10-Q

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, 2005

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

For the transition period from                      to                     

Commission File Number 0-24399

UNITED COMMUNITY FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

Ohio	34-1856319
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)

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

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

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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ                     No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

31,011,701 common shares as of July 29, 2005.

TABLE OF CONTENTS

	PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of June 30, 2005 (Unaudited) and December 31, 2004		1
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2005 and 2004 (Unaudited)		2
Consolidated Statement of Shareholders’ Equity for the six months ended June 30, 2005 (Unaudited)		3
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004 (Unaudited)		4
Notes to Consolidated Financial Statements		5 - 12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13-21
Item 3. Quantitative and Qualitative Disclosures about Market Risk		22
Item 4. Controls and Procedures		23
Part II. OTHER INFORMATION
Item 1. Legal Proceedings		24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		24
Item 3. Defaults Upon Senior Securities (None)
Item 4. Submission of Matters to a Vote of Security Holders		24
Item 5. Other Information (None)
Item 6. Exhibits		25
Signatures		26
Exhibits		27-30
EX-31.1 Certification
EX-31.2 Certification
EX-32 Certification

PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)

	June 30,			December 31,
	2005			2004
	(Dollars in thousands)
Assets:
Cash and deposits with banks	$	36,305		$	36,886
Federal funds sold and other		1,513			3,395
Total cash and cash equivalents		37,818			40,281
Securities:
Trading, at fair value		37,899			32,316
Available for sale, at fair value		180,297			198,404
Loans, net of allowance for loan losses of $15,116 and $15,877, respectively		1,992,703			1,815,976
Loans held for sale		25,221			59,099
Margin accounts		16,193			14,851
Federal Home Loan Bank stock, at cost		23,376			22,842
Premises and equipment, net		22,661			20,793
Accrued interest receivable		10,638			9,445
Real estate owned and other repossessed assets		3,133			1,682
Goodwill		33,593			33,593
Core deposit intangible		2,532			2,887
Cash surrender value of life insurance		21,828			21,406
Other assets		14,207			14,213
Total assets	$	2,422,099		$	2,287,788
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Interest bearing	$	1,497,755		$	1,437,987
Non-interest bearing		86,143			84,965
Total deposits		1,583,898			1,522,952
Borrowed funds:
Short-term		409,415			275,583
Long-term		141,587			207,920
Total borrowed funds		551,002			483,503
Advance payments by borrowers for taxes and insurance		11,046			12,048
Accrued interest payable		1,521			1,089
Accrued expenses and other liabilities		17,284			15,844
Total liabilities		2,164,751			2,035,436
Shareholders’ Equity
Preferred stock-no par value; 1,000,000 shares authorized and unissued at June 30, 2005		—			—
Common stock-no par value; 499,000,000 shares authorized; 37,804,457 shares issued		143,010			142,337
Retained earnings		200,190			193,690
Accumulated other comprehensive income		34			1,063
Unearned stock compensation		(14,019	)		(14,930	)
Treasury stock, at cost, 6,793,231 and 6,602,477 shares, respectively		(71,867	)		(69,808	)
Total shareholders’ equity		257,348			252,352
Total liabilities and shareholders’ equity	$	2,422,099		$	2,287,788

See Notes to Consolidated Financial Statements.

1

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

	For the Three Months Ended					For the Six Months Ended
	June 30,					June 30,
	2005		2004			2005		2004
	(Dollars in thousands, except per share data)
Interest income
Loans	$	29,890	$	25,273		$	57,608	$	49,614
Loans held for sale		297		220			805		444
Securities:
Trading		330		162			576		267
Available for sale		1,741		1,581			3,495		3,592
Margin accounts		293		173			564		338
Federal Home Loan Bank stock dividends		281		220			534		438
Other interest earning assets		21		10			36		21
Total interest income		32,853		27,639			63,618		54,714
Interest expense
Interest expense on deposits		8,918		6,689			16,947		13,233
Interest expense on borrowed funds		4,600		2,799			8,582		5,321
Total interest expense		13,518		9,488			25,529		18,554
Net interest income		19,335		18,151			38,089		36,160
Provision for loan losses		418		1,369			1,051		1,828
Net interest income after provision for loan losses		18,917		16,782			37,038		34,332
Non-interest income
Brokerage commissions		4,603		3,895			9,227		8,547
Service fees and other charges		3,073		2,699			6,190		5,589
Underwriting and investment banking		487		202			607		574
Net gains (losses):
Available for sale securities		—		385			239		1,073
Trading securities		249		(76	)		31		73
Loans sold		651		788			899		1,689
Other		52		12			56		3
Other income		1,182		761			1,913		1,449
Total non-interest income		10,297		8,666			19,162		18,997
Non-interest expense
Salaries and employee benefits		12,510		11,153			25,122		23,819
Occupancy		968		919			2,015		1,834
Equipment and data processing		2,175		2,201			4,504		4,535
Franchise tax		488		429			1,014		860
Advertising		554		600			858		1,219
Amortization of core deposit intangible		169		229			355		486
Other expenses		2,535		2,239			5,187		4,532
Total non-interest expenses		19,399		17,770			39,055		37,285
Income before income taxes		9,815		7,678			17,145		16,044
Income taxes		3,317		2,676			5,766		5,569
Net income	$	6,498	$	5,002		$	11,379	$	10,475
Comprehensive income	$	7,945	$	2,460		$	10,350	$	8,448
Earnings per share
Basic	$	0.23	$	0.17		$	0.40	$	0.35
Diluted	$	0.22	$	0.17		$	0.39	$	0.35

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
						(In thousands, except per share data)
Balance December 31, 2004		31,202		$	142,337	$	193,690		$	1,063		$	(14,930	)	$	(69,808	)	$	252,352
Comprehensive income:
Net income							11,379												11,379
Change in net unrealized gain/(loss) on securities, net of taxes of $(554)										(1,029	)								(1,029	)
Comprehensive income							11,379			(1,029	)								10,350
Shares allocated to ESOP participants					673								911						1,584
Purchase of treasury stock		(233	)													(2,499	)		(2,499	)
Exercise of stock options		42					(138	)								440			302
Dividends paid, $0.165 per share							(4,741	)											(4,741	)
Balance June 30, 2005		31,011		$	143,010	$	200,190		$	34		$	(14,019	)	$	(71,867	)	$	257,348

See Notes to Consolidated Financial Statements.

