposit intangible		93			127			193			260
Other expenses		2,594			2,525			5,110			4,973
Total non-interest expenses		21,500			20,126			42,742			40,483
Income before income taxes		6,125			9,631			13,376			19,036
Income taxes		2,195			3,381			4,776			6,654
Net income	$	3,930		$	6,250		$	8,600		$	12,382
Comprehensive income	$	1,119		$	4,695		$	6,227		$	10,339
Earnings per share
Basic	$	0.14		$	0.22		$	0.30		$	0.43
Diluted	$	0.13		$	0.21		$	0.29		$	0.42

See Notes to Consolidated Financial Statements.

2

UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(Unaudited)

												Unearned
									Accumulated			Employee
									Other			Stock
	Shares			Common		Retained			Comprehensive			Ownership			Treasury
	Outstanding			Stock		Earnings			Income (Loss)			Plan Shares			Stock			Total
	(Dollars in thousands, except per share data)
Balance December 31, 2006		30,977		$	145,834	$	220,527		$	(1,296	)	$	(11,287	)	$	(72,445	)	$	281,333
Comprehensive income:
Net income							8,600												8,600
Change in net unrealized gain/(loss) on securities, net of taxes of $1,278										(2,373	)								(2,373	)
Comprehensive income							8,600			(2,373	)								6,227
Shares allocated to ESOP participants					721								911						1,632
Purchase of treasury stock		(786	)													(8,518	)		(8,518	)
Exercise of stock options		22					(75	)								228			153
Dividends paid, $0.19 per share							(5,481	)											(5,481	)
Balance June 30, 2007		30,213		$	146,555	$	223,571		$	(3,669	)	$	(10,376	)	$	(80,735	)	$	275,346

See Notes to Consolidated Financial Statements.

3

UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Six Months Ended June 30,
	2007			2006
	(Dollars in thousands)
Cash Flows from Operating Activities
Net income	$	8,600		$	12,382
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		5,069			1,551
Net gains		(784	)		(1,010	)
Amortization of premiums and accretion of discounts		995			1,501
Depreciation and amortization		1,559			1,364
ESOP compensation		1,632			1,777
FHLB stock dividends		—			(690	)
Decrease in trading securities		3,155			3,781
Decrease in margin accounts		—			(972	)
Decrease (increase) in interest receivable		535			(1,123	)
(Increase) decrease in prepaid and other assets		(4,321	)		(223	)
Increase in interest payable		3,375			320
Net principal disbursed on loans held for sale		(109,845	)		(92,816	)
Proceeds from sale of loans held for sale		121,455			94,432
Increase (decrease) in other liabilities		115			(1,993	)
Net cash from operating activities		31,540			18,281
Cash Flows from Investing Activities
Proceeds from principal repayments and maturities of:
Available for sale securities		29,990			14,369
Proceeds from sale of:
Real estate owned and other repossessed assets		1,693			1,436
Nonperforming loans		—			210
Premises and equipment		—			531
Purchases of securities available for sale		(45,717	)		(30,334	)
Net principal repaid (disbursed) on loans		81,854			(1,735	)
Loans purchased		(90,897	)		(109,395	)
Purchases of premises and equipment		(2,328	)		(1,865	)
Net cash from investing activities		(25,405	)		(126,783	)
Cash Flows from Financing Activities
Net increase in NOW, savings and money market accounts		27,235			45,815
Net (decrease) increase in certificates of deposit		(48,919	)		48,548
Net decrease in advance payments by borrowers for taxes and insurance		(3,113	)		(921	)
Proceeds from FHLB advances		404,453			287,096
Repayment of FHLB advances		(416,892	)		(306,860	)
Net change in other borrowed funds		43,628			35,702
Dividends paid		(5,481	)		(5,209	)
Proceeds from the exercise of stock options		153			403
Purchase of treasury stock		(8,518	)		(2,208	)
Net cash from financing activities		(7,454	)		102,366
Decrease in cash and cash equivalents		(1,319	)		(6,136	)
Cash and cash equivalents, beginning of period		35,637			37,545
Cash and cash equivalents, end of period	$	34,318		$	31,409

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 bank (Conversion). Upon consummation of the Conversion on July 8, 1998, United Community became the unitary thrift holding company for Home Savings. During 2003, Home Savings changed its charter to a state savings bank. Home Savings has 38 full service offices and five 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 six months ended June 30, 2007, are not necessarily indicative of the results to be expected for the year ending December 31, 2007. 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, 2006, contained in United Community’s Form 10-K for the year ended December 31, 2006.

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

     2. RECENT ACCOUNTING DEVELOPMENTS

The Company adopted FASB Interpretation 48,Accounting for Uncertainty in Income Taxes(“FIN 48”), as of January 1, 2007. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax purposes not meeting the “more likely than not” test, no tax benefit is recorded. The adoption had no affect on the Company’s financial statements.

The Company and its subsidiaries are subject to U.S. federal income tax as well as various other state income taxes. The Company is no longer subject to examination by taxing authorities for years before 2002. The Company does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.

The Company recognizes interest related to income tax matters as interest expense and penalties related to income tax matters as other expense. The Company did not have any amounts accrued for interest and penalties at January 1, 2007.

In July 2006, the Emerging Issues Task Force (EITF) of FASB issued a draft abstract for EITF Issue No. 06-04,Accounting for Deferred Compensation and Postretirement Benefits Aspects of Endorsement Split-Dollar Life Insurance Arrangement. This draft abstract from EITF reached a consensus that for an endorsement split-dollar life insurance arrangement within the scope of this Issue, an employer should recognize a liability for future benefits in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”. The Task Force concluded that a liability for the benefit obligation under SFAS No. 106 has not been settled through the endorsement type life insurance policy. In September 2006, FASB agreed to ratify the consensus reached in EITF Issue No. 06-04. This new accounting standard will be effective for fiscal years beginning after December 15, 2007. At June 30, 2007, United Community and its subsidiaries owned $23.6 million of bank owned life insurance. The Company is evaluating the impact of the adoption of this standard.

