FORM 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 September 30, 2008


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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company 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. 30,051,773 common shares as of October 31, 2008.

PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)


	September 30,			December 31,
	2008			2007
	(Dollars in thousands)
Assets:
Cash and deposits with banks	$	29,096		$	33,266
Federal funds sold and other		4,050			4,097

Total cash and cash equivalents		33,146			37,363

Securities:
Trading, at fair value		10,364			5,064
Available for sale, at fair value		300,726			244,753
Loans, net of allowance for loan losses of $33,186 and $32,006, respectively		2,248,382			2,236,988
Loans held for sale		7,525			87,236
Federal Home Loan Bank stock, at cost		26,464			25,432
Premises and equipment, net		26,282			27,521
Accrued interest receivable		11,040			13,077
Real estate owned and other repossessed assets		20,549			10,510
Goodwill		—			33,593
Core deposit intangible		949			1,169
Cash surrender value of life insurance		24,764			24,053
Other assets		16,514			13,280

Total assets	$	2,726,705		$	2,760,039


Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Interest bearing	$	1,811,585		$	1,768,757
Non-interest bearing		105,489			106,449

Total deposits		1,917,074			1,875,206
Federal Home Loan Bank advances		418,434			437,253
Repurchase agreements and other borrowings		135,096			149,533
Advance payments by borrowers for taxes and insurance		11,766			17,853
Accrued interest payable		5,174			7,837
Accrued expenses and other liabilities		4,805			2,643

Total liabilities		2,492,349			2,490,325


Shareholders’ Equity
Preferred stock-no par value; 1,000,000 shares authorized and unissued		—			—
Common stock-no par value; 499,000,000 shares authorized; 37,804,457 shares issued and 30,051,773 shares outstanding		146,710			146,683
Retained earnings		177,881			213,727
Accumulated other comprehensive income (loss)		(245	)		661
Unearned employee stock ownership plan shares		(8,098	)		(9,465	)
Treasury stock, at cost, 7,752,684 shares		(81,892	)		(81,892	)

Total shareholders’ equity		234,356			269,714

Total liabilities and shareholders’ equity	$	2,726,705		$	2,760,039

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	(Dollars in thousands, except per share data)
Interest income
Loans	$	33,503		$	38,463		$	103,246		$	115,381
Loans held for sale		76			223			352			768
Securities:
Trading		81			54			211			179
Available for sale		3,823			3,029			10,978			9,062
Federal Home Loan Bank stock dividends		352			417			1,032			1,229
Other interest earning assets		87			204			348			600

Total interest income		37,922			42,390			116,167			127,219
Interest expense
Deposits		14,461			16,886			46,007			50,436
Federal Home Loan Bank advances		3,069			5,757			9,952			16,384
Repurchase agreements and other		1,477			1,869			5,141			4,968

Total interest expense		19,007			24,512			61,100			71,788

Net interest income		18,915			17,878			55,067			55,431
Provision for loan losses		8,995			5,363			14,709			10,432

Net interest income after provision for loan losses		9,920			12,515			40,358			44,999

Non-interest income
Brokerage commissions		6,820			6,475			20,460			19,764
Service fees and other charges		3,513			3,705			10,973			11,048
Underwriting and investment banking		483			113			718			358
Net gains (losses):
Securities available for sale		—			—			988			—
Other than temporary impairment of securities		(5,029	)		—			(5,029	)		—
Trading securities		(4	)		3			(53	)		51
Loans sold		292			892			2,871			2,079
Other		(1,164	)		(143	)		(2,837	)		(546	)
Other income		1,052			1,064			3,353			2,989

Total non-interest income		5,963			12,109			31,444			35,743

Non-interest expense
Salaries and employee benefits		14,136			13,733			43,767			42,374
Goodwill impairment charge		33,593			—			33,593			—
Occupancy		1,281			1,232			3,902			3,588
Equipment and data processing		2,473			2,156			6,947			6,777
Franchise tax		495			543			1,642			1,657
Advertising		395			325			1,134			1,032
Amortization of core deposit intangible		69			88			220			281
Other expenses		4,910			2,655			11,760			7,765

Total non-interest expenses		57,352			20,732			102,965			63,474

Income (loss) before income tax expense (benefit)		(41,469	)		3,892			(31,163	)		17,268
Income tax expense (benefit)		(2,915	)		1,309			619			6,085

Net income (loss)	$	(38,554	)	$	2,583		$	(31,782	)	$	11,183

Comprehensive income (loss)	$	(35,135	)	$	4,771		$	(32,688	)	$	10,998
Earnings (loss) per share
Basic	$	(1.34	)	$	0.09		$	(1.11	)	$	0.39
Diluted	$	(1.34	)	$	0.09		$	(1.11	)	$	0.38

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30,
	2008			2007
	(Dollars in thousands)
Cash Flows from Operating Activities
Net (loss) income	$	(31,782	)	$	11,183
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		14,709			10,432
Net losses on impaired securities		5,029			—
Net gains on loans held for sale and other assets		(1,322	)		(1,584	)
Amortization of premiums and accretion of discounts		1,304			1,803
Depreciation and amortization		2,169			2,327
ESOP compensation		1,244			2,205
Stock based compensation		150			—
FHLB stock dividends		(1,032	)		—
(Increase) decrease in trading securities		(5,353	)		5,873
Decrease in interest receivable		2,037			261
Goodwill impairment charge		33,593			—
Increase in prepaid and other assets		(4,882	)		(4,126	)
(Decrease) increase in interest payable		(2,663	)		2,511
Net principal disbursed on loans held for sale		(127,407	)		(161,119	)
Proceeds from sale of loans held for sale		209,989			175,084
Increase (decrease) in other liabilities		2,649			(3,410	)

Net cash from operating activities		98,432			41,440

Cash Flows from Investing Activities
Proceeds from principal repayments and maturities of:
Available for sale securities		48,366			40,736
Proceeds from sale of:
Available for sale securities		49,399			—
Real estate owned and other repossessed assets		10,875			2,753
Purchases of:
Securities available for sale		(158,915	)		(45,717	)
Net principal repaid on loans		23,891			78,666
Loans purchased		(73,823	)		(140,425	)
Purchases of premises and equipment		(903	)		(3,364	)

Net cash from investing activities		(101,110	)		(67,351	)

Cash Flows from Financing Activities
Net (decrease) increase in NOW, savings and money market accounts		(34,622	)		14,358
Net increase (decrease) in certificates of deposit		76,490			(54,076	)
Net decrease in advance payments by borrowers for taxes and insurance		(6,087	)		(5,878	)
Proceeds from FHLB advances		581,000			581,353
Repayment of FHLB advances		(599,819	)		(541,064	)
Net change in other borrowed funds		(14,437	)		49,104
Dividends paid		(4,064	)		(8,166	)
Proceeds from the exercise of stock options		—			176
Purchase of treasury stock		—			(9,709	)

Net cash from financing activities		(1,539	)		26,098

(Decrease) increase in cash and cash equivalents		(4,217	)		187
Cash and cash equivalents, beginning of period		37,363			35,637

Cash and cash equivalents, end of period	$	33,146		$	35,824

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. BASIS OF PRESENTATION

United Community Financial Corp. (United Community) was incorporated under Ohio law in February 1998 by The Home Savings and Loan Company of Youngstown, Ohio (Home Savings) in connection with the conversion of Home Savings from an Ohio mutual savings and loan association to an Ohio capital stock savings association (Conversion). Upon consummation of the Conversion on July 8, 1998, United Community became the unitary thrift holding company for Home Savings. Home Savings, a state-chartered savings bank, conducts business from its main office located in Youngstown, Ohio, 39 full-service branches and six loan production offices located throughout Ohio and western Pennsylvania. 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 conducts business from its main office located in Youngstown, Ohio and 22 offices located in northeastern Ohio, western Pennsylvania, and western New York.

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 nine months ended September 30, 2008, are not necessarily indicative of the results to be expected for the year ending December 31, 2008. 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, 2007, contained in United Community’s Form 10-K for the year ended December 31, 2007.

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

2. RECENT ACCOUNTING DEVELOPMENTS

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 became effective for fiscal years beginning after December 15, 2007. At September 30, 2008, United Community and its subsidiaries owned $24.8 million of bank owned life insurance. The adoption of this standard had no impact on United Community’s consolidated financial statements.

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The impact of adoption was not material.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. United Community did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008, the effective date of the standard.

On November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value through Earnings (“SAB 109”). Previously, SAB 105, Application of Accounting Principles to Loan Commitments, stated that in

measuring the fair value of a derivative loan commitment, a company should not incorporate the expected net future cash flows related to the associated servicing of the loan. SAB 109 supersedes SAB 105 and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in measuring fair value for all written loan commitments that are accounted for at fair value through earnings. SAB 105 also indicated that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment, and SAB 109 retains that view. SAB 109 is effective for derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. United Community’s adoption of this bulletin did not have a material impact on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(R) (revised version of SFAS No. 141), Business Combinations. SFAS No. 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, to be measured at their fair values as of that date. SFAS No. 141(R) replaces SFAS No. 141’s cost-allocation process, which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. SFAS No. 141(R) applies to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 31, 2008. United Community has not determined what impact this standard may have on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements — an amendment of ARB No. 51. SFAS No. 160 amends ARB 51 to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. This pronouncement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. United Community has not determined what impact this standard may have on its consolidated financial statements.