3

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Six Months Ended June 30,
	2005			2004
	(Dollars in thousands)
Cash Flows from Operating Activities
Net income	$	11,379		$	10,475
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,051			1,828
Net gains		(1,194	)		(2,765	)
Amortization of premiums and accretion of discounts		1,822			2,523
Depreciation and amortization		1,188			1,536
ESOP compensation		1,584			1,810
FHLB stock dividends		(534	)		(438	)
Increase in trading securities		(5,583	)		(13,968	)
(Increase) decrease in margin accounts		(1,342	)		189
Increase in interest receivable		(1,193	)		(428	)
Increase in prepaid and other assets		(1,163	)		(7,186	)
Increase in interest payable		432			76
Net principal disbursed on loans held for sale		(89,223	)		(77,160	)
Proceeds from sale of loans held for sale		86,939			98,385
Increase in other liabilities		1,993			1,302
Net cash from operating activities		6,156			16,179
Cash Flows from Investing Activities
Proceeds from principal repayments and maturities of:
Available for sale securities		30,370			29,575
Proceeds from sale of:
Available for sale securities		17,328			48,324
Real estate owned and other repossessed assets		1,064			1,643
Commercial loan participations		1,500			20,976
Non-performing loans		6,173			—
Premises and equipment		—			1
Purchases of:
Securities available for sale		(31,320	)		(51,771	)
Net principal disbursed on loans		(34,297	)		(111,641	)
Loans purchased		(116,936	)		(89,945	)
Purchases of premises and equipment		(3,039	)		(1,658	)
Net cash from investing activities		(129,157	)		(154,496	)
Cash Flows from Financing Activities
Net (decrease) increase in NOW, savings and money market accounts		(56,464	)		5,636
Net increase in certificates of deposit		117,443			20,925
Net decrease in advance payments by borrowers for taxes and insurance		(1,002	)		(1,500	)
Proceeds from FHLB advances and other long term debt		10,000			15,000
Repayment of FHLB advances and other long term debt		(1,332	)		(331	)
Net change in other borrowed funds		58,831			105,370
Dividends paid		(4,741	)		(4,262	)
Proceeds from the exercise of stock options		302			6,251
Purchase of treasury stock		(2,499	)		(47,804	)
Net cash from financing activities		120,538			99,285
Decrease in cash and cash equivalents		(2,463	)		(39,032	)
Cash and cash equivalents, beginning of period		40,281			81,155
Cash and cash equivalents, end of period	$	37,818		$	42,123
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest on deposits and borrowings, net of amounts capitalized	$	25,097		$	18,478
Interest capitalized on borrowings		15			—
Income taxes		1,541			5,620
Supplemental schedule of noncash activities:
Loans transferred to the portfolio from held for sale		37,075			—
Transfers from loans to real estate owned and other repossessed assets		2,458			979

See Notes to Consolidated Financial Statements.

4

UNITED COMMUNITY FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     1. BASIS OF PRESENTATION

United Community Financial Corp. (United Community) was incorporated under Ohio law in February 1998 by The Home Savings and Loan Company of Youngstown, Ohio (Home Savings) in connection with the conversion of Home Savings from an Ohio mutual savings and loan association to an Ohio capital stock savings and loan association (Conversion). Upon consummation of the Conversion on July 8, 1998, United Community became the unitary savings and loan holding company for Home Savings. During 2003, Home Savings changed its charter to a state savings bank. Home Savings has 36 full service offices and six loan production offices throughout northern and central Ohio and western Pennsylvania. Butler Wick Corp. (Butler Wick) became a wholly owned subsidiary of United Community on August 12, 1999. Butler Wick is the parent company for two wholly owned subsidiaries: Butler Wick & Co., Inc. and Butler Wick Trust Company. Butler Wick has 14 office locations providing a full range of investment alternatives for individuals, companies and not-for-profit organizations throughout Ohio and western Pennsylvania.

The accompanying consolidated financial statements of United Community have been prepared in accordance with instructions 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, 2005, are not necessarily indicative of the results to be expected for the year ending December 31, 2005. The consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2004, contained in United Community’s Form 10-K for the year ended December 31, 2004.

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

     2. STOCK COMPENSATION

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

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

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2005		2004		2005		2004
	(Dollars in thousands,				(Dollars in thousands,
	except per share data)				except per share data)
Net income as reported	$	6,498	$	5,002	$	11,379	$	10,475
Deduct: Stock-based compensation expense determined under fair value method		—		—		—		1,855
Pro Forma net income	$	6,498	$	5,002	$	11,379	$	8,620
Basic earnings per share as reported	$	0.23	$	0.17	$	0.40	$	0.35
Pro forma basic earnings per share	$	0.23	$	0.17	$	0.40	$	0.29
Diluted earnings per share as reported	$	0.22	$	0.17	$	0.39	$	0.35
Pro forma diluted earnings per share	$	0.22	$	0.17	$	0.39	$	0.29

5

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

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

     3. SECURITIES

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

	June 30, 2005							December 31, 2004
					(Dollars in thousands)
			Gross		Gross					Gross		Gross
	Fair		Unrealized		Unrealized			Fair		Unrealized		Unrealized
	Value		Gains		Losses			Value		Gains		Losses
U.S. Treasury and agency securities	$	78,716	$	12	$	(592	)	$	88,317	$	7	$	(417	)
Tax exempt municipal obligation		7		1		—			7		1		—
Equity securities		6,458		737		(78	)		7,169		1,459		—
Mortgage-related securities		99,116		394		(501	)		102,911		869		(364	)
Total	$	180,297	$	1,144	$	(1,171	)	$	198,404	$	2,336	$	(781	)

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

	June 30,		December 31,
	2005		2004
	(Dollars in thousands)
Debt Securities:
Obligations of U.S. government	$	29,500	$	28,587
State and municipal obligations		1,144		1,657
Corporate bonds, debentures and notes		123		60
Mortgage-related securities		5,162		—
Mutual funds		1,970		2,012
Total trading securities	$	37,899	$	32,316