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5,Accounting for Purchases of Life Insurance — Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance).This issue requires that a policyholder consider contractual terms of a life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all

5

individual policies in a group are surrendered at the same time, that the surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the issue discusses whether the cash surrender value should be discounted when the policyholder is contractually limited in its ability to surrender a policy. This issue is effective for fiscal years beginning after December 15, 2006. The adoption of this issue did not have a material impact on United Community’s financial statements.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities. This statement grants companies the option to carry most financial assets and liabilities at fair value, with changes in fair value recorded in earnings. This statement will be effective in the first quarter of 2008. The Company is evaluating the effect of adopting this statement.

     3. STOCK COMPENSATION

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

The 1999 Plan provides for the grant of options, which may qualify as either incentive or nonqualified stock options. The incentive plan provides that option prices will not be less than the fair market value of the stock at the grant date. The maximum number of common shares that may be issued under the plan is 3,471,562, all of which were granted prior to December 31, 2004. All of the options awarded became exercisable on the date of grant. The option period expires 10 years from the date of grant. A summary of activity in the plan is as follows:

		For the six months ended June 30,
				2007
						Aggregate
				Weighted		intrinsic
				average		value (in
	Shares			exercise price		thousands)
Outstanding at beginning of year		2,068,558		$	9.63
Granted		—			—
Exercised		(21,447	)		7.17
Forfeited		—			—
Outstanding at end of period		2,047,111		$	9.65	$	2,636
Options exercisable at end of period		2,047,111		$	9.65	$	2,636

Information related to the stock option plan during the quarter follows:

	June 30,
	2007
Intrinsic value of options exercised	$	77
Cash received from option exercises		153
Tax benefit realized from option exercises		—
Weighted average fair value of options granted		—

Outstanding stock options have a weighted average remaining life of 5.51 years and may be exercised in the range of $6.66 to $12.73.

On April 26, 2007, shareholders approved the United Community Financial Corp. 2007 Long-Term Incentive Plan (2007 Plan). The purpose of the 2007 Plan is the same as that of the 1999 Plan. The 2007 Plan provides for the issuance of up to 2,000,000 shares and are to be used for awards of restricted stock shares, stock options, performance awards, stock appreciation rights (SARs), or other forms of stock-based incentive awards. No awards have been granted under the 2007 Plan.

6

     4. SECURITIES

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

	June 30, 2007							December 31, 2006
					(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	$	94,613	$	—	$	(1,436	)	$	96,847	$	63	$	(722	)
Equity securities		7,802		599		(135	)		7,866		641		(112	)
Mortgage-related securities		147,221		11		(4,560	)		132,818		131		(1,870	)
Total	$	249,636	$	610	$	(6,131	)	$	237,531	$	835	$	(2,704	)

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

	June 30,		December 31,
	2007		2006
	(Dollars in thousands)
Obligations of U.S. Government	$	833	$	1,296
State and municipal obligations		5,890		8,606
Corporate bonds, debentures and notes		271		258
Mutual funds, stocks and warrants		637		626
Total trading securities	$	7,631	$	10,786

     5. LOANS

Portfolio loans consist of the following:

	June 30,			December 31,
	2007			2006
	(Dollars in thousands)
Real Estate:
One- to four-family residential	$	889,007		$	854,829
Multifamily residential		166,036			163,541
Nonresidential		351,130			348,528
Land		24,605			26,684
Construction:
One- to four-family residential		379,655			388,926
Multifamily and non-residential		17,324			25,215
Total real estate		1,827,757			1,807,723
Consumer		350,333			345,607
Commercial		88,986			116,952
Total loans		2,267,076			2,270,282
Less:
Allowance for loan losses		19,395			16,955
Deferred loan fees, net		(781	)		(232	)
Total		18,614			16,723
Loans, net	$	2,248,462		$	2,253,559

7

Changes in the allowance for loan loss are as follows:

	As of or For the
	Six Months			As of or For the
	Ended			Year Ended
	June 30,			December 31,
	2007			2006
	(Dollars in thousands)
Balance, beginning of year	$	16,955		$	15,723
Provision for loan losses		5,069			4,347
Amounts charged off		(2,875	)		(3,438	)
Recoveries		246			323
Balance, end of period	$	19,395		$	16,955

Non-accrual loans were $69.8 million and $52.6 million at June 30, 2007 and December 31, 2006, respectively. Restructured loans were $2.5 million at June 30, 2007 and $1.4 million at December 31, 2006. Loans greater than 90 days past due and still accruing interest were $1.8 million and $796,000 at June 30, 2007 and December 31, 2006, respectively.

Impaired loans consist of the following:

	As of or For		As of or For
	the Six		the Year
	Months Ended		Ended
	June 30,		December 31,
	2007		2006
	(Dollars in thousands)
Impaired loans on which no specific valuation allowance was provided	$	38,043	$	28,329
Impaired loans on which a specific valuation allowance was provided		20,514		14,217
Total impaired loans at period-end	$	58,557	$	42,546
Specific valuation allowances on impaired loans at period-end	$	4,879	$	2,841
Average impaired loans during the period		49,695		23,617
Interest income recognized during impairment		169		372
Cash basis interest recognized		169		373

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     6. MORTGAGE BANKING ACTIVITIES

Mortgage loans serviced for others, which are not reported in United Community’s assets, totaled $871.3 million at June 30, 2007 and $861.5 million at December 31, 2006.

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,
	2007			2006
	(Dollars in thousands)
Balance, beginning of year	$	6,820		$	6,923
Originations		585			1,917
Sale of servicing		—			(323	)
Amortized to expense		(873	)		(1,697	)
Balance, end of period	$	6,532		$	6,820

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

	June 30,			December 31,
	2007			2006
	(Dollars in thousands)
Balance, beginning of year	$	(435	)	$	—
Impairment charges		—			(435	)
Recoveries		435			—
Balance, end of period	$	—		$	(435	)

Fair value of mortgage servicing rights as of June 30, 2007 was approximately $10.6 million and at December 31, 2006 was $9.3 million.