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

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

On February 20, 2008, the FASB issued Staff Position FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions, to resolve questions about the accounting for repurchase financings. This FSP is effective for repurchase financings in which the initial transfer is entered into in fiscal years beginning after November 15, 2008. Management is currently evaluating the impact, if any, of FSP 140-3 on United Community’s consolidated financial statements.

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

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

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

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 share at the grant date. The maximum number of common shares that may be issued under the plan is 3,471,562. There are currently 264,924 shares remaining in the plan that could be granted. All of the options awarded became exercisable on the date of grant. The option period expires 10 years from the date of grant.

On April 26, 2007, shareholders approved the United Community Financial Corp. 2007 Long-Term Incentive Plan (2007 Plan). The purpose of the 2007 Plan is the same as that of the 1999 Plan. The 2007 Plan provides for the issuance of up to 2,000,000 shares that are to be used for awards of restricted stock shares, stock options, performance awards, stock appreciation rights (SARs), or other forms of stock-based incentive awards. There were 237,072 stock options granted in the first quarter of 2008 under the 2007 Plan. All of the options awarded became exercisable on the date of grant. The option period expires 10 years from the date of grant. United Community recognized $161,000 in expenses related to this grant.

A summary of activity in the plans is as follows:


	For the nine months ended September 30, 2008
						Aggregate
				Weighted		intrinsic
				average		value (in
	Shares			exercise price		thousands)

Outstanding at beginning of year		2,043,856		$	9.66
Granted		237,072			6.05
Exercised		—			—
Forfeited		(244,396	)		8.83

Outstanding at end of period		2,036,532		$	9.34	$	—

Options exercisable at end of period		2,036,532		$	9.34	$	—

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


	September 30,
	2008

Intrinsic value of options exercised	$	—
Cash received from option exercises		—
Tax benefit realized from option exercises		—
Weighted average fair value of options granted, per share		0.68

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

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


Risk-free interest rate	3.03	%
Expected term (years)	5
Expected stock volatility	23.8
Dividend yield	6.28	%

Outstanding stock options have a weighted average remaining life of 4.81 years and may be exercised in the range of $6.05 to $12.73.

4. SECURITIES

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


	September 30, 2008							December 31, 2007
	(Dollars in thousands)
			Gross		Gross					Gross		Gross
	Fair		Unrealized		Unrealized			Fair		Unrealized		Unrealized
	Value		Gains		Losses			Value		Gains		Losses
U.S. Treasury and government sponsored entities’ securities	$	49,433	$	194	$	(269	)	$	84,388	$	337	$	(126	)
Equity securities		1,849		104		(564	)		7,064		221		(494	)
Mortgage-related securities		249,444		1,045		(1,431	)		153,301		977		(443	)

Total	$	300,726	$	1,343	$	(2,264	)	$	244,753	$	1,535	$	(1,063	)

Home Savings holds in its available-for-sale securities portfolio a Fannie Mae auction rate pass through trust security with a cost basis of $5.0 million. This security represents an interest in a trust that is collateralized with Fannie Mae non-cumulative preferred stock. The market value of the security held by the Company declined following the September 7, 2008 announcement of the appointment of a conservator for Fannie Mae. Because the effects of the conservatorship may trigger the redemption provisions of the trust, UCFC management determined it was necessary for the Company to recognize a write-down of $4.7 million in the third quarter of 2008. The Company also owns an equity interest in the common shares of another financial institution, which has traded below the Company’s cost basis for more than twelve months and is not expected to recover in the near term. The Company has taken a write-down of $353,000 on this investment.

The equity securities that have gross unrealized losses at September 30, 2008, are investments in the common shares of regional financial institutions. These institutions continue to report strong capital ratios and a reasonable level of nonperforming loans. Management believes that they have been temporarily impaired as a result of the downturn in the financial sector and that this will be a temporary situation. Management has the intent and ability to hold these investments for the foreseeable future.

Securities pledged for public funds deposits were approximately $15.7 million at September 30, 2008, and $19.0 million at December 31, 2007. Securities sold under an agreement to repurchase are secured primarily by mortgage-backed securities with a fair value of approximately $119.5 million at September 30, 2008, and $121.4 million at December 31, 2007.

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


	September 30,		December 31,
	2008		2007
	(Dollars in thousands)
US Treasury and government sponsored entities	$	1,543	$	1,054
State and municipal obligations		8,672		3,636
Corporate bonds, debentures and notes		149		62
Mutual funds		—		312

Total trading securities	$	10,364	$	5,064

5. LOANS

Portfolio loans consist of the following:


	September 30,			December 31,
	2008			2007
	(Dollars in thousands)
Real Estate:
One- to four-family residential	$	900,970		$	871,019
Multifamily residential		197,504			179,535
Nonresidential		390,606			359,070
Land		24,272			22,818
Construction:
One- to four-family residential		282,284			357,153
Multifamily and non-residential		32,228			25,191

Total real estate		1,827,864			1,814,786
Consumer		358,454			349,447
Commercial		93,449			103,208

Total loans		2,279,767			2,267,441
Less:
Allowance for loan losses		33,186			32,006
Deferred loan fees, net		(1,801	)		(1,553	)

Total		31,385			30,453

Loans, net	$	2,248,382		$	2,236,988

Changes in the allowance for loan loss are as follows:


	As of or For the
	Nine Months			As of or For the
	Ended			Year Ended
	September 30,			December 31,
	2008			2007
	(Dollars in thousands)
Balance, beginning of year	$	32,006		$	16,955
Provision for loan losses		14,709			28,750
Amounts charged off		(14,121	)		(14,220	)
Recoveries		592			521

Balance, end of period	$	33,186		$	32,006

Non-accrual loans were $99.2 million and $97.5 million at September 30, 2008, and December 31, 2007, respectively. Restructured loans were $3.2 million at September 30, 2008 and $2.3 million at December 31, 2007. Loans greater than 90 days past due and still accruing interest were $3.8 million and $1.2 million at September 30, 2008 and December 31, 2007, respectively.

Impaired loans consist of the following:


	As of or For
	the Nine		As of or For
	Months Ended		the Year
	September 30,		Ended
	2008		December 31, 2007
	(Dollars in thousands)
Impaired loans on which no specific valuation allowance was provided	$	37,494	$	30,475
Impaired loans on which a specific valuation allowance was provided		44,432		53,902

Total impaired loans at period-end	$	81,926	$	84,377


Specific valuation allowances on impaired loans at period-end	$	11,561	$	13,165
Average impaired loans during the period		82,087		63,468
Interest income recognized on impaired loans during the period		424		348
Interest income received on impaired loans during the period		424		348

6. MORTGAGE BANKING ACTIVITIES

Mortgage loans serviced for others, which are not reported in United Community’s assets, totaled $928.2 million at September 30, 2008, and $876.1 million at December 31, 2007.

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


	As of or for the
	Nine Months
	Ended			As of or for the
	September 30,			Year Ended
	2008			December 31, 2007
	(Dollars in thousands)
Balance, beginning of year	$	6,184		$	6,820
Originations		1,179			1,268
Amortized to expense		(1,494	)		(1,904	)

Balance, end of period	$	5,869		$	6,184

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


	September 30,			December 31,
	2008			2007
	(Dollars in thousands)
Balance, beginning of year	$	(562	)	$	(435	)
Impairment charges		(5	)		(562	)
Recoveries		562			435

Balance, end of period	$	(5	)	$	(562	)

Fair value of mortgage servicing rights as of September 30, 2008 was approximately $9.9 million and at December 31, 2007 was $8.7 million.

Key economic assumptions in measuring the value of mortgage servicing rights at September 30, 2008 and December 31, 2007 were as follows:


	September 30,			December 31,
	2008			2007
Weighted average prepayment rate	180 PSA			272 PSA
Weighted average life (in years)		3.60			3.87
Weighted average discount rate		8	%		8	%

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 September 30,
	2008			2007
	(Dollars in thousands)
Service cost	$	—		$	—
Interest cost		49			56
Expected return on plan assets		—			—
Net amortization of prior service cost		(1	)		(1	)
Net amortization of actuarial gain		(3	)		—

Net periodic benefit cost	$	45		$	55


Assumptions used in the valuations were as follows:
Weighted average discount rate		6.00	%		5.50	%


	Nine Months Ended September 30,
	2008			2007
	(Dollars in thousands)
Service cost	$	—		$	—
Interest cost		145			167
Expected return on plan assets		—			—
Net amortization of prior service cost		(1	)		(1	)
Net amortization of actuarial gain		(9	)		—

Net periodic benefit cost	$	135		$	166


Assumptions used in the valuations were as follows:
Weighted average discount rate		6.00	%		5.50	%

8. FAIR VALUE MEASUREMENT

Statement 157 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) or identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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

Impaired loans are measured at fair value on a nonrecurring basis in the normal course of business and are subject to adjustments based on the value of the underlying collateral.