6

     4. LOANS

Portfolio loans consist of the following:

	June 30,		December 31,
	2005		2004
	(Dollars in thousands)
Real Estate:
One- to four-family residential	$	747,826	$	690,413
Multifamily residential		151,781		153,011
Nonresidential		306,922		289,755
Land		14,234		14,701
Construction:
One- to four-family residential		356,822		301,193
Multifamily and non-residential		55,994		47,230
Total real estate		1,633,579		1,496,303
Consumer		299,000		267,646
Commercial		76,535		68,523
Total loans		2,009,114		1,832,472
Less:
Allowance for loan losses		15,116		15,877
Deferred loan fees, net		1,295		619
Total		16,411		16,496
Loans, net	$	1,992,703	$	1,815,976

Changes in the allowance for loan loss are as follows:

	June 30,			December 31,
	2005			2004
	(Dollars in thousands)
Balance, beginning of year	$	15,877		$	15,111
Provision for loan losses		1,051			9,370
Amounts charged off		(2,370	)		(9,060	)
Recoveries		558			456
Balance, end of period	$	15,116		$	15,877

Nonaccrual loans were $25.0 million and $20.9 million at June 30, 2005 and December 31, 2004, respectively. Restructured loans were $1.2 million and $1.3 million at June 30, 2005 and December 31, 2004, respectively. Loans greater than ninety days past due and still accruing were $1.0 million and $377,000 at June 30, 2005 and December 31, 2004, respectively.

7

     Impaired loans consist of the following:

	As of or For		As of or For
	the Six		the Twelve
	Months Ended		Months Ended
	June 30,		December 31,
	2005		2004
	(Dollars in thousands)
Impaired loans on which no specific valuation allowance was provided	$	6,332	$	7,898
Impaired loans on which a specific valuation allowance was provided		5,599		7,320
Total impaired loans at period-end	$	11,931	$	15,218
Specific valuation allowances on impaired loans at period-end	$	836	$	1,691
Average impaired loans during the period		13,604		10,683
Interest income recognized on impaired loans during the period		160		134
Interest income received on impaired loans during the period		140		307
Interest income foregone based on original contract terms of impaired loans		570		685

     5. MORTGAGE BANKING ACTIVITIES

Mortgage loans serviced for others, which are not reported in United Community’s assets, totaled $692.5 million at June 30, 2005 and $667.0 million at December 31, 2004.

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

	June 30,			December 31,
	2005			2004
	(Dollars in thousands)
Balance, beginning of year	$	5,533		$	5,557
Originations		863			1,629
Amortized to expense		(744	)		(1,653	)
Balance, end of period	$	5,652		$	5,533

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

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

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

	June 30, 2005			December 31, 2004
Weighted average prepayment rate	299.67 PSA			281.39 PSA
Weighted average life (in years)		5.15			5.41
Weighted average discount rate		8	%		8	%

8

     6. OTHER POSTRETIREMENT BENEFIT PLANS

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

Components of net periodic benefit cost are as follows:

	For the Three Months Ended
	June 30,
	2005			2004
	(Dollars in thousands)
Service cost	$	1		$	2
Interest cost		50			57
Expected return on plan assets		—			—
Net amortization of prior service cost		—			—
Recognized net actuarial gain		—			—
Net periodic benefit cost	$	51		$	59
Assumptions used in the valuations were as follows:
Weighted average discount rate		5.75	%		6.00	%

	For the Six Months Ended
	June 30,
	2005			2004
	(Dollars in thousands)
Service cost	$	2		$	4
Interest cost		100			114
Expected return on plan assets		—			—
Net amortization of prior service cost		—			—
Recognized net actuarial gain		—			—
Net periodic benefit cost	$	102		$	118
Assumptions used in the valuations were as follows:
Weighted average discount rate		5.75	%		6.00	%

     7. LONG-TERM INCENTIVE PLAN

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

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

9

	For the Six Months Ended June 30,
	2005					2004
				Weighted					Weighted
				average					average
				exercise					exercise
	Shares			price		Shares			price
Outstanding at beginning of year		2,309,748		$	9.49		2,468,622		$	7.60
Granted		—			—		754,403			12.73
Exercised		(41,646	)		7.26		(875,228	)		7.01
Forfeited		—			—		—			—
Outstanding at end of period		2,268,102		$	9.54		2,347,797		$	9.46
Options exercisable at end of period		2,268,102		$	9.54		2,347,797		$	9.46
Weighted-average fair value of options granted during year				$	—				$	3.13

10

     8. SEGMENT INFORMATION

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

	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 Three Months Ended June 30, 2004
	Banking		Investment
	Services		Services		Total
	(Dollars in thousands)
Interest income	$	27,283	$	356	$	27,639
Interest expense		9,409		79		9,488
Provision for loan loss		1,369		—		1,369
Net interest income after provision for loan loss		16,505		277		16,782
Non-interest income		3,125		5,541		8,666
Non-interest expense		11,992		5,778		17,770
Income before tax		7,638		40		7,678
Income tax expense		2,661		15		2,676
Net income	$	4,977	$	25	$	5,002

	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

11

	For the Six Months Ended June 30, 2004
	Banking		Investment
	Services		Services		Total
	(Dollars in thousands)
Interest income	$	54,071	$	643	$	54,714
Interest expense		18,435		119		18,554
Provision for loan loss		1,828		—		1,828
Net interest income after provision for loan loss		33,808		524		34,332
Non-interest income		6,729		12,268		18,997
Non-interest expense		24,928		12,357		37,285
Income before tax		15,609		435		16,044
Income tax expense		5,435		134		5,569
Net income	$	10,174	$	301	$	10,475