Key economic assumptions in measuring the value of mortgage servicing rights at June 30, 2007 and December 31, 2006 were as follows:

	June 30,		December 31,
	2007		2006
Weighted average prepayment rate	197 PSA		261 PSA
Weighted average life (in years)		4.20		4.50
Weighted average discount rate		8%		8%

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     7. OTHER POSTRETIREMENT BENEFIT PLANS

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

Components of net periodic benefit cost are as follows:

	Three Months Ended June 30,
	2007			2006
	(Dollars in thousands)
Service cost	$	—		$	—
Interest cost		55			55
Expected return on plan assets		—			—
Net amortization of prior service cost		—			—
Recognized net actuarial gain		—			—
Net periodic benefit cost/(gain)	$	55		$	55
Assumptions used in the valuations were as follows:
Weighted average discount rate		5.50	%		5.50	%

	Six Months Ended June 30,
	2007			2006
	(Dollars in thousands)
Service cost	$	—		$	—
Interest cost		111			112
Expected return on plan assets		—			—
Net amortization of prior service cost		—			—
Recognized net actuarial gain		—			—
Net periodic benefit cost/(gain)	$	111		$	112
Assumptions used in the valuations were as follows:
Weighted average discount rate		5.50	%		5.50	%

10

     8. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURE

Supplemental disclosures of cash flow information are summarized below.

	June 30, 2007		June 30, 2006
	(Dollars in thousands)
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest on deposits and borrowings, net of amounts capitalized	$	43,901	$	38,868
Interest capitalized on borrowings		13		16
Income taxes		6,881		6,550
Supplemental schedule of noncash activities:
Transfers from loans to real estate owned and other repossessed assets		8,687		1,895

     9. 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, 2007 and 2006 are as follows:

	For the Three Months Ended June 30, 2007
	Banking		Investment
	Services		Services		Total
	(Dollars in thousands)
Interest income	$	41,696	$	308	$	42,004
Interest expense		23,761		91		23,852
Provision for loan loss		2,744		—		2,744
Net interest income after provision for loan loss		15,191		217		15,408
Non-interest income		3,698		8,519		12,217
Non-interest expense		13,760		7,740		21,500
Income before tax		5,129		996		6,125
Income tax expense		1,864		331		2,195
Net income	$	3,265	$	665	$	3,930

	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

11

	For the Six Months Ended June 30, 2007
	Banking		Investment
	Services		Services		Total
	(Dollars in thousands)
Interest income	$	84,265	$	564	$	84,829
Interest expense		47,092		184		47,276
Provision for loan loss		5,069		—		5,069
Net interest income after provision for loan loss		32,104		380		32,484
Non-interest income		7,315		16,319		23,634
Non-interest expense		27,848		14,894		42,742
Income before tax		11,571		1,805		13,376
Income tax expense		4,162		614		4,776
Net income	$	7,409	$	1,191	$	8,600

	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

12

     10. 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 717,247 shares that were antidilutive for the period ending June 30, 2007 and 746,097 shares that were antidilutive for the period ending June 30, 2006.

	For the Three Months
	Ended June 30,
	2007		2006
	(Dollars in thousands,
	except per share data)
Net income applicable to common stock	$	3,930	$	6,250
Weighted average common shares outstanding		28,769		29,029
Dilutive effect of stock options		255		361
Weighted average common shares outstanding for dilutive computation		29,024		29,390
Basic earnings per share as reported	$	0.14	$	0.22
Diluted earnings per share as reported	$	0.13	$	0.21

	For the Six Months
	Ended June 30,
	2007		2006
	(Dollars in thousands,
	except per share data)
Net income applicable to common stock	$	8,600	$	12,382
Weighted average common shares outstanding		28,946		29,009
Dilutive effect of stock options		291		379
Weighted average common shares outstanding for dilutive computation		29,237		29,388
Basic earnings per share as reported	$	0.30	$	0.43
Diluted earnings per share as reported	$	0.29	$	0.42

     11. SUBSEQUENT EVENT

On July 24, 2007 United Community Financial Corp. (United Community) executed a definitive agreement for United Community to acquire PVF Capital Corp., the holding company for Park View Federal Savings Bank located in Solon, Ohio. Subject to approval of regulatory authorities, PVF Capital Corp. shareholders and United Community shareholders, each share of PVF Capital Corp. common stock will be exchanged for, at the election of each shareholder, $18.50 in cash, or 1.852 shares of United Community common stock, or a combination of $9.25 in cash and 0.926 shares of United Community common stock. The transaction is anticipated to be completed at or near the end of the year. United Community will account for the acquisition as a purchase and will include PVF Capital Corp.’s results of operations from the effective date of the acquisition in the appropriate financial statements. At the time of the announcement, PVF Capital Corp. had total assets of $908 million. Based on the closing price of United Community common stock as quoted on the Nasdaq Global Market of $7.52 on July 24, 2007, the parties value the consideration at $16.21 per share of PVF Capital Corp. common stock, for a total transaction consideration of $130.8 million. The complete copy of the press release announcing the acquisition can be found as an exhibit to Form 8-K filed with the Securities and Exchange Commission on July 26, 2007.

13

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

Selected financial ratios and other data: (1)