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


			Fair Value Measurements at September 30, 2008 Using:
			Quoted Prices in
			Active Markets				Significant
			for Identical		Significant Other		Unobservable
	September 30,		Assets		Observable		Inputs
	2008		(Level 1)		Inputs (Level 2)		(Level 3)

Assets:
Trading securities	$	10,364	$	10,364	$	—	$	—
Available for sale securities		300,726		1,524		299,202		—

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

Fair Value Measurements at September 30, 2008 Using:

Quoted Prices in

Active Markets

Significant

for Identical

Significant Other

Unobservable

September 30,

Assets

Observable

Inputs

2008

(Level 1)

Inputs (Level 2)

(Level 3)

Assets:

Impaired loans

32,871

—

32,871

Impaired loans, which are usually measured for impairment using the fair value of the collateral, had a carrying amount of $81.9 million at September 30, 2008, and $84.4 million at December 31, 2007. Of these, $32.9 million were carried at fair value at September 30, 2008, compared to $53.9 million at December 31, 2007. The specific valuation on these loans increased from $13.2 million at December 31, 2008, to $11.6 million at September 30, 2008.

STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURE

Supplemental disclosures of cash flow information are summarized below.


	September 30, 2008		September 30, 2007
	(Dollars in thousands)
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest on deposits and borrowings, net of amounts capitalized	$	63,763	$	69,277
Interest capitalized on borrowings		—		17
Income taxes		3,859		9,434
Supplemental schedule of noncash activities:
Transfers from loans to real estate owned and other repossessed assets		23,754		11,720

10. SEGMENT INFORMATION

United Community has two principal segments, banking and investment services. Banking provides consumer and commercial banking services. Investment services provide investment brokerage and a network of integrated financial services. Condensed statements of income by operating segment for the three and nine months ended September 30, 2008 and 2007 are as follows:


	For the Three Months Ended September 30, 2008
	Banking			Investment
	Services			Services		Total
	(Dollars in thousands)
Interest income	$	37,748		$	174	$	37,922
Interest expense		18,951			56		19,007
Provision for loan loss		8,995			—		8,995

Net interest income after provision for loan loss		9,802			118		9,920
Securities available for sale write-down		(5,029	)		—		(5,029	)
Non-interest income		2,654			8,338		10,992
Goodwill impairment charge		33,593			—		33,593
Non-interest expense		15,923			7,836		23,759

Income (loss) before tax		(42,089	)		620		(41,469	)
Income tax expense (benefit)		(3,132	)		217		(2,915	)

Net income (loss)	$	(38,957	)	$	403	$	(38,554	)


	For the Three Months Ended September 30, 2007
	Banking		Investment
	Services		Services		Total
	(Dollars in thousands)
Interest income	$	42,105	$	285	$	42,390
Interest expense		24,433		79		24,512
Provision for loan loss		5,363		—		5,363

Net interest income after provision for loan loss		12,309		206		12,515
Non-interest income		4,121		7,988		12,109
Non-interest expense		13,462		7,270		20,732

Income before tax		2,968		924		3,892
Income tax expense		983		326		1,309

Net income	$	1,985	$	598	$	2,583

11. 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 2,036,537 stock options that were antidilutive for the period ending September 30, 2008. There were stock options for 717,247 shares that were antidilutive for the period ending September 30, 2007.


	For the Three Months					For the Nine Months
	Ended					Ended
	September 30,					September 30,
	2008			2007		2008			2007
	(In thousands, except per share data)
Net income applicable to common stock	$	(38,554	)	$	2,583	$	(31,782	)	$	11,183


Weighted average common shares outstanding		28,692			28,489		28,561			28,792
Dilutive effect of stock options		—			43		—			205

Weighted average common shares outstanding for dilutive computation		28,692			28,532		28,561			28,997


Basic earnings per share as reported	$	(1.34	)	$	0.09	$	(1.11	)	$	0.39
Diluted earnings per share as reported	$	(1.34	)	$	0.09	$	(1.11	)	$	0.38

12. OTHER BORROWINGS

Included in other borrowings is $14.9 million outstanding at September 30, 2008 under a Credit Agreement between JP Morgan Chase Bank, N.A., (JP Morgan) and United Community, dated September 12, 2005, as amended on July 18, 2007, and March 28, 2008, (the “Credit Agreement”). The Credit Agreement provided United Community with a line of credit of up to $40.0 million.

The Credit Agreement sets forth numerous covenants with which United Community must comply. At December 31, 2007, the ratio of Home Savings’ loans past due 90 days or more and still accruing interest, all non-accrual loans, all restructured loans and leases and all other non-performing loans to its total loans and Other Real Estate Owned exceeded the level permitted in the Credit Agreement. JP Morgan would not agree to waive the default and notified United Community that it would not advance any new funds and that a default rate of interest equal to the one month LIBOR plus 5.25% would be charged on the outstanding principal balance.

On March 28, 2008, United Community and JP Morgan amended the Credit Agreement to provide, among other things, (1) a waiver of all existing defaults under the credit agreement, (2) that no new funds would be advanced to United Community on the line of credit, and (3) an increase in the allowable non-performing asset ratio to 6.50% of total loans and REO. As of September 30, 2008, that ratio was 5.52%.

On August 29, 2008, United Community and JP Morgan amended the Credit Agreement in response to the event of default that occurred when United Community entered into a Stipulation and Consent to Issuance of Order to Cease and Desist with the Office of Thrift Supervision (“OTS”) and United Community’s wholly owned subsidiary, The Home Savings and Loan Company of Youngstown, Ohio, entered into a Stipulation and Consent to the Issuance of an Order to Cease and Desist with the Federal Deposit Insurance Corporation (“FDIC”) and State of Ohio, Division of Financial Institutions (“Ohio Division”). The Amendment waived the events of default and extended the maturity date of the borrowings until January 31, 2009. In connection with the Amendment, United Community made a principal payment of $1.4 million to reduce the amount of borrowings to $14.9 million at September 30, 2008 and pledged additional collateral.

13. BROKERED CERTIFICATES OF DEPOSIT

To supplement its funding needs, United Community began obtaining brokered certificates of deposit in 2007. Such deposits have maturities ranging from six months to two years. The total balance of brokered certificates of deposit was $185.2 million at September 30, 2008 and $39.9 million at December 31, 2007. Home Savings cannot obtain additional brokered certificates of deposit without prior consent of the FDIC and Ohio Division.

14. REGULATORY ENFORCEMENT ACTION

On August 8, 2008, the board of directors of United Community approved a Stipulation and Consent to Issuance of Order to Cease and Desist (OTS Order) with the OTS. Simultaneously, the board of directors of Home Savings approved a Stipulation and Consent to the Issuance of an Order to Cease and Desist (Bank Order) with the FDIC and the Ohio Division. Although United Community and Home Savings have agreed to the issuance of the OTS Order and the Bank Order, respectively, neither has admitted or denied any allegations of unsafe or unsound banking practices, or any legal or regulatory violations. No monetary penalties were assessed by the OTS, the FDIC, or the Ohio Division.

The OTS Order requires UCFC to obtain OTS approval prior to: (i) incurring or increasing its debt position; (ii) repurchasing any UCFC stock; or (iii) paying any dividends. The OTS Order also requires UCFC to develop a debt reduction plan and submit the plan to the OTS for approval.

The Bank Order requires Home Savings, within specified timeframes, to take or refrain from certain actions, including: (i) retaining a bank consultant to assess Home Savings management needs and submitting a management plan that identifies officer positions needed, identifies and establishes board and internal operating committees, evaluates Home Savings’ senior officers, and provides for the hiring of any additional personnel; (ii) seeking regulatory approval prior to adding any individuals to the board of directors or employing any individual as a senior executive officer of Home Savings; (iii) not extending additional credit to classified borrowers; (iv) establishing a compliant Allowance for Loan and Lease Loss methodology; (v) enhancing its risk management policies and procedures; (vi) adopting and implementing plans to reduce its classified assets and delinquent loans, and to reduce loan concentrations in nonowner-occupied commercial real estate and construction, land development, and land loans; (vii) establishing board of directors committees to evaluate and approve certain loans and oversee Home Savings’ compliance with the Bank Order; (viii) revising its loan policy and enhancing its underwriting and credit administration functions; (ix) developing a strategic plan and budget and profit plan; (x) correcting all violations of laws, rules, and regulations and implementing procedures to ensure future compliance; (xi) increasing its Tier 1 capital to 8% and its total risk based capital to 12% by December 31, 2008; and (xii) seeking regulatory approval prior to declaring or paying any cash dividend. At September 30, 2008, Home Savings’ Tier 1 capital was 7.43% and its total risk based capital was 11.78%. Because of the consent to the Bank Order, Home Savings is deemed ‘adequately capitalized’ for regulatory capital purposes.

United Community and Home Savings are moving toward compliance with the OTS Order and Bank Order. As part of its plan to improve capital, the Company may sell securities or other assets, restrict lending activities and paydown subordinated debt and invest the capital in Home Savings.