     9. EARNINGS PER SHARE

Earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of shares determined for the basic computation plus the dilutive effect of potential common shares that could be issued under outstanding stock options and restricted stock awards. There were stock options for 754,403 shares that were antidilutive at June 30, 2005 and June 30, 2004.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
	(In thousands,				(In thousands,
	except per share data)				except per share data)
Net income applicable to common stock	$	6,498	$	5,002	$	11,379	$	10,475
Weighted average common shares outstanding		28,779		28,537		28,797		29,699
Dilutive effect of stock options		321		470		322		463
Weighted average common shares outstanding for dilutive computation		29,100		29,007		29,119		30,162
Earnings per share:
Basic	$	0.23	$	0.17	$	0.40	$	0.35
Diluted	$	0.22	$	0.17	$	0.39	$	0.35

     10. LOSS CONTINGENCY

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

12

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,
	2005			2004			2005			2004
Selected financial ratios and other data: (1)
Performance ratios:
Return on average assets (2)		1.09	%		0.94	%		0.97	%		1.00	%
Return on average equity (3)		10.09	%		8.12	%		8.86	%		8.06	%
Interest rate spread (4)		3.15	%		3.39	%		3.17	%		3.43	%
Net interest margin (5)		3.44	%		3.64	%		3.45	%		3.70	%
Non-interest expense to average assets		3.25	%		3.34	%		3.33	%		3.57	%
Efficiency ratio (6)		65.56	%		66.20	%		67.98	%		68.14	%
Average interest-earning assets to average interest- bearing liabilities		112.25	%		113.04	%		112.26	%		114.10	%
Capital ratios:
Average equity to average assets		10.79	%		11.59	%		10.95	%		12.45	%
Equity to assets, end of period		10.62	%		11.19	%		10.62	%		11.19	%
Tier 1 leverage ratio		8.46	%		8.33	%		8.46	%		8.33	%
Tier 1 risk-based capital ratio		10.04	%		9.49	%		10.04	%		9.49	%
Total risk-based capital ratio		10.83	%		10.40	%		10.83	%		10.40	%
Asset quality ratios:
Non-performing loans to total loans at end of period (7)		1.36	%		0.77	%		1.36	%		0.77	%
Non-performing assets to average assets (8)		1.27	%		0.66	%		1.29	%		0.69	%
Non-performing assets to total assets at end of period		1.25	%		0.66	%		1.25	%		0.66	%
Allowance for loan losses as a percent of loans		0.75	%		0.92	%		0.75	%		0.92	%
Allowance for loan losses as a percent of non-performing loans (7)		55.56	%		118.81	%		55.56	%		118.81	%
Office data:
Number of full service banking offices		36			35			36			35
Number of loan production offices		6			5			6			5
Number of brokerage offices		12			12			12			12
Number of trust offices		2			2			2			2
Per share data:
Basic earnings per share (9)	$	0.23		$	0.17		$	0.40		$	0.35
Diluted earnings per share (9)	$	0.22		$	0.17		$	0.39		$	0.35
Book value (10)	$	8.30		$	7.84		$	8.30		$	7.84
Tangible book value (11)	$	7.13		$	6.65		$	7.13		$	6.65
Market value as a percent of book value (12)		132	%		166	%		132	%		166	%

(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 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.

13

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, 2005 and December 31, 2004

Total assets increased by $134.3 million, or 5.9%, to $2.4 billion at June 30, 2005, compared to December 31, 2004. The net change in assets was a result of increases of $176.7 million in net loans, $5.6 million in trading securities, $1.8 million in premises and equipment and $1.5 million in real estate owned and other repossessed assets. These increases were offset partially by decreases of $33.9 in loans held for sale, $18.1 million in available for sale securities and $2.5 million in cash and cash equivalents. Total liabilities increased $129.3 million primarily as a result of a $67.5 million increase in borrowed funds, a $59.8 million increase in interest-bearing deposits and a $1.4 million increase in accrued expenses and other liabilities.

Cash and cash equivalents decreased $2.5 million, or 6.1% during the first six months of 2005. The reduction is attributable to a decrease in federal funds sold by Home Savings as excess funds were used partially to fund loan growth.

Trading securities increased $5.6 million or 17.3% to $37.8 million at June 30, 2005, from $32.3 million at December 31, 2004. The change was a result of Butler Wick taking advantage of interest rate opportunities in the federal agency market place.

Available for sale securities decreased $18.1 million or 9.1% from December 31, 2004 to June 30, 2005, as a result of sales aggregating $17.1 million coupled with paydowns and maturities of $30.3 million. Purchases of $31.3 million in securities partially offset the decrease.

During the first quarter of 2005, Home Savings reclassified approximately $37.1 million in fixed-rate, fixed-term second mortgage loans from held for sale to the loan portfolio. In connection with the reclassification, a charge of $244,000 was recorded to write the loans down to their fair market value. This transfer, along with $34.3 million of loan originations net of repayments, $116.9 million of loan purchases and the sale of $6.2 million in non-performing loans and $1.5 million of commercial loan participations, resulted in net loans increasing by $176.7 million, or 9.7%, from December 31, 2004 to June 30, 2005. No gains or losses were recorded on the sale of non-performing loans. Home Savings had increases of $72.9 million in real estate loans, $64.4 million in construction loans, $31.4 million in consumer loans and $8.0 million in commercial loans.

Loans held for sale decreased $33.8 million, or 57.3%, to $25.2 million at June 30, 2005, compared to $59.1 million at December 31, 2004. This change is due to the reclassification discussed above, along with the net impact of loan originations, purchases and sales. Home Savings sells loans as part of its risk management strategy and anticipates continuing to do so in the future. Home Savings also purchases loans, both for its portfolio and to be sold in the secondary market. As interest rates continue to rise, management anticipates lower originations, resulting in fewer loan sales and reduced gains from those sales.

The allowance for loan losses decreased to $15.1 million at June 30, 2005, from $15.9 million at December 31, 2004. A substantial portion of the decrease is attributable to the continued resolution of marine lending credit issues that existed in 2004. The allowance for loan losses is monitored closely and may increase or decrease depending on a variety of factors such as levels and trends of delinquencies, chargeoffs and recoveries, non-performing loans, and potential risk in the portfolios. Management has developed and maintains an appropriate, systematic and consistently applied process to determine the amount of allowance and provision for loan losses. It is management’s intent to build procedural discipline and consistency into the allowance for loan losses process. See Note 4 to the financial statements for a summary of the allowance for loan losses. The allowance for loan losses as a percentage of net loans (coverage ratio) decreased to 0.75% at June 30, 2005, compared to 0.87% at December 31, 2004. The twelve basis point decrease in the coverage ratio is a result of the allocated portion of the allowance for loan losses for marine lending decreasing.