	At or For the Three						At or For the Six
	Months Ended						Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
Performance ratios:
Return on average assets (2)		0.58	%		0.95	%		0.64	%		0.96	%
Return on average equity (3)		5.49	%		9.13	%		5.99	%		9.09	%
Interest rate spread (4)		2.37	%		2.97	%		2.47	%		3.01	%
Net interest margin (5)		2.83	%		3.38	%		2.93	%		3.41	%
Noninterest expense to average assets		3.18	%		3.07	%		3.16	%		3.14	%
Efficiency ratio (6)		69.72	%		65.33	%		69.14	%		65.87	%
Average interest-earning assets to average interest-bearing liabilities		112.49	%		112.42	%		112.60	%		112.64	%
Capital ratios:
Average equity to average assets		10.58	%		10.44	%		10.61	%		10.55	%
Equity to assets, end of period		10.17	%		10.22	%		10.17	%		10.22	%
Tier 1 leverage ratio		7.95	%		8.49	%		7.95	%		8.49	%
Tier 1 risk-based capital ratio		9.96	%		10.34	%		9.96	%		10.34	%
Total risk-based capital ratio		12.29	%		11.10	%		12.29	%		11.10	%
Asset quality ratios:
Nonperforming loans to net loans at end of period (7)		3.30	%		1.33	%		3.30	%		1.33	%
Nonperforming assets to average assets (8)		3.10	%		1.23	%		3.10	%		1.25	%
Nonperforming assets to total assets at end of period		3.10	%		1.22	%		3.10	%		1.22	%
Allowance for loan losses as a percent of loans		0.86	%		0.72	%		0.86	%		0.72	%
Allowance for loan losses as a percent of non-performing loans (7)		26.17	%		54.42	%		26.17	%		54.42	%
Office data:
Number of full service banking offices		38			37			38			37
Number of loan production offices		5			6			5			6
Number of brokerage offices		20			20			20			20
Number of trust offices		2			2			2			2
Per share data:
Basic earnings per share (9)	$	0.14		$	0.22		$	0.30		$	0.43
Diluted earnings per share (9)	$	0.13		$	0.21		$	0.29		$	0.42
Book value (10)	$	9.11		$	8.72		$	9.11		$	8.72
Tangible book value (11)	$	7.95		$	7.58		$	7.95		$	7.58
Market value as a percent of book value (12)		110	%		138	%		110	%		138	%

(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.

14

Forward Looking Statements

When used in this Form 10-Q the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in United Community’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in Home Savings’ market area, demand for investments in Butler Wick’s market area and competition, that could cause actual results to differ materially from results presently anticipated or projected. United Community cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. United Community advises readers that the factors listed above could affect United Community’s financial performance and could cause United Community’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

Comparison of Financial Condition at June 30, 2007 and December 31, 2006

Total assets increased by $2.6 million to $2.7 billion at June 30, 2007, compared to December 31, 2006. The net change in assets was a result of increases of $12.1 million in available for sale securities, $6.6 million in real estate owned and other repossessed assets, $778,000 in premises and equipment and $3.4 million in other assets. These increases were offset by decreases in cash and cash equivalents of $1.4 million, trading securities of $3.2 million, net loans of $5.1 million and loans held for sale of $10.5 million.

Cash and cash equivalents decreased $1.3 million, or 3.7%, during the first six months of 2007. The reduction is attributable to decreases at Home Savings in currency to be delivered to branches of $3.2 million and cash on deposit at the Federal Reserve of $2.2 million. These decreases were offset by an increase in correspondent bank account balances at Home Savings of $922,000 and an increase in cash on deposit with other institutions at Butler Wick of $2.8 million. Cash and cash equivalents on hand at Butler Wick have an inverse relationship with their trading securities portfolio. Therefore, as securities were sold, cash increased.

The trading securities portfolio decreased $3.2 million, or 29.3%, to $7.6 million at June 30, 2007, from $10.8 million at December 31, 2006. This change was a result of decreases in Butler Wick’s portfolio of $2.8 million in municipal securities and $413,000 in government securities.

Net available for sale securities increased $12.1 million, or 5.1%, from December 31, 2006 to June 30, 2007. Home Savings had purchases of $42.8 million to replace scheduled maturities and runoff within its portfolio while Butler Wick had purchases of $2.9 million. These purchases were offset by paydowns and maturities of $28.2 million at Home Savings and $1.8 million at Butler Wick. The remaining difference is primarily a result of changes in the market valuation of the portfolio, net of any amortization or accretion.

Net loans declined $5.1 million from December 31, 2006 to June 30, 2007. Real estate loans increased $37.2 million and consumer loans increased $4.7 million. These increases were offset by decreases in construction loans of $17.2 million and commercial loans of $28.0 million.

The allowance for loan losses increased to $19.4 million at June 30, 2007, from $17.0 million at December 31, 2006 as a result of a loan loss provision of $5.1 million which was partially offset by net chargeoffs, primarily in the commercial and consumer portfolios. 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, nonperforming 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 0.86% at June 30, 2007, compared to 0.75% at December 31, 2006. See Note 5 to the financial statements for a summary of the allowance for loan losses. The following table summarizes the trend in the allowance for loan losses for the first six months of 2007.

15

	Allowance For										Allowance For
	Loan Losses at										Loan Losses at
	December 31, 2006		Provision			Recovery		Chargeoff			June 30, 2007
Real Estate Loans
Permanent
One-to four-family	$	2,234	$	610		$	6	$	(357	)	$	2,493
Multifamily residential		818		359			—		(21	)		1,156
Nonresidential		2,256		(84	)		—		—			2,172
Land		151		5			—		—			156
Total		5,459		890			6		(378	)		5,977
Construction Loans
One-to four-family residential		3,092		1,462			—		(76	)		4,478
Multifamily and nonresidential		229		(67	)		—		—			162
Total		3,321		1,395			—		(76	)		4,640
Consumer Loans
Home Equity		1,046		(121	)		—		(100	)		825
Auto		510		13			14		(59	)		478
Marine		991		1,076			6		(400	)		1,673
Recreational vehicle		1,888		531			1		(375	)		2,045
Other		712		(82	)		218		(246	)		602
Total		5,147		1,417			239		(1,180	)		5,623
Commercial Loans
Secured		1,936		1,345			—		(1,241	)		2,040
Unsecured		1,092		22			1		—			1,115
Total		3,028		1,367			1		(1,241	)		3,155
Total Allowance	$	16,955	$	5,069		$	246	$	(2,875	)	$	19,395

The provision for loan losses of $5.1 million during the first six months of 2007 can be attributed to the overall increase in nonperforming loans. Nonperforming loans consist of loans past due 90 days or more, loans past due less than 90 days that are on nonaccrual status, and restructured loans. Nonperforming loans were $74.1 million at June 30, 2007, compared to $54.8 million at December 31, 2006. The schedule below summarizes the trend in nonperforming loans for the first six months of 2007.