15. GOODWILL

Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets (as amended),” requires goodwill to be tested for impairment on an annual basis, or more frequently if circumstances indicate that an asset might be impaired, by comparing the fair value of such goodwill to its recorded or carrying amount. If the carrying amount of the goodwill exceeds the fair value, an impairment charge must be recorded in an amount equal to the excess. Based on the level that United Community shares had been trading and other factors, management determined that it would be appropriate under the guidance of SFAS No. 142, to test the value of the goodwill previously recorded as a result of the mergers with Industrial Bancorp, Inc. in 2001 and Potters Financial Corporation in 2002 for goodwill impairment during the third quarter of 2008. As a result of impairment testing performed, the Company recorded an impairment charge of $33.6 million.

The fair value of goodwill was estimated using a number of measurement methods. These included the application of various metrics from bank sale transactions for institutions comparable to Home Savings, including the application of market-derived multiples of tangible book value and earnings, as well as estimations of the present value of future cash flows. Home Savings’ management reviewed the valuation of the fair value of Home Savings with the Audit Committee and concluded that Home Savings should recognize an impairment charge and write down its goodwill to a balance of zero.

16. PARTICIPATION IN THE U.S. TREASURY CAPITAL PURCHASE PROGRAM

On October 3, 2008, Congress passed the Emergency Stabilization Act of 2008 (“EESA”), which provides the U.S. Secretary of the Treasury with broad authority to implement certain actions to help restore stability and liquidity to U.S. markets. One of the provisions resulting from the Act is the Treasury Capital Purchase Program (“CPP”) , which provides direct equity investment of perpetual preferred stock by the Treasury in qualified financial institutions. The program is voluntary and requires an institution to comply with a number of restrictions and provisions, including limits on executive compensation, stock redemptions and declaration of dividends. Applications must be submitted by November 14, 2008 and are subject to approval by the Treasury. The CPP provides

for a minimum investment of 1% of risk-weighted assets, with a maximum investment equal to the lesser of 3% of total risk-weighted assets or $25 billion. The perpetual preferred stock investment will have a dividend rate of 5% per year, until the fifth anniversary of the Treasury investment, and a dividend of 9% thereafter. The CPP also requires the Treasury to receive warrants for common stock equal to 15% of the capital invested by the Treasury. Participation in the program is not automatic and subject to approval by the Treasury. The Company has applied for participation in the CPP.

17. OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) included in the Consolidated Statements of Shareholders’ Equity consists of unrealized gains and losses on available for sale securities and changes in unrealized gains and losses on postretirement liability. The change includes reclassification of losses on sales of securities and impairment charges, net of tax of $1.4 million at September 30, 2008, and $21,000 at December 31, 2007.

Other comprehensive income (loss) components and related tax effects are as follows:


	September 30,			December 31,
	2008			2007
Unrealized holding gain (loss) on securities available for sale and postretirement benefits	$	2,647		$	3,016
Reclassification adjustment for losses (gains) realized in income		4,041			5

Net unrealized gains (losses)		(1,394	)		3,011
Tax effect (35%)		(488	)		1,054

Net of tax amount	$	(906	)	$	1,957

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


	Balance at		Current			Balance at
	December 31,		Period			September 30,
	2007		Change			2008
Unrealized gains (losses) on securities available for sale	$	359	$	(906	)	$	(547	)
Unrealized gains on post-retirement benefits		302		—			302

Total	$	661	$	(906	)	$	(245	)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNITED COMMUNITY FINANCIAL CORP.


	At or For the Three						At or For the Nine
	Months Ended						Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Selected financial ratios and other data: (1)
Performance ratios:
Return on average assets (2)		(5.57	)%		0.38	%		(1.54	)%		0.55	%
Return on average equity (3)		(54.84	)%		3.63	%		(14.96	)%		5.21	%
Interest rate spread (4)		2.61	%		2.33	%		2.48	%		2.42	%
Net interest margin (5)		2.92	%		2.78	%		2.84	%		2.88	%
Non-interest expense to average assets		8.29	%		3.05	%		4.99	%		3.12	%
Efficiency ratio (6)		76.24	%		68.52	%		74.01	%		68.94	%
Average interest-earning assets to average interest- bearing liabilities		110.52	%		111.86	%		111.22	%		112.35	%
Capital ratios:
Average equity to average assets		10.17	%		10.47	%		10.29	%		10.56	%
Equity to assets, end of period		8.59	%		10.10	%		8.59	%		10.10	%
Tier 1 leverage ratio		7.43	%		8.03	%		7.43	%		8.03	%
Tier 1 risk-based capital ratio		9.86	%		9.94	%		9.86	%		9.94	%
Total risk-based capital ratio		11.78	%		12.44	%		11.78	%		12.44	%
Asset quality ratios:
Non-performing loans to total loans at end of period (7)		4.73	%		4.40	%		4.73	%		4.40	%
Non-performing assets to average assets (8)		4.58	%		4.14	%		4.61	%		4.15	%
Non-performing assets to total assets at end of period		4.65	%		4.10	%		4.65	%		4.10	%
Allowance for loan losses as a percent of loans		1.45	%		1.03	%		1.45	%		1.03	%
Allowance for loan losses as a percent of non-performing loans (7)		31.23	%		23.61	%		31.23	%		23.61	%
Office data:
Number of full service banking offices		39			38			39			38
Number of loan production offices		6			5			6			5
Number of brokerage offices		21			20			21			21
Number of trust offices		2			2			2			2
Per share data:
Basic earnings (loss) per share (9)	$	(1.34	)	$	0.09		$	(1.11	)	$	0.39
Diluted earnings (loss) per share (9)	$	(1.34	)	$	0.09		$	(1.11	)	$	0.38
Book value (10)	$	7.80		$	9.21		$	7.80		$	9.21
Tangible book value (11)	$	7.77		$	8.05		$	7.77		$	8.05
Market value as a percent of book value (12)		64	%		78	%		64	%		78	%


(1)		Ratios for the three and nine month periods are annualized where appropriate.

(2)		Net income (loss) divided by average total assets.

(3)		Net income (loss) 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 and goodwill impairment charge, divided by the sum of net interest income and noninterest income, excluding securities write-downs and 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 ( loss) 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. UCFC shares closed at $5.00 per share on September 30, 2008, as quoted on the NASDAQ stock market.

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 September 30, 2008 and December 31, 2007

Total assets decreased $33.3 million to $2.7 billion at September 30, 2008, compared to December 31, 2007. The change was attributable to decreases in loans held for sale of $79.7 million, goodwill of $33.6 million, cash and cash equivalents of $4.2 million, accrued interest receivable of $2.0 million and premises and equipment of $1.2 million. These decreases were offset partially by increases in securities available for sale of $56.0 million, net loans of $11.4 million, real estate owned and other repossessed assets of $10.0 million and other assets of $3.2 million.

Cash and cash equivalents decreased $4.2 million to $33.1 million at September 30, 2008, compared to $37.4 million at December 31, 2007. This change is primarily the result of a decrease in checks awaiting deposit at the Federal Reserve and cash maintained at Home Savings’ branch locations. These decreases were partially offset by an increase in cash maintained in Home Savings’ account at the Federal Reserve.

The trading securities portfolio increased $5.3 million to $10.4 million at September 30, 2008, from $5.1 million at December 31, 2007. This change resulted primarily from an increase in Butler Wick’s portfolio of $5.0 million in state and municipal securities and an increase of $149,000 in US Treasury and government sponsored securities, offset by decreases of $312,000 in mutual fund investments. Butler Wick’s increase in trading securities is due to normal trading activity and securities Butler Wick holds in inventory.

Available for sale securities increased $56.0 million, or 22.9%, from December 31, 2007, to September 30, 2008. Home Savings purchased $157.1 million in securities during the first nine months of 2008 and Butler Wick purchased $1.9 million. These purchases were partially offset by sales of $48.4 million at Home Savings and paydowns and maturities of $50.1 million at Home Savings and $2.6 million at Butler Wick. The remaining difference is primarily a result of changes in the market valuation of the portfolio, including the $4.7 million write-down of the Fannie Mae security, net of any amortization or accretion.

Net loans increased $11.4 million from December 31, 2007, to September 30, 2008. Real estate loans increased $13.1 million and consumer loans increased $9.0 million. The overall increase in loans is attributable primarily to higher originations and purchases of loans offset partially by paydowns during the period.