The total outstanding balance of all impaired loans was $11.9 million at June 30, 2005. 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 $5.0 million to $27.2 million during the first six months of 2005. Real estate owned increased $586,000 and repossessed assets also increased $861,000. Total non-performing loans were 1.36% of net loans at June 30, 2005, up from 1.22% of net loans at December 31, 2004, primarily as a result of loans past due 90 days increasing $6.6 million. A substantial portion of the increase in loans past due 90 days is attributable to one borrowing relationship. The allowance for loan losses as a percentage of non-performing loans was 55.6% at

14

June 30, 2005, compared to 71.6% at December 31, 2004. Total non-performing assets were 1.25% of total assets at June 30, 2005, compared to 1.04% at December 31, 2004.

Premises and equipment increased $1.9 million from December 31, 2004 to June 30, 2005. The increase was due to capitalization of additional expenses related to the construction of a new branch, which opened in the first quarter of 2005. Land purchased for possible branch expansion also contributed to the increase.

Accrued interest receivable increased $1.2 million or 12.6% to $10.6 million at June 30, 2005, compared to $9.4 million at December 31, 2004. The change was due primarily to increases of accrued interest due from mortgage loans of $896,000, commercial loans of $602,000, line of credit interest and fees of $64,000 and investment securities at Home Savings of $9,000. Butler Wick also contributed to the increase with an increase of $30,000 in interest receivable from investments. An increase in the reserve for uncollected commercial loan interest during the first half of 2005 of $541,000 partially offset the above mentioned increases.

Total deposits increased $60.9 million, or 4.0% from December 31, 2004 to June 30, 2005. This increase was due mainly to a $117.4 million increase in certificates of deposit offset by decreases of $39.6 million in demand deposit accounts and $14.2 million in savings accounts.

Borrowed funds, consisting of both long- and short-term debt, increased $67.5 million to $551.0 million at June 30, 2005, compared to $483.5 million at December 31, 2004. The change was due to an increase in overnight advances from the Federal Home Loan Bank (FHLB) by Home Savings of $47.3 million, long-term advances by Home Savings of $8.7 million and short-term borrowings by Butler Wick of $6.7 million. The borrowings were used to fund loan growth in excess of deposit growth and to fund security purchases at Butler Wick.

Shareholders’ equity increased $5.0 million, to $257.3 million at June 30, 2005, from $252.3 million at December 31, 2004. Earnings from Home Savings of $10.7 million and $729,000 from Butler Wick for the first six months of 2005 were offset by dividend payments to shareholders’ of $4.7 million and a decrease in other comprehensive income of $1.0 million as a result of the market valuation of available for sale securities.

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

Net Income. Net income for the three months ended June 30, 2005 was $6.5 million, or $0.22 per diluted share, compared to net income of $5.0 million, or $0.17 per diluted share, for the three months ended June 30, 2004. Net interest income increased $1.2 million and the provision for loan losses decreased $951,000. Noninterest income increased $1.6 million to $10.3 million and noninterest expense increased $1.6 million to $19.4 million. United Community’s annualized return on average assets and return on average equity were 1.09% and 10.09%, respectively, for the three months ended June 30, 2005. The annualized return on average assets and return on average equity for the comparable period in 2004 were 0.94% and 8.12%, respectively.

Net Interest Income. Net interest income for the quarter ended June 30, 2005 was $19.3 million compared to $18.2 million for the same period last year. Interest income increased $5.2 million for the second quarter of 2005 compared to the second quarter of 2004. The change was caused by an increase in income on net loans of $4.6 million as a result of an increase in the average balance of $243.1 million. Interest earned on loans held for sale increased $77,000 as a result of a $3.1 million increase in the average balance of those assets. The average balance of trading securities increased $19.9 million, causing an increase in interest earned of $168,000. Interest earned on margin accounts at Butler Wick increased $120,000 as the average balance of those assets grew by $1.5 million and the yield earned increased 2.63% over the same period in 2004. Interest earned on available for sale securities also grew as a result of a rise in the yield on those assets of 60 basis points.

Total interest expense increased $4.0 million for the quarter ended June 30, 2005, as compared to the same quarter last year. The increase was due to rising interest expense on deposits of $2.2 million and borrowed funds of $1.8 million.

Interest expense on certificates of deposit was $2.1 million greater in the second quarter of 2005 compared to the same period in 2004 and was the primary reason for the increase in interest expense on total deposits. Home Savings had an increase in the average balance of certificates of deposit of $156.6 million as well as an increase of 39 basis points paid on those deposits.

The increase in interest expense on borrowed funds was due to growth in the average balance of those liabilities and an increase in the cost of those funds of 67 basis points. $129.4 million of the balance of borrowed funds increased because demand for funds for loan originations was greater than the increase in deposits.

15

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, 2005 was 3.15% compared to 3.39% for the quarter ended June 30, 2004. Net interest margin declined 20 basis points to 3.44% for the three months ended June 30, 2005 compared to 3.64% for the same quarter in 2004.

	For the Three Months Ended June 30,
	2005 vs. 2004
	Increase						Total
	(decrease) due to						increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	919		$	3,698		$	4,617
Loans held for sale		41			36			77
Investment securities:
Trading		38			130			168
Available for sale		261			(100	)		161
Margin accounts		100			20			120
FHLB stock		51			10			61
Other interest-earning assets		12			(2	)		10
Total interest-earning assets	$	1,422		$	3,792			5,214
Interest-bearing liabilities:
Savings accounts		(2	)		(22	)		(24	)
NOW and money market accounts		213			(43	)		170
Certificates of deposit		770			1,313			2,083
Borrowed funds		760			1,041			1,801
Total interest-bearing liabilities	$	1,741		$	2,289			4,030
Change in net interest income							$	1,184

Provision for Loan Losses. A provision for loan losses is charged to operations to bring the total allowance for loan losses to a level considered by management to be adequate to provide for probable incurred losses based on management’s evaluation of such factors as the delinquency status of loans, current economic conditions, the fair value of the underlying collateral, changes in the composition of the loan portfolio and prior loan loss experience. The provision for loan losses decreased in the second quarter by $951,000. This change was a result of a decrease in the provision for consumer loans of $712,000 and a decrease in the provision for commercial loans of $364,000 offset by an increase in the provision for real estate and construction loans of $124,000. The decrease in the provision loan consumer lending was the result of the continued resolution of marine lending issues. During the second quarter of 2005, $579,000 of consumer loans were charged off, net of recoveries.