16

Nonperforming Loans
			December 31,					2007 Interest
	June 30, 2007		2006		Change			Foregone
Real Estate Loans
Permanent
One-to four-family	$	10,787	$	8,976	$	1,811		$	60
Multifamily residential		8,648		2,642		6,006			278
Nonresidential		14,522		13,941		581			525
Land		3,700		6,699		(2,999	)		265
Total		37,657		32,258		5,399			1,128
Construction Loans
One-to four-family residential		22,375		11,853		10,522			1,173
Multifamily and nonresidential		825		2,533		(1,708	)		(100	)
Total		23,200		14,386		8,814			1,073
Consumer Loans
Home Equity		1,429		1,374		55			17
Auto		206		252		(46	)		—
Boat		1,678		1,383		295			8
Recreational vehicle		300		540		(240	)		(1	)
Other		334		252		82			25
Total		3,947		3,801		146			49
Commercial Loans
Secured		5,604		2,380		3,224			219
Unsecured		1,201		617		584			30
Total		6,805		2,997		3,808			249
Restructured Loans		2,515		1,385		1,130			—
Total Nonperforming Loans	$	74,124	$	54,827	$	19,297		$	2,499

The $8.8 million increase in nonperforming construction and multifamily loans is primarily a result of two lending relationships totaling $7.5 million. The increase in nonperforming commercial loans is a result of one lending relationship.

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect both the contractual interest payments and the contractual principal payments, as scheduled in the loan agreement. The net increase in impaired loans, as shown in the following table, of $16.0 million during the period relates to a commercial loan relationship secured by marine assets totaling $3.7 million and deterioration in the construction loan portfolio and multi-family loan portfolio that caused impaired loans to increase $8.8 million and $6.0 million respectively for those two portfolios. The schedule below summarizes impaired loans for the first six months of 2007.

17

Impaired Loans
			December 31,
	June 30, 2007		2006		Change
Real Estate Loans
Permanent
One-to four-family	$	1,515	$	794	$	721
Multifamily residential		8,648		2,642		6,006
Nonresidential		14,522		13,927		595
Land		3,700		6,699		(2,999	)
Total		28,385		24,062		4,323
Construction Loans
One-to four-family residential		20,864		11,698		9,166
Multifamily and nonresidential		825		2,533		(1,708	)
Total		21,689		14,231		7,458
Consumer Loans
Home Equity		—		—		—
Auto		—		—		—
Boat		1,678		1,377		301
Recreational vehicle		—		—		—
Other		—		—		—
Total		1,678		1,377		301
Commercial Loans
Secured		5,604		2,282		3,322
Unsecured		1,201		594		607
Total		6,805		2,876		3,929
Total Impaired Loans	$	58,557	$	42,546	$	16,011

Other nonperforming assets, consisting of real estate and other consumer property acquired in the settlement of loans, were $9.8 million at June 30, 2007, compared to $3.2 million at December 31, 2006. The increase is primarily attributable to a $2.9 million loan secured by land and a $1.7 million construction loan secured by a mini-storage facility that was taken into possession by the Company. Other consumer property, such as boats, recreational vehicles and automobiles that were received by the Company in the satisfaction of loans makes up the remainder of the change. The resolution and reduction of the level of nonperforming loans and other nonperforming assets remains a top priority with management.

Loans held for sale decreased $10.5 million, or 38.8%, to $16.5 million at June 30, 2007, compared to $27.0 million at December 31, 2006. Loan sales of $121.5 million during the six month period exceeded principal disbursed on loans held for sale of $109.8 million. 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 anticipates fewer originations, which will result in fewer loan sales and reduced gains from sales.

Federal Home Loan Bank stock remained at $25.4 million at June 30, 2007, compared to December 31, 2006. During the first half of 2007, the Federal Home Loan Bank paid cash dividends in lieu of a stock dividend.

Premises and equipment increased $778,000 million, or 3.1%, due to the cost of construction of a new Home Savings branch along with renovations to other branches. The total cost of the branch and renovations aggregated $1.6 million. These capitalized expenditures were offset by an increase in accumulated depreciation of $1.3 million.

Accrued interest receivable decreased $535,000 to $13.2 million at June 30, 2007, compared to $13.7 million at December 31, 2006. Home Savings had increases of accrued interest due from mortgage loans of $1.4 million and commercial loans of $850,000, which were offset by a decrease in interest accrued on consumer loans of $95,000 and an increase in reserves for uncollected interest on mortgage loans of $1.4 million and commercial loans of $1.1 million. The increase in the reserves for uncollected interest is directly affected by any increase in loans on non-accrual status. This, too, will be monitored closely as a component of nonperforming loans.

18

Other assets increased $3.4 million to $16.7 million at June 30, 2007, compared to $13.2 million at December 31, 2006. Home Savings had an increase in prepaid Ohio franchise tax of $1.1 million offset by decreases in other prepaid expenses of $170,000 and deferred federal income tax of $1.3 million. Butler Wick had an increase in receivables due from customers and brokers of $2.0 million offset by a decrease in other assets, such as deferred taxes and prepaid assets, of $1.3 million.

Total deposits decreased $21.7 million to $1.8 billion at June 30, 2007, compared to December 31, 2006. This change was due primarily to a decrease of $48.9 million in certificates of deposit and a decrease of $3.9 million in savings accounts offset by a $31.1 million increase in money market accounts and other demand deposit accounts.

Federal Home Loan Bank advances decreased $12.4 million during the first six months of 2007, reflecting a decline in overnight advances of $60.6 million and paydown of term advances of $16.8 million offset by new term advances of $65.0 million. Repurchase agreements and other borrowed funds increased $43.6 million to $142.1 million at June 30, 2007 from $98.5 million at December 31, 2006.

Advance payments by borrowers for taxes and insurance decreased $3.1 million during the first six months of 2007. Payments for real estate taxes and property insurance made on behalf of customers of Home Savings account for $558,000 of the decrease. Also, funds held for payments received on loans sold where servicing was retained by Home Savings decreased $2.6 million.