The allowance for loan losses increased to $33.2 million, or 1.45% of portfolio loans and 31.2% of nonperforming loans as of September 30, 2008, from $32.0 million or 1.41% of portfolio loans as of December 31, 2007. Provisions totaling $14.9 million during the nine months ended September 30, 2008 were substantially offset by charge-offs totaling $14.1 million. .Management establishes the allowance for loan losses at a level it believes adequate to absorb probable losses incurred in the loan portfolio. Management bases its determination of the adequacy of the allowance upon estimates derived from an analysis of individual credits, prior and current loss experience, loan portfolio delinquency levels, overall growth in the loan portfolio, current economic conditions, and results of regulatory examinations. Furthermore, in determining the level of the allowance for loan loss, management reviews and evaluates on a monthly basis the necessity of a reserve for individual loans classified by management. The specifically allocated reserve for a classified loan is determined based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal remedies available to Home Savings. Once a review is completed, the need for a specific reserve is determined by the Home Savings Asset Review Committee and allocated to the loan. Other loans not reviewed specifically by management are evaluated as a homogeneous group of loans (e.g., performing single-family residential mortgage loans and all consumer credit except marine loans) using the historical charge-off experience ratio specific to each type of loan. The historical charge-off experience ratio considers the homogeneous nature of the loans, the geographical lending areas involved, regulatory examination findings, specific grading systems applied, and any other known factors that may impact the ratios used. Specific reserves on individual loans and historical ratios are reviewed periodically and adjusted as necessary based on subsequent collections, loan upgrades or downgrades, nonperforming trends, or actual principal charge-offs. These factors are

susceptible to changes that could result in a material adjustment to results of operations. The provision for loan losses represents a charge against current earnings in order to maintain the allowance for loan losses at an appropriate level.


	Allowance For Loan Losses
	December 31,										September 30,
	2007		Provision			Recovery		Chargeoff			2008
Real Estate Loans
Permanent
One-to four-family	$	2,803	$	1,781		$	17	$	(2,276	)	$	2,325
Multifamily residential		2,365		2,123			3		(641	)		3,850
Nonresidential		4,488		607			3		(575	)		4,523
Land		629		(146	)		—		—			483

Total		10,285		4,365			23		(3,492	)		11,181


Construction Loans
One-to four-family residential		11,892		5,528			10		(6,391	)		11,039
Multifamily and nonresidential		607		(12	)		—		—			595

Total		12,499		5,516			10		(6,391	)		11,634


Consumer Loans
Home Equity		1,260		1,054			—		(1,186	)		1,128
Auto		447		(134	)		33		(72	)		274
Marine		1,468		264			62		(316	)		1,478
Recreational vehicle		2,050		(89	)		103		(616	)		1,448
Other		260		256			260		(447	)		329

Total		5,485		1,351			458		(2,637	)		4,657


Commercial Loans
Secured		2,375		1,540			—		(1,417	)		2,498
Unsecured		1,362		1,937			101		(184	)		3,216

Total		3,737		3,477			101		(1,601	)		5,714

Total	$	32,006	$	14,709		$	592	$	(14,121	)	$	33,186

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 $106.3 million, or 4.73% of net loans, at September 30, 2008, compared to $101.1 million, or 4.52% of net loans, at December 31, 2007. The schedule below summarizes the change in nonperforming loans for the first nine months of 2008.


Nonperforming Loans
	September 30,		December 31,					2008 Interest
	2008		2007		Change			Foregone
Real Estate Loans
Permanent
One-to four-family	$	16,923	$	12,752	$	4,171		$	472
Multifamily residential		15,490		13,604		1,886			623
Nonresidential		13,679		13,597		82			110
Land		3,717		3,700		17			322

Total		49,809		43,653		6,156			1,527


Construction Loans
One-to four-family residential		42,363		44,680		(2,317	)		245
Multifamily and nonresidential		816		825		(9	)		75

Total		43,179		45,505		(2,326	)		320


Consumer Loans
Home Equity		2,123		2,454		(331	)		61
Auto		196		211		(15	)		—
Marine		2,617		1,714		903			66
Recreational vehicle		790		376		414			23
Other		22		64		(42	)		3

Total		5,748		4,819		929			153


Commercial Loans
Secured		4,027		4,554		(527	)		406
Unsecured		288		184		104			51
Total		4,315		4,738		(423	)		457

Restructured Loans		3,199		2,341		858			—

Total Nonperforming Loans	$	106,250	$	101,056	$	5,194		$	2,457

The $4.2 million increase in nonperforming loans secured by one-to four-family properties was primarily a result of the overall increase in the number of loans becoming 90 or more days past due. The decrease in nonperforming construction loans was primarily the result of Home Savings taking into possession property collateralizing three lending relationships totaling $12.5 million in the first quarter of 2008.

A loan is impaired when, based on current information and events, it is probable that Home Savings will be unable to collect both the contractual interest payments and the contractual principal payments, as scheduled in the loan agreement. The net decrease in impaired loans, as shown in the following table, of $2.5 million during the period relates primarily to Home Savings taking possession of property collateralizing $12.5 of one-to four-family residential loans and property collateralizing $3.7 million of nonresidential real estate loans.


Impaired Loans
	September 30,		December 31,
	2008		2007		Change
Real Estate Loans
Permanent
One-to four-family	$	2,252	$	2,681	$	(429	)
Multifamily residential		15,770		13,604		2,166
Nonresidential		13,817		13,597		220
Land		3,700		3,700		—

Total		35,539		33,582		1,957


Construction Loans
One-to four-family residential		38,639		43,518		(4,879	)
Multifamily and nonresidential		816		825		(9	)

Total		39,455		44,343		(4,888	)


Consumer Loans
Home Equity		—		—		—
Auto		—		—		—
Boat		2,617		1,714		903
Recreational vehicle		—		—		—
Other		—		—		—

Total		2,617		1,714		903


Commercial Loans
Secured		4,027		4,554		(527	)
Unsecured		288		184		104

Total		4,315		4,738		(423	)

Total Impaired Loans	$	81,926	$	84,377		(2,451	)

Other nonperforming assets, consisting of real estate and other consumer property acquired in the settlement of loans, totaled $20.5 million at September 30, 2008, compared to $10.5 million at December 31, 2007. The $10.0 million increase is primarily attributable to the acquisition of properties having an estimated market value of $13.3 million that collateralized commercial construction loans primarily in the central Ohio market area and three properties with a combined estimated market value of $1.2 million that secured three commercial real estate loans located in northeast Ohio. Home Savings disposed of land with a value of $3.1 million in the first quarter of 2008, partially offsetting the increase. Other consumer property, such as boats, recreational vehicles, and automobiles that were received by Home Savings in the satisfaction of loans, makes up the remainder of the change.

Loans held for sale decreased $79.7 million, or 91.4%, to $7.5 million at September 30, 2008, compared to $87.2 million at December 31, 2007. The change in loans held for sale was due largely to loans that were designated for sale in the fourth quarter of 2007 and were sold in February 2008, with a gain of $1.5 million. Home Savings sells newly originated loans as part of its risk management strategy and anticipates doing so in the future.

Federal Home Loan Bank stock grew to $26.5 million at September 30, 2008, compared to $25.4 million at December 31, 2007. During the first nine months of 2008, the Federal Home Loan Bank paid a stock dividend in lieu of a cash dividend to its member banks.

Home Savings maintains a contra account for uncollected interest for loans on non-accrual status that represents the reduction in interest income from the time the borrower stopped making payments until the loan is repaid, charged off or the default is cured and performance resumes. The increases in these reserves, from $12.2 million at December 31, 2007, to $14.6 million at September 30, 2008, and the impact of the loan sale mentioned above, were the primary reasons that accrued interest receivable decreased $2.0 million to $11.0 million at September 30, 2008, compared to $13.1 million at December 31, 2007.

At December 31, 2007, United Community has recorded $33.6 million in goodwill in connection with two acquisitions completed in 2001 and 2002. Goodwill is not amortized. Generally Accepted Accounting Principles (GAAP) require the Company to perform an impairment test on goodwill annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired, by comparing the fair value of goodwill to its carrying amount. If the carrying amount exceeds the fair value, an impairment charge must be recognized in an amount equal to that excess. GAAP does not permit an increase to goodwill if, in future valuations, the fair value of the asset exceeds its carrying cost. As a result of impairment testing performed, the Company recorded an impairment charge of $33.6 million. The Company decided it was appropriate to perform the analysis in the third quarter based primarily on the price at which its shares were trading.

Other assets increased $3.2 million to $16.5 million at September 30, 2008, compared to $13.3 million at December 31, 2007. Home Savings had increases in deferred federal income taxes of $437,000 related to the market valuation of available for sale securities, prepaid Ohio franchise tax of $526,000, cash due on payments of mortgage-backed securities of $1.2 million and $242,000 in deferred mortgage servicing rights. Butler Wick had an increase in other assets, such as deferred taxes and prepaid assets, of $967,000.

Total deposits increased $41.9 million to $1.9 billion at September 30, 2008, compared to December 31, 2007. This change was due primarily to an increase of $145.1 million in brokered certificates of deposit offset by a $68.6 million decrease in retail certificates of deposit and a $34.7 million decrease in money market accounts and other demand deposit accounts. To supplement its funding needs, United Community began obtaining brokered certificates of deposit in 2007. Such deposits have maturities ranging from six months to two years. The total balance of brokered certificates of deposit was $185.2 million at September 30, 2008 and $39.9 million at December 31, 2007. Home Savings cannot obtain additional brokered certificates of deposit without prior consent of the FDIC and Ohio Division.

Federal Home Loan Bank advances decreased $18.8 million during the first nine months of 2008, reflecting a decrease in overnight advances of $11.8 million and a decrease in term advances of $7.0 million. Home Savings had approximately $170.5 million in unused borrowing capacity at the FHLB at September 30, 2008. Repurchase agreements and other borrowed funds, including United Community’s line of credit with JP Morgan Chase Bank, N.A., decreased $14.4 million to $135.1 million at September 30, 2008 from $149.5 million at December 31, 2007. The maturity date of this line of credit is January 31, 2009.