Noninterest Income. Noninterest income increased $1.6 million, or 18.8%, from $8.7 million for the three months ended June 30, 2004, to $10.3 million for the three months ended June 30, 2005, primarily due to increases of $708,000 in brokerage commissions, $374,000 in service fees and other charges, $285,000 in underwriting and investment banking fees, $325,000 in gains recognized on trading securities and $421,000 in other income. The increase in brokerage commissions is a result of increased brokerage activity during the second quarter of 2005 compared to the second quarter of 2004. The increase in service fees and other charges was caused by a decrease at Home Savings of $209,000 in deferred mortgage servicing rights amortization, and an increase of $121,000 in loan servicing fee income and $73,000 in loan broker fee income. Butler Wick also had increases in service fees of $107,000 attributable primarily to trust services. These changes were offset by decreases at Home Savings in fees earned on the OverdraftHonor™ program of $74,000.

Noninterest Expense. Total noninterest expense increased $1.6 million to $19.4 million for the three months ended June 30, 2005, from $17.8 million for the three months ended June 30, 2004. The increase primarily is due to a $1.4 million increase in

16

salaries and employee benefits and a $296,000 increase in other expenses. These increases were offset partially by minimal decreases in advertising expense and amortization of the core deposit intangible.

Salaries and employee benefits expense increased as a result of increased healthcare costs at both Home Savings and Butler Wick. Bonus provisions and commissions paid to brokers at Butler Wick also contributed to the increase.

Federal Income Taxes. The provision for income taxes increased $641,000, or 24.0%, as a result of higher pretax income for the second quarter of 2005 compared to the second quarter of 2004. The effective tax rate for the quarter ending June 30, 2005 was 33.8% compared to 34.9% for the quarter ending June 30, 2004.

Comparison of Operating Results for the Six Months Ended
June 30, 2005 and June 30, 2004

Net Income. Net income for the six months ended June 30, 2005 was $11.4 million, or $0.39 per diluted share, compared to net income of $10.5 million, or $0.35 per diluted share, for the six months ended June 30, 2004. Net interest income increased $1.9 million to $38.1 million and the provision for loan losses decreased $777,000 to $1.1 million. Noninterest income increased $165,000 to $19.1 million and noninterest expense increased $1.8 million to $39.1 million. United Community’s annualized return on average assets and return on average equity were 0.97% and 8.86%, respectively, for the six months ended June 30, 2005. The annualized return on average assets and return on average equity for the comparable period in 2004 were 1.00% and 8.06%, respectively.

Net Interest Income. Net interest income for the six months ended June 30, 2005 was $38.1 million compared to $36.2 million for the same period last year. Interest income increased $8.9 million for the first six months of 2005 compared to the first six months of 2004. The change was caused by an increase in income on net loans of $8.0 million as a result of an increase in the average balance of $239.1 million. Interest earned on loans held for sale increased $361,000 as a result of a $16.0 million increase in the average balance of those assets. The average balance of trading securities grew by $19.0 million, resulting in an increase in interest earned of $309,000. Interest earned on margin accounts at Butler Wick grew by $226,000 as the average balance of those assets increased $1.5 million and the yield earned rose 2.46% over the same period in 2004.

Total interest expense increased $7.0 million for the six months ended June 30, 2005, as compared to the same period last year. The change was due to increases in interest expense on deposits of $3.7 million and borrowed funds of $3.3 million.

Interest expense on certificates of deposit was $15.0 million, up $3.5 million over the same period in 2004. Home Savings had an increase in the average balance of certificates of deposit of $136.2 million as well as an increase of 33 basis points paid on those deposits.

The change in interest expense on borrowed funds was due to an increase in the average balance of those liabilities of $150.4 million and an increase in cost of those funds of 40 basis points. Borrowed funds increased as demand for funds for loan originations was greater than the increase in deposits.

17

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, 2005 was 3.17% compared to 3.43% for the six months ended June 30, 2004. Net interest margin declined 25 basis points to 3.45% for the six months ended June 30, 2005 compared to 3.70% for the same period in 2004.

	For the Six Months Ended June 30,
	2005 vs. 2004
	Increase						Total
	(decrease) due to						increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	766		$	7,228		$	7,994
Loans held for sale		(1	)		362			361
Investment securities:
Trading		54			255			309
Available for sale		531			(628	)		(97	)
Margin accounts		186			40			226
FHLB stock		77			19			96
Other interest-earning assets		19			(4	)		15
Total interest-earning assets	$	1,632		$	7,272			8,904
Interest-bearing liabilities:
Savings accounts		(60	)		(33	)		(93	)
NOW and money market accounts		340			(66	)		274
Certificates of deposit		1,287			2,246			3,533
Other borrowed funds		780			2,481			3,261
Total interest-bearing liabilities	$	2,347		$	4,628			6,975
Change in net interest income							$	1,929

Provision for Loan Losses. A provision for loan losses is charged to operations to bring the total allowance for loan losses to a level considered by management to be adequate to provide for probable incurred losses based on management’s evaluation of such factors as the delinquency status of loans, current economic conditions, the fair value of the underlying collateral, changes in the composition of the loan portfolio and prior loan loss experience. The provision for loan losses decreased $777,000 in the first half of 2005, when compared to the first half of 2004. The change is a result of decreases in the provision for commercial loans of $712,000, real estate and construction loans $58,000 and consumer loans $7,000.