Accrued interest payable increased $3.4 million during the first half of 2007 largely due to the accrual of interest on certificates of deposit of $2.9 million and an increase in accrued interest on other borrowed funds of $612,000.

Accrued expenses and other liabilities decreased $1.2 million, or 7.7% to $14.0 million at June 30, 2007 from $15.2 million at December 31, 2006. Home Savings had decreases in accrued federal income tax expenses of $2.2 million due to reduced income and accrued payroll tax expense of $1.1 million. Butler Wick had an increase in securities sold but not yet settled of $1.2 million.

Shareholders’ equity decreased $6.0 million, to $275.3 million at June 30, 2007, from $281.3 million at December 31, 2006. Earnings from Home Savings and Butler Wick for the first six months of 2007 were offset by dividend payments to shareholders of $5.5 million and an increase in treasury stock of $8.5 million, as a result of the purchase of approximately 786,000 shares during the period.

Comparison of Operating Results for the Three Months Ended
June 30, 2007 and June 30, 2006

Net Income.Net income for the three months ended June 30, 2007, was $3.9 million, or $0.13 per diluted share, compared to net income of $6.3 million, or $0.21 per diluted share, for the three months ended June 30, 2006. During the second quarter of 2007, net interest income decreased $2.9 million, the provision for loan losses increased $1.9 million and non-interest expense increased $1.4 million. These changes were offset by an increase in non-interest income of $2.7 million and a decrease in the provision for income taxes of $1.2 million. The Company’s annualized return on average assets and return on average equity were 0.58% and 5.49%, respectively, for the three months ended June 30, 2007. The annualized return on average assets and return on average equity for the comparable period in 2006 were 0.95% and 9.13%, respectively.

Net Interest Income.Net interest income for the quarter ended June 30, 2007, was $18.2 million compared to $21.0 million for the same period last year. Interest income increased $357,000 for the second quarter of 2007 compared to the second quarter of 2006. The change in interest income was primarily due to an increase in income on available for sale securities of $733,000. Interest earned on available for sale securities increased as the average balance of those assets grew by $39.7 million and the yield earned on those securities increased 47 basis points. Partially offsetting these increases was a decrease in interest earned on margin accounts of $367,000. As mentioned in prior reports, in the third quarter of 2006, management of Butler Wick decided to outsource the clearing function in an effort to increase efficiency in the investment services business segment. The decrease in margin account interest is a direct result of the outsourcing of this function. The average yield on interest earning assets decreased 14 basis points to 6.56% for the three months ended June 30, 2007, compared to 6.70% for the three months ended June 30, 2006.

Total interest expense increased $3.2 million for the quarter ended June 30, 2007, as compared to the same quarter last year. The increase was due primarily to rising interest expense on deposits of $2.7 million, repurchase agreements and other borrowings of $537,000 and Federal Home Loan Bank advances of $29,000.

The primary cause of the increase in interest expense on deposits was an increase in interest paid on certificates of deposit, which was $1.7 million greater in the second quarter of 2007 compared to the same period in 2006. Additionally, interest expense on NOW and

19

money market accounts was $1.0 million higher in the second quarter of 2007 compared to the same period in 2006. Home Savings had an increase in the average balance of certificates of deposit of $11.5 million as well as an increase of 57 basis points paid on those deposits. The average balance of NOW and money market accounts increased $68.8 million and the rate paid on those deposits increased 50 basis points. The increase in interest expense on Federal Home Loan Bank advances was due to an increase in the cost of those funds of 23 basis points. Interest expense on repurchase agreements and other borrowed funds increased primarily as a result of an increase of 37 basis points paid for those funds.

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, 2007, was 2.37% compared to 2.97% for the quarter ended June 30, 2006. Net interest margin compressed 55 basis points to 2.83% for the three months ended June 30, 2007 compared to 3.38% for the same quarter in 2006.

	For the Three Months Ended June 30,
	2007 vs. 2006
	Increase						Total
	(decrease) due to						increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	(22,163	)	$	22,117		$	(46	)
Loans held for sale		1,026			(1,217	)		(191	)
Investment securities:
Trading		(11	)		(6	)		(17	)
Available for sale		270			463			733
Margin accounts		(183	)		(184	)		(367	)
FHLB stock		47			16			63
Other interest-earning assets		137			45			182
Total interest-earning assets	$	(20,877	)	$	21,234		$	357
Interest-bearing liabilities:
Savings accounts		—			(33	)		(33	)
NOW and money market accounts		450			561			1,011
Certificates of deposit		1,576			121			1,697
Federal Home Loan Bank advances		190			(161	)		29
Repurchase agreements and other		103			434			537
Total interest-bearing liabilities	$	2,319		$	922			3,241
Change in net interest income							$	(2,884	)

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 $1.9 million, to $2.7 million for the three months ended June 30, 2007, compared to $812,000 for the same period in 2006. The $2.7 million provision was affected significantly by nonperforming construction loans totaling $8.8 million. The credit quality of these loans deteriorated significantly during the second quarter and a provision was allocated to these loans based on information available at that time. The Company may incur an additional provision in future quarters as more information becomes available concerning the collectability of these loans. These relationships continue to be monitored and evaluated by management.

Non-interest Income.Non-interest income increased $2.7 million, or 28.2%, to $12.2 million for the three months ended June 30, 2007, from $9.5 million for the three months ended June 30, 2006, due to increases in brokerage commissions, service fees and other charges, underwriting and investment banking activity and gains on trading securities and loans sold. These increases were offset by an increase in other net losses recognized as a result of the sale of real estate owned and other repossessed assets.

Non-interest Expense.Total non-interest expense increased $1.4 million for the three months ended June 30, 2007, compared to the three months ended June 30, 2006. The increase is due primarily to an increase in salaries and employee benefits.