Advance payments by borrowers for taxes and insurance decreased $6.1 million during the first nine months of 2008. Payments for real estate taxes and property insurance made on behalf of customers of Home Savings account for $3.1 million of the decrease. In addition, funds held for payments received on loans sold where servicing was retained by Home Savings decreased $3.0 million.

Accrued interest payable declined from $7.8 million at December 31, 2007, to $5.2 million at September 30, 2008. The decrease was primarily due to a decrease in interest accrued on retail certificates of deposit of $4.6 million, partially offset by increases in interest accrued on brokered certificates of deposit of $1.7 million and money market and other demand accounts of $335,000.

Accrued expenses and other liabilities increased $2.2 million, to $4.8 million at September 30, 2008 from $2.6 million at December 31, 2007. Home Savings had an increase in accrued liabilities for official check remittances of $1.3 million. Butler Wick had an increase in accrued expenses and other liabilities due largely to securities sold but not yet settled over the end of the period. These increases were offset by a decrease in accrued federal income tax at Home Savings of $2.4 million.

Shareholders’ equity decreased $35.4 million, to $234.4 million at September 30, 2008, from $269.7 million at December 31, 2007. Earnings of $1.1 million from Butler Wick for the first nine months of 2008 were more than offset by a $31.9 million net loss recognized by Home Savings. Dividend payments to shareholders of $4.1 million and changes in available for sale securities, net of tax, of $906,000 also contributed to the decrease. United Community reduced its quarterly dividend to $0.0475 per share in the second quarter of 2008 and paid no dividend in the third quarter of 2008. Continuing credit quality issues and the cease and desist orders consented to in August 2008 could have an adverse impact on future dividends. If the Company participates in the CPP, it will not be able to increase its dividend with out consent of the OTS.

The $33.6 million impairment charge to goodwill will not impact regulatory capital as goodwill is excluded from equity for regulatory capital purposes.

United Community and Home Savings have regulators that have established minimum capital ratios for banks, thrifts and bank holding companies. The net unrealized gain or loss on available for sale securities is generally not included in computing regulatory capital. The Cease and Desist Orders consented to in August 2008, require Home Savings to be at and maintain a Tier 1 capital ratio of 8% and a total risk-based capital ratio of 12%. This must be achieved by December 31, 2008. At September 30, 2008, Home Savings’ reported a Tier 1 ratio of 7.43% and a total risk based capital ratio of 11.78%. The Company has developed a capital enhancement plan and expects to reach the ordered threshold before December 31, 2008. Discussion of this capital plan can be found under the caption “Impact of Cease and Desist Orders on Future Earnings” found at the end of this Management Discussion and Analysis..

Comparison of Operating Results for the Three Months Ended
September 30, 2008 and September 30, 2007

Net Income (Loss). United Community recognized a net loss for the three months ended September 30, 2008, of $38.6 million, or $(1.34) per diluted share, compared to net income of $2.6 million, or $0.09 per diluted share, for the three months ended September 30, 2007. Compared with the third quarter of 2007, net interest income increased $1.0 million, the provision for loan losses increased $3.6 million, non-interest income decreased $6.1 million, and non-interest expense increased $36.6 million primarily as a result of the goodwill impairment. United Community’s annualized return on average assets and return on average equity were (5.57)% and (54.84)%, respectively, for the three months ended September 30, 2008. The annualized return on average assets and return on average equity for the comparable period in 2007 were 0.38% and 3.63%, respectively.

Net Interest Income. Net interest income for the three months ended September 30, 2008, was $18.9 million compared to $17.9 million for the same period last year. Interest income decreased $4.5 million in the third quarter of 2008 compared to the third quarter of 2007. The change in interest income was due primarily to decreases in interest earned on net loans. Home Savings had a decrease in the average balance of net loans of $27.6 million and a reduction of 81 basis points in the rate earned on those loans during the third quarter of 2008, as compared to the same quarter in 2007. This decrease was offset partially by an increase in interest earned on available for sale securities, as the average balance of those assets grew by $59.1 million and the yield earned on those securities increased eight basis points.

Total interest expense decreased $5.5 million for the quarter ended September 30, 2008, as compared to the same quarter last year. The change was due primarily to a reduction of $2.7 million in interest paid on Federal Home Loan Bank advances. A decrease in interest paid on deposits of $2.4 million also contributed to the change. Interest paid on certificates of deposit decreased $991,000. Interest paid on other interest-bearing deposits such as money market accounts and savings accounts, decreased $1.4 million, primarily reflecting a reduction of 157 basis points in the cost of money market accounts and a reduction of 77 basis points in the cost of certificates of deposit, which more than offset the impact of an increase in the average balance of those accounts.

The primary cause of the decrease in interest expense on Federal Home Loan Bank advances was due to a decrease in the average balance of those funds of $84.5 million and a rate decrease on those borrowings of 172 basis points in the third quarter compared to the same quarter in 2007. The rate on short term advances from the Federal Home Loan Bank has decreased due to the Federal Reserve’s action to drop the federal funds rate over the past year. The average balance of certificates of deposit increased based on management’s decision to utilize brokered certificates of deposit as a means of enhancing liquidity at Home Savings. The decrease in interest expense on repurchase agreements and other borrowings was due primarily to a decrease in the rate paid on these alternative borrowings of 95 basis points.

The following table shows the impact of interest rate and outstanding balance (volume) changes compared to the third quarter of last year. The interest rate spread for the three months ended September 30, 2008, grew to 2.61% compared to 2.33% for the quarter ended September 30, 2007. Net interest margin increased 14 basis points to 2.92% for the three months ended September 30, 2008 compared to 2.78% for the same quarter in 2007.


	For the Three Months Ended September 30,
	2008 vs. 2007
	Increase						Total
	(decrease) due to						increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	(4,497	)	$	(463	)	$	(4,960	)
Loans held for sale		(25	)		(122	)		(147	)
Investment securities:
Trading		2			25			27
Available for sale		54			740			794
FHLB stock		(77	)		12			(65	)
Other interest-earning assets		(120	)		3			(117	)

Total interest-earning assets	$	(4,663	)	$	195		$	(4,468	)


Interest-bearing liabilities:
Savings accounts		14			1			15
NOW and money market accounts		(1,696	)		247			(1,449	)
Certificates of deposit		(2,694	)		1,703			(991	)
Federal Home Loan Bank advances		(1,777	)		(911	)		(2,688	)
Repurchase agreements and other		(341	)		(51	)		(392	)

Total interest-bearing liabilities	$	(6,494	)	$	989			(5,505	)

Change in net interest income							$	1,037

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, based on management’s evaluation of such factors as the delinquency status of loans, current economic conditions, the net realizable value of the underlying collateral, changes in the composition of the loan portfolio and prior loan loss experience. The provision for loan losses increased by $3.6 million, to $9.0 million for the three months ended September 30, 2008, compared to $5.4 million for the same period in 2007. The $9.0 million provision was primarily the result of the recurring assessments of the portfolio.

Non-interest Income. Non-interest income decreased $6.1 million, or 50.8%, to $6.0 million for the three months ended September 30, 2008, from $12.1 million for the three months ended September 30, 2007, primarily as a result of the write down of $4.7 million for the Fannie Mae security and the write down of $353,000 on the stock owned by the Company in another financial institution. In addition, United Community recognized an increase in losses of $1.0 million, on the value of other real estate owned by Home Savings obtained in the settlement of nonperforming loans. These losses were partially offset by modest increases in brokerage commissions and underwriting and investment banking income.

Non-interest Expense. Total non-interest expense increased $36.6 million for the three months ended September 30, 2008, compared to the three months ended September 30, 2007. The increase is due primarily to the recognition of the #33.6 million impairment charge associated an evaluation of goodwill, as previously mentioned. The Company also incurred additional expenses associated with deposit insurance premiums, consulting fees and expenses required to maintain other real estate owned prior to its sale. Expenses to maintain other real estate owned are expected to remain high through the rest of 2008 due to the increase in the number of properties acquired by Home Savings in resolving nonperforming loans, as well as legal expenses and other collection expenses associated with Home Savings’ nonperforming loans.

Comparison of Operating Results for the Nine Months Ended
September 30, 2008 and September 30 2007

Net Income (Loss). United Community incurred a net loss for the nine months ended September 30, 2008, of $31.8 million, or $(1.11) per diluted share, compared to net income of $11.2 million, or $0.38 per diluted share, for the nine months ended September 30, 2007. During the first nine months of 2008, net interest income decreased $364,000, the provision for loan losses increased $4.2

million, non-interest income decreased $4.3 million, and non-interest expense increased $39.5 million. United Community’s annualized return on average assets and return on average equity were (1.54)% and (14.96)%, respectively, for the nine months ended September 30, 2008. The annualized return on average assets and return on average equity for the comparable period in 2007 were 0.55% and 5.21%, respectively.