Noninterest Income. Noninterest income increased $165,000 for the six months ended June 30, 2005 compared to the same period in 2004. This change is due primarily to increases of $680,000 in brokerage commissions, $601,000 in service fees and other charges and $464,000 in other income. These increases were offset by decreases in the gains on sales of available for sale securities of $834,000 and the sale of loans of $790,000.

The increase in brokerage commissions is a result of increased brokerage activity during the first six months of 2005 compared to the first six months of 2004. The increase in service fees and other charges was caused by a decrease at Home Savings of $168,000 in deferred mortgage servicing rights amortization, and an increase of $236,000 in loan collection fee income and $120,000 in loan broker fee income. Butler Wick also had an increase in service fees of $297,000 attributable to trust services. These changes were offset by decreases at Home Savings in fees earned on the OverdraftHonor™ program of $135,000 and in the valuation of deferred mortgage servicing rights of $76,000.

18

The decrease in gains on available for sale securities is a result of the Company selling fewer securities than in the previous year. During the first six months of 2005, the Company sold approximately $17.1 million worth of available for sale securities. During the same period in 2004, sales of $40.8 million worth of available for sale securities were recorded. The decrease in gains on loans sold is attributable to sales of fewer originations in the first six months of 2005 compared to the first six months of 2004. During 2005, Home Savings sold approximately $95.3 million in loans compared to $117.7 million in 2004.

Noninterest Expense. Total noninterest expense increased $1.8 million to $39.1 million for the six months ended June 30, 2005, from $37.3 million for the six months ended June 30, 2004. The increase primarily is due to a $1.3 million increase in salaries and employee benefits and a $655,000 increase in other expenses. These increases were offset partially by decreases in advertising expense and amortization of the core deposit intangible.

Salaries and employee benefits expense increased as a result of increased healthcare costs at both Home Savings and Butler Wick. Bonus provisions and commissions paid to brokers at Butler Wick also contributed to the increase.

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

Federal Income Taxes. The provision for income taxes increased $197,000, as a result of higher pretax income for the first six months of 2005 compared to the first six months of 2004. The effective tax rate for the six months ending June 30, 2005 was 33.6% compared to 34.7% for the six months ending June 30, 2004.

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

	Three Months Ended June 30,
	2005							2004
	Average		Interest					Average		Interest
	Outstanding		Earned/		Yield/			Outstanding		Earned/		Yield/
	Balance		Paid		Cost			Balance		Paid		Cost
			(Dollars In thousands)
Interest-earning assets:
Net loans (1)	$	1,951,085	$	29,890		6.13	%	$	1,708,032	$	25,273		5.92	%
Net loans held for sale		23,435		297		5.07	%		20,345		220		4.33	%
Investment securities:
Trading		48,716		330		2.71	%		28,807		162		2.25	%
Available for sale		181,947		1,741		3.83	%		195,930		1,581		3.23	%
Margin accounts		15,432		293		7.59	%		13,950		173		4.96	%
FHLB stock		23,099		281		4.87	%		22,144		220		3.97	%
Other interest-earning assets		3,425		21		2.45	%		5,887		10		0.68	%
Total interest-earning assets		2,247,139		32,853		5.85	%		1,995,095		27,639		5.54	%
Noninterest-earning assets		140,804							132,463
Total assets	$	2,387,943						$	2,127,558
Interest-bearing liabilities:
NOW and money market accounts	$	273,570	$	702		1.03	%	$	300,957	$	532		0.71	%
Savings accounts		297,999		306		0.41	%		319,651		330		0.41	%
Certificates of deposit		904,932		7,910		3.50	%		748,365		5,827		3.11	%
Other borrowed funds		525,317		4,600		3.50	%		395,917		2,799		2.83	%
Total interest-bearing liabilities		2,001,818		13,518		2.70	%		1,764,890		9,488		2.15	%
Noninterest-bearing liabilities		128,425							116,177
Total liabilities		2,130,243							1,881,067
Equity		257,700							246,491
Total liabilities and equity	$	2,387,943						$	2,127,558
Net interest income and Interest rate spread			$	19,335		3.15	%			$	18,151		3.39	%
Net interest margin						3.44	%						3.64	%
Average interest-earning assets to average interest- bearing liabilities						112.25	%						113.04	%

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

20

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

	Six Months Ended June 30,
	2005							2004
	Average		Interest					Average		Interest
	Outstanding		Earned/		Yield/			Outstanding		Earned/		Yield/
	Balance		Paid		Cost			Balance		Paid		Cost
			(Dollars In thousands)
Interest-earning assets:
Net loans (1)	$	1,902,669	$	57,608		6.06	%	$	1,663,609	$	49,614		5.96	%
Net loans held for sale		35,505		805		4.53	%		19,550		444		4.54	%
Investment securities:
Trading		41,677		576		2.76	%		22,725		267		2.35	%
Available for sale		185,447		3,495		3.77	%		208,211		3,592		3.45	%
Margin accounts		15,378		564		7.34	%		13,866		338		4.88	%
FHLB stock		22,972		534		4.65	%		22,035		438		3.98	%
Other interest-earning assets		3,552		36		2.03	%		5,996		21		0.70	%
Total interest-earning assets		2,207,200		63,618		5.77	%		1,955,992		54,714		5.59	%
Noninterest-earning assets		139,464							130,783
Total assets	$	2,346,664						$	2,086,775
Interest-bearing liabilities:
NOW and money market accounts	$	283,369	$	1,375		0.97	%	$	302,999	$	1,101		0.73	%
Savings accounts		301,844		618		0.41	%		316,859		711		0.45	%
Certificates of deposit		875,454		14,954		3.42	%		739,253		11,421		3.09	%
Other borrowed funds		505,514		8,582		3.40	%		355,126		5,321		3.00	%
Total interest-bearing liabilities		1,966,181		25,529		2.60	%		1,714,237		18,554		2.16	%
Noninterest-bearing liabilities		123,530							112,764
Total liabilities		2,089,711							1,827,001
Equity		256,953							259,774
Total liabilities and equity	$	2,346,664						$	2,086,775
Net interest income and Interest rate spread			$	38,089		3.17	%			$	36,160		3.43	%
Net interest margin						3.45	%						3.70	%
Average interest-earning assets to average interest-bearing liabilities						112.26	%						114.10	%

(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 senior management in setting and implementing day to day operating strategies.