20

Comparison of Operating Results for the Six Months Ended
June 30, 2007 and June 30, 2006

Net Income.Net income for the six months ended June 30, 2007, was $8.6 million, or $0.29 per diluted share, compared to net income of $12.4 million, or $0.42 per diluted share, for the six months ended June 30, 2006. During the first half of 2007, net interest income decreased $4.2 million, the provision for loan losses increased $3.5 million and non-interest expense increased $2.3 million. These changes were offset by an increase in non-interest income of $4.3 million and a decrease in the provision for income taxes of $1.9 million. The Company’s annualized return on average assets and return on average equity were 0.64% and 5.99%, respectively, for the six months ended June 30, 2007. The annualized return on average assets and return on average equity for the comparable period in 2006 were 0.96% and 9.09%, respectively.

Net Interest Income.Net interest income for the six months ended June 30, 2007, was $37.6 million compared to $41.7 million for the same period last year. Interest income increased $4.6 million for the first half of 2007 compared to the first half of 2006. The change in interest income was primarily due to an increase in income on net loans of $3.8 million as a result of an increase in the average balance of outstanding loans of $111.8 million. The average yield on interest earning assets increased 6 basis points to 6.62% for the six months ended June 30, 2007, compared to 6.56% for the six months ended June 30, 2006. Interest earned on available for sale securities increased $1.5 million as the average balance of those assets grew by $38.6 million and the yield earned on those securities increased 50 basis points. Partially offsetting these increases was a decrease in interest earned on margin accounts of $707,000. As mentioned above, in the third quarter of 2006, management of Butler Wick decided to outsource the clearing function in an effort to increase efficiency in the investment services business segment. The decrease in margin account interest is a direct result of the outsourcing of this function.

Total interest expense increased $8.7 million for the six months ended June 30, 2007, as compared to the same period last year. The increase was due primarily to rising interest expense on deposits of $7.0 million, repurchase agreements and other borrowings of $1.0 million and Federal Home Loan Bank advances of $746,000.

The primary reason for the rise in interest expense on deposits was an increase in interest paid on certificates of deposit, which was $4.4 million greater in the first half of 2007 compared to the same period in 2006. Additionally, interest expense on NOW and money market accounts was $2.7 million higher in the first half of 2007 compared to the same period in 2006. Home Savings had an increase in the average balance of certificates of deposit of $38.3 million as well as an increase of 64 basis points paid on those deposits. The average balance of NOW and money market accounts increased $83.5 million and the rate paid on those deposits increased 80 basis points. The increase in interest expense on Federal Home Loan Bank advances was due to an increase in the cost of those funds of 41 basis points. Interest expense on repurchase agreements and other borrowed funds increased primarily as a result of an increase of 53 basis points paid for those funds.

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, 2007, was 2.47% compared to 3.01% for the six months ended June 30, 2006. Net interest margin compressed 48 basis points to 2.93% for the six months ended June 30, 2007 compared to 3.41% for the same period in 2006.

21

	For the Six Months Ended June 30,
	2007 vs. 2006
	Increase						Total
	(decrease) due to						increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	29		$	3,818		$	3,847
Loans held for sale		183			(626	)		(443	)
Investment securities:
Trading		(22	)		(15	)		(37	)
Available for sale		564			889			1,453
Margin accounts		(353	)		(354	)		(707	)
FHLB stock		86			37			123
Other interest-earning assets		236			84			320
Total interest-earning assets	$	723		$	3,833		$	4,556
Interest-bearing liabilities:
Savings accounts		2			(86	)		(84	)
NOW and money market accounts		1,392			1,271			2,663
Certificates of deposit		3,604			794			4,398
Federal Home Loan Bank advances		892			(146	)		746
Repurchase agreements and other		279			726			1,005
Total interest-bearing liabilities	$	6,169		$	2,559			8,728
Change in net interest income							$	(4,172	)

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 $3.5 million, to $5.1 million for the six months ended June 30, 2007, compared to $1.6 million for the same period in 2006. The $5.1 million provision was affected significantly by one commercial loan relationship secured by marine assets totaling $3.7 million that became impaired during the first quarter and nonperforming construction loans totaling $8.8 million that became impaired during the second quarter. The Company may incur an additional provision in future quarters as more information becomes available concerning the collectability of these loans. These relationships continue to be monitored and evaluated by management.

Non-interest Income.Non-interest income increased $4.3 million, or 22.2%, to $23.6 million for the six months ended June 30, 2007, from $19.3 million for the six months ended June 30, 2006, due to increases in brokerage commissions, service fees and other charges, underwriting and investment banking activity and gains on trading securities and loans sold. These increases were offset by an increase in other net losses recognized as a result of the sale of real estate owned and other repossessed assets.

Non-interest Expense.Total non-interest expense increased $2.3 million for the six months ended June 30, 2007, compared to the six months ended June 30, 2006. The increase is due primarily to a rise in employee compensation and benefits.

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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 three month periods ended June 30, 2007 and 2006. Average balance calculations were based on daily balances.

	Three Months Ended June 30,
	2007							2006
	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)	$	2,248,849	$	37,915		6.74	%	$	2,175,424	$	37,961		6.98	%
Net loans held for sale		17,163		289		6.74	%		42,931		480		4.47	%
Investment securities:
Trading		6,748		63		3.73	%		7,359		80		4.35	%
Available for sale		256,214		3,099		4.84	%		216,544		2,366		4.37	%
Margin accounts		—		—		0.00	%		16,366		367		8.97	%
FHLB stock		25,432		412		6.48	%		24,350		349		5.73	%
Other interest-earning assets		7,683		226		11.77	%		4,596		44		3.83	%
Total interest-earning assets		2,562,089		42,004		6.56	%		2,487,570		41,647		6.70	%
Noninterest-earning assets		144,534							135,647
Total assets	$	2,706,623						$	2,623,217
Interest-bearing liabilities:
NOW and money market accounts	$	399,187	$	3,477		3.48	%	$	330,408	$	2,466		2.99	%
Savings accounts		191,455		196		0.41	%		223,236		229		0.41	%
Certificates of deposit		1,111,291		13,155		4.74	%		1,099,823		11,458		4.17	%
Federal Home Loan Bank advances		434,387		5,280		4.86	%		453,654		5,251		4.63	%
Repurchase agreements and other		141,343		1,744		4.94	%		105,633		1,207		4.57	%
					��
Total interest-bearing liabilities		2,277,663		23,852		4.19	%		2,212,754		20,611		3.73	%
Noninterest-bearing liabilities		142,647							136,572
Total liabilities		2,420,310							2,349,326
Equity		286,313							273,891
Total liabilities and equity	$	2,706,623						$	2,623,217
Net interest income and interest rate spread			$	18,152		2.37	%			$	21,036		2.97	%
Net interest margin						2.83	%						3.38	%
Average interest-earning assets to average interest-bearing liabilities						112.49	%						112.42	%

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

23

UNITED COMMUNITY FINANCIAL CORP.