Net Interest Income. Net interest income for the nine months ended September 30, 2008, was $55.1 million compared to $55.4 million for the same period last year. Interest income decreased $11.1 million for the first nine months of 2008 compared to the first nine of 2007. The change in interest income was due primarily to decreases in interest earned on net loans. The average balance of net loans decreased $14.9 million, and the rate earned on those loans decreased 68 basis points. This decrease was offset partially by an increase in interest earned on available for sale securities, as the average balance of those assets grew by $46.9 million and the yield earned on those securities increased ten basis points.

Total interest expense decreased $10.7 million for the nine months ended September 30, 2008, as compared to the same period last year. The change was due primarily to decreases in interest paid on Federal Home Loan Bank advances of $6.3 million, and interest expense on deposits of $4.4 million. These decreases were partially offset by an increase in the cost of repurchase agreements and other borrowings of $173,000.

The primary cause of the decrease in interest expense on Federal Home Loan Bank advances was a decrease in the average balance of those funds of $51.4 million and a rate decrease on those borrowings of 153 basis points when comparing the nine months ended September 30, 2008 to the nine months ended September 30, 2007. As previously mentioned, Home Savings sold loans in February 2008 that were designated for sale in the fourth quarter of 2007. Some of the proceeds from that sale were used to pay down these advances. Additionally, the rate on short term borrowings from the Federal Home Loan Bank has decreased due to the Federal Reserve’s action to drop the federal funds rate over the past year.

Interest expense on deposits decreased $4.4 million when comparing the nine months ended September 30, 2008, to September 30, 2007. This change was due primarily to the overall decrease in the rate paid for these deposits of 150 basis points despite an increase in the average balance of certificates of deposit of $33.1 million. The average balance of certificates of deposit increased based on management’s decision to utilize brokered certificates of deposit as a means of enhancing liquidity at Home Savings. Notwithstanding an increase in the average balance of interest bearing demand deposit and money market accounts, a decrease in the rate paid on those deposits of 117 basis points also contributed to the decrease.

The following table shows the impact of interest rate and outstanding balance (volume) changes compared to the first nine months of last year. The interest rate spread for the nine months ended September 30, 2008, was 2.48% compared to 2.42% for the nine months ended September 30, 2007. Net interest margin compressed 4 basis points to 2.84% for the nine months ended September 30, 2008 compared to 2.88% for the same period in 2007.


	For the Nine Months Ended September 30,
	2008 vs. 2007
	Increase						Total
	(decrease) due to						increase
	Rate			Volume			(decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	(11,376	)	$	(759	)	$	(12,135	)
Loans held for sale		(107	)		(309	)		(416	)
Investment securities:
Trading		3			29			32
Available for sale		185			1,731			1,916
FHLB stock		(214	)		17			(197	)
Other interest-earning assets		(258	)		6			(252	)

Total interest-earning assets	$	(11,767	)	$	715		$	(11,052	)


Interest-bearing liabilities:
Savings accounts		(170	)		169			(1	)
NOW and money market accounts		(4,225	)		1,704			(2,521	)
Certificates of deposit		(3,132	)		1,225			(1,907	)
Federal Home Loan Bank advances		(4,712	)		(1,720	)		(6,432	)
Repurchase agreements and other		(336	)		509			173

Total interest-bearing liabilities	$	(12,575	)	$	1,887			(10,688	)

Change in net interest income							$	(364	)

Provision for Loan Losses. The provision for loan losses increased by $4.3 million, to $14.7 million for the nine months ended September 30, 2008, compared to $10.4 million for the same period in 2007. The $14.7 million provision was primarily the result of the monthly assessments of the portfolio.

Non-interest Income. Non-interest income decreased $4.3 million, or 12.0%, to $31.4 million for the nine months ended September 30, 2008, from $35.7 million for the nine months ended September 30, 2007. The primary cause of the decrease was the write-down of the Fannie Mae auction rate pass through trust security and the write-down of the shares owned by the Company of another financial institution, as previously mentioned. In addition, United Community incurred increased losses on the disposition of property acquired in the resolution of nonperforming loans. These losses were offset partially by increased gains recognized on the sale of loans and the sale of available for sale securities. Gains recognized on the sale of loans during the first nine months of 2008 included $1.5 million in gains recognized on the sale of $76.5 million of loans designated for sale in the fourth quarter of 2007 and sold in February 2008. Also in the first nine months of 2008, Home Savings sold approximately $48.4 million in callable agency securities classified as available for sale and recognized a gain of approximately $802,000. The remaining gain recognized was the result of an ownership interest by Home Savings in Visa, Inc.

Non-interest Expense. Total non-interest expense increased $39.5 million for the nine months ended September 30, 2008, compared to the nine months ended September 30, 2007. The increase is largely attributable to the impairment charge associated with goodwill, as mentioned above. The Company also incurred additional expenses associated with deposit insurance premiums, consulting fees and expenses required to maintain other real estate owned prior to its sale. Expenses to maintain other real estate owned and FDIC insurance premiums are expected to remain high through the rest of 2008, as previously mentioned. An increase in salaries and employee benefits related to one-time severance costs and hospitalization related expenses at Home Savings also contributed to the change. Butler Wick also paid higher commissions and recognized additional expenses related to signing bonuses paid to new brokers in 2008.

Impact of Cease and Desist Orders on Future Earnings. United Community and Home Savings expect to incur higher expenses related to compliance with the Cease and Desist Orders (Orders) consented to in August 2008. Higher consulting fees are expected, resulting from the hiring of specialized consultants to assess personnel needs, enhance risk management policies and practices, enhance credit administration, and assist with the development and implementation of Home Savings’ strategic plan. These expenses are expected to be recognized in the fourth quarter and will aggregate approximately $200,000. Federal deposit insurance premiums are also expected to increase and are forecasted to be approximately $1.4 million in the fourth quarter of 2008.

The Orders require Home Savings to refine the methodology surrounding the allowance for loan and lease losses. Any changes in methodology are not expected to result in material changes to the adequacy of the allowance for loan and lease losses. The Orders also require Home Savings to develop and implement a plan to reduce classified assets and delinquent loans. Management believes these assets are properly valued at September 30, 2008, but cannot predict the future value of those assets. Furthermore, Home Savings must enhance loan policies, underwriting and credit administration functions, which may limit future growth and interest income.

The Orders prohibit United Community from incurring additional debt without prior approval, and to develop a debt reduction plan. Compliance with this provision will have a minimal impact on the Company’s liquidity but will reduce borrowing expenses over time. Furthermore, United Community must seek regulatory approval before declaring a dividend payment to shareholders. This may adversely affect the price at which the Company’s shares are traded.

Home Savings is required to increase its capital ratios by the end of the year, and maintain those levels over time. A capital enhancement plan is being developed and may include the reduction of certain types of lending and the sale of available for sale securities. Home Savings has received regulatory approval to prepay its $14.0 million subordinated note to United Community. Following this payment, United Community will invest the capital in Home Savings. The Company has also applied for participation in The Capital Purchase Program announced by the U.S. Treasury on October 14, 2008, as part of the Troubled Asset Relief Program.

UNITED COMMUNITY FINANCIAL CORP.
AVERAGE BALANCE SHEETS

The following table presents the total dollar amounts of interest income and interest expense on the indicated amounts of average interest-earning assets or interest-bearing liabilities together with the weighted average interest rates for the three month periods ended September 30, 2008 and 2007. Average balance calculations were based on daily balances.


	Three Months Ended September 30,
	2008							2007
	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)	$	2,235,986	$	33,503		5.99	%	$	2,263,546	$	38,463		6.80	%
Net loans held for sale		7,241		76		4.20	%		18,605		223		4.79	%
Investment securities:
Trading		8,421		81		3.90	%		5,701		54		3.79	%
Available for sale		305,024		3,823		5.01	%		245,884		3,029		4.93	%
FHLB stock		26,116		352		5.39	%		25,432		417		6.56	%
Other interest-earning assets		9,308		87		3.74	%		9,169		204		8.90	%


Total interest-earning assets		2,592,096		37,922		5.85	%		2,568,337		42,390		6.60	%

Noninterest-earning assets		174,186							151,234

Total assets	$	2,766,282						$	2,719,571


Interest-bearing liabilities:
NOW and money market accounts	$	427,339	$	2,115		1.98	%	$	401,458	$	3,564		3.55	%
Savings accounts		183,209		206		0.45	%		182,720		191		0.42	%
Certificates of deposit		1,207,454		12,140		4.02	%		1,096,057		13,131		4.79	%
Federal Home Loan Bank advances		385,506		3,069		3.18	%		470,031		5,758		4.90	%
Repurchase agreements and other		141,827		1,477		4.17	%		145,860		1,868		5.12	%

Total interest-bearing liabilities		2,345,335		19,007		3.24	%		2,296,126		24,512		4.27	%


Noninterest-bearing liabilities		139,754							138,833

Total liabilities		2,485,089							2,434,959
Equity		281,193							284,612

Total liabilities and equity	$	2,766,282						$	2,719,571

Net interest income and interest rate spread			$	18,915		2.61	%			$	17,878		2.33	%

Net interest margin						2.92	%						2.78	%
Average interest-earning assets to average interest-bearing liabilities						110.52	%						111.86	%


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

UNITED COMMUNITY FINANCIAL CORP.