Quantitative Aspects of Market Risk. As part of its interest rate risk analysis, Home Savings uses the “net portfolio value” (NPV) methodology. Generally, NPV is the discounted present value of the difference between incoming cash flows on interest-earning and other assets and outgoing cash flows on interest-bearing and other liabilities. The application of the methodology attempts to quantify interest rate risk as the change in the NPV and net interest income that would result from various levels of theoretical basis point changes in market interest rates.

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

Presented below are analyses of Home Savings’ interest rate risk as measured by changes in NPV and net interest income for instantaneous and sustained parallel shifts of 100 basis point increments in market interest rates. As noted, for the quarter ended June 30, 2005, the percentage changes fall within the policy limits set by the Board of Directors of Home Savings as the minimum NPV ratio and the maximum change in interest income the Home Savings Board deems advisable in the event of various changes in interest rates. Home Savings continues to monitor its interest rate exposure to declining rates. See the table below for Board adopted policy limits.

Quarter Ended June 30, 2005
Change
in rates	NPV as % of portfolio value of assets									Next 12 months net interest income
(Basis				Internal policy									Internal policy
points)	NPV Ratio			limitations			Change in %			$ Change			limitations			% Change
+300		12.68	%		5.00	%		(0.63	)%	$	2,918			(15.00	)%		4.02	%
+200		13.12			6.00			(0.19	)		2,441			(10.00	)		3.37
+100		13.44			6.00			0.13			1,833			(5.00	)		2.53
Static		13.31			7.00			—			—			—			—
(100)		12.75			6.00			(0.56	)		(3,270	)		(5.00	)		(4.51	)
(200)		11.40			6.00			(1.91	)		(9,634	)		(15.00	)		(13.28	)
(300)		N/A			N/A			N/A			N/A			(20.00	)		N/A

N/A — Due to a continuing low interest environment, it is not possible to calculate results for these scenarios.

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

N/A — Due to a continuing low interest environment, it is not possible to calculate results for these scenarios.

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

As with any method of measuring interest rate risk, certain shortcomings are inherent in the NPV approach. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, expected rates of prepayment on loans and early withdrawal levels from certificates of deposit may deviate significantly from those assumed in making risk calculations.

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

ITEM 4. Controls and Procedures

An evaluation was carried out by United Community’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of United Community’s disclosure controls and procedures (as defined in Rules 13a-14(c)/15d-14(c) of the Securities Exchange Act of 1934) as of June 30, 2005. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that United Community’s disclosure controls and procedures are effective. During the quarter ended June 30, 2005, there were no changes in United Community’s internal controls over financial reporting that have materially affected or are reasonably likely to materially affect United Community’s internal control 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 involved in a number of legal proceedings arising out of their businesses and regularly face various claims, including unasserted claims, which may ultimately result in litigation. Management believes that the financial position, results of operations and cash flows would not be materially affected by the outcome of any pending or threatened legal proceedings, commitments or claims.

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

Issuer Purchases of Equity Securities

					Total Number of
					Shares Purchased as		Maximum Number of
					Part of Publicly		Shares that May Yet Be
	Total Number of		Average Price		Announced Plans or		Purchased Under the
Period	Shares Purchased		Paid per Share		Programs		Plans or Programs
4/1 to 4/30/2005		—	$	—		—		765,647	(1)
5/1 to 5/31/2005		79,100		10.54		79,100		686,547
6/1 to 6/30/2005		62,200		10.86		62,200		624,347
Total		141,300	$	10.68		141,300		624,347

(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 28, 2005, United Community held its Annual Meeting of Shareholders. In connection therewith, two matters were submitted to shareholders for a vote. First, shareholders elected three directors with terms expiring in 2007 by the following votes:

Director	For		Withheld
Richard J. Schiraldi		24,380,437		725,743
Herbert F. Schuler, Sr.		24,581,088		525,092
David C. Sweet		24,229,389		876,791

The shareholders also ratified the selection of Crowe Chizek and Company LLC as auditors for the 2005 fiscal year by the following vote:

For	Against		Abstain
24,500,279		209,197		396,704

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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 9, 2005		/s/ Douglas M. McKay
		Douglas M. McKay, Chief Executive Officer
Date: August 9, 2005		/s/ Patrick A. Kelly
		Patrick A. Kelly, Chief Financial Officer

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UNITED COMMUNITY FINANCIAL CORP.

Exhibit 3.1

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

Exhibit 3.2

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

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EX-31.1

EXHIBIT 31.1

RULE 13a-14(a)/15d-14(a) CERTIFICATION

I, Douglas M. McKay, certify that:

1)	I have reviewed this quarterly report on Form 10-Q of United Community Financial Corp.
2)	Based on my knowledge, this quarterly report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3)	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4)	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) and internal control over financial reporting (as defined in Exchange Act Rules 13a 15(f) and 15d 15(f)) for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
c)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing equivalent function):

a)	all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Douglas M. McKay

Douglas M. McKay

Chief Executive Officer

August 9, 2005

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EX-31.2

EXHIBIT 31.2

RULE 13a-14(a)/15d-14(a) CERTIFICATION

I, Patrick A. Kelly, certify that:

1)	I have reviewed this quarterly report on Form 10-Q of United Community Financial Corp.
2)	Based on my knowledge, this quarterly report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3)	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4)	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) and internal control over financial reporting (as defined in Exchange Act Rules 13a 15(f) and 15d 15(f)) for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
c)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing equivalent function):

a)	all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Patrick A. Kelly

Patrick A. Kelly

Chief Financial Officer

August 9, 2005

29

EX-32

EXHIBIT 32

UNITED COMMUNITY FINANCIAL CORP.

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Quarterly Report of United Community Financial Corp. (the “Company”) on Form 10-Q for the period ending June 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

     (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Douglas M. McKay	/s/ Patrick A. Kelly
Douglas M. McKay	Patrick A. Kelly
Chief Executive Officer	Chief Executive Officer
August 9, 2005	August 9, 2005

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

30