AVERAGE BALANCE SHEETS

The following table presents the total dollar amounts of interest income and interest expense on the indicated amounts of average interest-earning assets or interest-bearing liabilities together with the weighted average interest rates for the six month periods ended June 30, 2007 and 2006. Average balance calculations were based on daily balances.

	Six Months Ended June 30,
	2007							2006
	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)	$	2,251,840	$	76,918		6.83	%	$	2,140,079	$	73,071		6.83	%
Net loans held for sale		20,156		545		5.41	%		42,114		988		4.69	%
Investment securities:
Trading		6,905		125		3.62	%		7,676		162		4.22	%
Available for sale		251,615		6,033		4.80	%		212,989		4,580		4.30	%
Margin accounts		—		—		0.00	%		15,996		707		8.84	%
FHLB stock		25,432		812		6.39	%		24,181		689		5.70	%
Other interest-earning assets		7,175		396		11.04	%		4,174		76		3.64	%
Total interest-earning assets		2,563,123		84,829		6.62	%		2,447,209		80,273		6.56	%
Noninterest-earning assets		141,914							134,890
Total assets	$	2,705,037						$	2,582,099
Interest-bearing liabilities:
NOW and money market accounts	$	388,609	$	6,723		3.46	%	$	305,081	$	4,060		2.66	%
Savings accounts		192,829		394		0.41	%		234,800		478		0.41	%
Certificates of deposit		1,130,838		26,433		4.67	%		1,092,551		22,035		4.03	%
Federal Home Loan Bank advances		437,536		10,627		4.86	%		444,231		9,881		4.45	%
Repurchase agreements and other		126,426		3,099		4.90	%		95,869		2,094		4.37	%
Total interest-bearing liabilities		2,276,238		47,276		4.15	%		2,172,532		38,548		3.55	%
Noninterest-bearing liabilities		141,687							137,281
Total liabilities		2,417,925							2,309,813
Equity		287,112							272,286
Total liabilities and equity	$	2,705,037						$	2,582,099
Net interest income and interest rate spread			$	37,553		2.47	%			$	41,725		3.01	%
Net interest margin						2.93	%						3.41	%
Average interest-earning assets to average interest-bearing liabilities						112.60	%						112.64	%

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

24

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, 2007, 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, 2007
	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	8.86%	5.00%	(1.88)%	$(8,845)	(15.00)%	(12.01)%
+200	9.55	6.00	(1.19)	(5,765)	(10.00)	(7.83)
+100	10.16	6.00	(0.58)	(2,742)	(5.00)	(3.72)
Static	10.74	7.00	—	—	—	—
(100)	10.53	6.00	(0.21)	2,740	(5.00)	3.72
(200)	9.89	6.00	(0.85)	3,350	(15.00)	4.55
(300)	8.61	5.00	(2.13)	4.841	(20.00)	6.58

25

Year Ended December 31, 2006
NPV as % of portfolio value of assets										Next 12 months net interest income
										(Dollars in thousands)
Change in rates				Internal policy									Internal policy
(Basis points)	NPV Ratio			limitations			Change in %			$ Change			limitations			% Change
+300		8.92	%		5.00	%		(2.27	)%	$	(10,078	)		(15.00	)%		(13.95	)%
+200		9.81			6.00			(1.38	)		(6,455	)		(10.00	)		(8.94	)
+100		10.60			6.00			(0.59	)		(2,972	)		(5.00	)		(4.12	)
Static		11.19			7.00			—			—			—			—
(100)		11.19			6.00			—			2,651			(5.00	)		3.67
(200)		10.62			6.00			(0.57	)		3,548			(15.00	)		4.91
(300)		9.69			5.00			(1.50	)		2,254			(20.00	)		3.12

Due to changes in the composition of Home Savings’ funding mix since December 2006, Home Savings reduced some of its sensitivity to rising rates. Home Savings remains liability sensitive. 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.

Over the last year, Home Savings’ margin has been negatively impacted due to a flat yield curve. Home Savings is pursuing strategies to mitigate the effects of the flat yield curve but without some steepening of the curve, margin pressure will most likely continue for the remainder of the year.

ITEM 4. Controls and Procedures

An evaluation was carried out by United Community’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of United Community’s disclosure controls and procedures (as defined in Rules 13a-15(e)/15d-15(e) of the Securities Exchange Act of 1934) as of June 30, 2007. 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, 2007, 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.

26

PART II. OTHER INFORMATION

UNITED COMMUNITY FINANCIAL CORP.

ITEM 1 — Legal Proceedings

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

ITEM 1A — Risk Factors

There have been no significant changes in the Company’s risk factors as outlined in the Company’s Form 10K for the period ended December 31, 2006.

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
					Part of Publicly		Be Purchased Under
	Total Number of		Average Price Paid		Announced Plans or		the Plans or
Period	Shares Purchased		per Share		Programs		Programs
4/1 to 4/30/2007		—	$	—		—		2,090,187	(1)
5/1 to 5/31/2007		250,523		10.54		250,523		1,839,664
6/1 to 6/30/2007		197,409		10.63		197,409		1,642,255
Total		447,932	$	10.58		447,932		1,642,255

(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. On April 30, 2007, United Community announced that its Board of Directors had approved a plan to repurchase an additional 2,000,000 shares of stock.

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

27

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, 2007	/S/ Douglas M. McKay
	Douglas M. McKay, Chief Executive Officer
Date: August 8, 2007	/S/ Patrick A. Kelly
	Patrick A. Kelly, Chief Financial Officer

28

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.

29