AVERAGE BALANCE SHEETS

The following table presents the total dollar amounts of interest income and interest expense on the indicated amounts of average interest-earning assets or interest-bearing liabilities together with the weighted average interest rates for the nine month periods ended September 30, 2008 and 2007. Average balance calculations were based on daily balances.


	Nine Months Ended September 30,
	2008							2007
	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)	$	2,240,853	$	103,246		6.14	%	$	2,255,789	$	115,381		6.82	%
Net loans held for sale		10,690		352		4.39	%		19,633		768		5.22	%
Investment securities:
Trading		7,572		211		3.73	%		6,503		179		3.67	%
Available for sale		296,538		10,978		4.94	%		249,681		9,062		4.84	%
FHLB stock		25,776		1,032		5.34	%		25,432		1,229		6.44	%
Other interest-earning assets		7,921		348		5.86	%		7,844		600		10.20	%


Total interest-earning assets		2,589,350		116,167		5.98	%		2,564,882		127,219		6.61	%

Noninterest-earning assets		163,989							145,057

Total assets	$	2,753,339						$	2,709,939


Interest-bearing liabilities:
NOW and money market accounts	$	446,017	$	7,766		2.32	%	$	392,939	$	10,287		3.49	%
Savings accounts		181,038		584		0.43	%		189,422		585		0.41	%
Certificates of deposit		1,152,175		37,657		4.36	%		1,119,117		39,564		4.71	%
Federal Home Loan Bank advances		397,083		9,952		3.34	%		448,487		16,384		4.87	%
Repurchase agreements and other		151,749		5,141		4.52	%		132,976		4,968		4.98	%

Total interest-bearing liabilities		2,328,062		61,100		3.50	%		2,282,941		71,788		4.19	%


Noninterest-bearing liabilities		142,074							140,731

Total liabilities		2,470,136							2,423,672
Equity		283,203							286,267

Total liabilities and equity	$	2,753,339						$	2,709,939

Net interest income and interest rate spread			$	55,067		2.48	%			$	55,431		2.42	%

Net interest margin						2.84	%						2.88	%
Average interest-earning assets to average interest-bearing liabilities						111.22	%						112.35	%


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

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Qualitative Aspects of Market Risk. The principal market risk affecting United Community is interest rate risk. United Community is subject to interest rate risk to the extent that its interest-earning assets reprice differently than its interest-bearing liabilities. Interest rate risk is defined as the sensitivity of a company’s earnings and net asset values to changes in interest rates. As part of its efforts to monitor and manage the interest rate risk, Home Savings, which accounts for most of the assets and liabilities of United Community, has adopted an interest rate risk policy that requires the Home Savings Board to review quarterly reports related to interest rate risk and to set exposure limits for Home Savings as a guide to management in setting and implementing day-to-day operating strategies.

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

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

Presented below are analyses of Home Savings’ interest rate risk as measured by changes in NPV and net interest income for instantaneous and sustained parallel shifts of 100 basis point increments in market interest rates. Due to the current low level of treasury rates, values for a decline in rates of 200 and 300 basis points are not calculated for the quarter ended September 30, 2008. As noted, for the quarter ended September 30, 2008, 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 September 30, 2008
	NPV as % of portfolio value of assets									Next 12 months net interest income
										(Dollars in thousands)
													Internal policy
				Internal policy									limitations on
Change in rates				limitations as to									maximum
(Basis points)	NPV Ratio			minimum %			Change in %			$ Change			change			% Change

+300		7.91	%		5.00	%		(2.71	)%	$	(7,970	)		(15.00	)%		(10.20	)%
+200		9.03			6.00			(1.59	)		(4,881	)		(10.00	)		(6.24	)
+100		9.77			6.00			(0.86	)		(2,111	)		(5.00	)		(2.70	)
Static		10.62			7.00			—			—			—			—
(100)		10.72			6.00			0.10			903			(5.00	)		1.16


Year Ended December 31, 2007
	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		7.99	%		5.00	%		(1.48	)%	$	(7,009	)		(15.00	)%		(9.93	)%
+ 200		8.73			6.00			(0.75	)		(4,353	)		(10.00	)		(6.17	)
+ 100		9.29			6.00			(0.18	)		(2,139	)		(5.00	)		(3.03	)
Static		9.47			7.00			—			—			—			—
(100)		9.53			6.00			0.05			2,723			(5.00	)		3.86
(200)		8.82			6.00			(0.66	)		3,467			(15.00	)		4.91
(300)		7.90			5.00			(1.57	)		3,397			(20.00	)		4.81

Due to changes in the composition of Home Savings’ funding mix since December 2007, Home Savings sensitivity to rising rates has increased slightly. Therefore, 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.

In the last nine months, Home Savings has begun to see the positive impact of a steeper yield curve. The net interest margin continues to improve, despite a high level of nonperforming assets, as certificates of deposit reprice at much lower levels supported by loan yields that have stabilized.

ITEM 4. Controls and Procedures

An evaluation was carried out by United Community’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of United Community’s disclosure controls and procedures (as defined in Rules 13a-15(e)/15d-15(e) of the Securities Exchange Act of 1934) as of September 30, 2008. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that United Community’s disclosure controls and procedures are effective. During the quarter ended September 30, 2008, there were no changes in United Community’s internal controls over financial reporting that have materially affected or are reasonably likely to affect materially United Community’s internal controls over financial reporting.

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

Item 1A of United Community’s Form 10-K for the year ended December 31, 2007 presents risk factors that may impact United Community’s future results. In light of recent cease and Desist Orders consented to by Home Savings and United Community, those risk factors are supplemented by the following risk factor:

Cease and desist orders restrict dividends and certain business activities.

United Community’s ability to pay regular quarterly dividends to shareholders and to pay interest on United Community’s debt depends to a large extent upon the dividends received from Home Savings. The Bank Orders prohibit Home Savings from paying dividends to United Community without prior regulatory approval. In addition, the OTS Orders prohibit United Community from paying dividends to shareholders without prior regulatory approval.

Management believes that United Community, on a stand-alone basis, currently has adequate resources to meet its current obligations, which are primarily interest payments on a $14.9 million line of credit. However, in the longer term, United Community’s ability to service debt depends on its ability to receive dividends from Home Savings and Butler Wick and, when debt matures, on its ability to renew, refinance or pay down the line of credit. Furthermore, the OTS Orders prohibit United Community to issue or renew debt without prior approval. We cannot predict whether regulatory approval will be received for payments of dividends by Home Savings to United Community, or for the payment of future dividends by United Community to shareholders or how long these restrictions will remain in effect.

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

There have been no purchases of treasury shares during the quarter ended September 30, 2008.

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


	PAGE
Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Statements of Financial Condition as of September 30, 2008 (Unaudited) and December 31, 2007		1

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2008 and 2007 (Unaudited)		2

Consolidated Statement of Shareholders’ Equity for the Nine Months ended September 30, 2008 (Unaudited)		3

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007 (Unaudited)		4

Notes to Consolidated Financial Statements		5-17

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18-29

Item 3. Quantitative and Qualitative Disclosures about Market Risk		30

Item 4. Controls and Procedures		31

Part II. OTHER INFORMATION

Item 1. Legal Proceedings		32

Item 1A. Risk Factors		32

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		32

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		32

Signatures		33

Exhibits		34-37
EX-31.1
EX-31.2
EX-32



Date: November 10, 2008	/S/ Douglas M. McKay
	Douglas M. McKay
	Chief Executive Officer


Date: November 10, 2008	/S/ James R. Reske
	James R. Reske, CFA
	Chief Financial Officer

	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)		designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)		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; 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 affect materially, the registrant’s internal control over financial reporting.

	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.

	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)		designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)		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; 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 affect materially, the registrant’s internal control over financial reporting.

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												Unearned
									Accumulated			Employee
									Other			Stock
	Shares		Common			Retained			Comprehensive			Ownership			Treasury
	Outstanding		Stock			Earnings			Income (Loss)			Plan Shares			Stock			Total
	(Amounts in thousands, except share data)
Balance December 31, 2007		30,052	$	146,683		$	213,727		$	661		$	(9,465	)	$	(81,892	)	$	269,714
Comprehensive income (loss):
Net income (loss)							(31,782	)											(31,782	)
Change in net unrealized gain/(loss) on securities and postretirement liabilities, net of reclassification and taxes of $488										(906	)								(906	)

Comprehensive income (loss)																			(32,688	)
Shares allocated to ESOP participants				(123	)								1,367						1,244
Stock based compensation				150															150
Dividends paid, $0.1425 per share							(4,064	)											(4,064	)

Balance September 30, 2008		30,052	$	146,710		$	177,881		$	(245	)	$	(8,098	)	$	(81,892	)	$	234,356

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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


/S/ Douglas M. McKay Douglas M. McKay
Chief Executive Officer
November 10, 2008


/S/ James R. Reske James R. Reske, CFA
Chief Financial Officer
November 10, 2008