UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2009

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

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

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See 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		Small 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. 30,897,826 common shares as of July 31, 2009.

 

 

TABLE OF CONTENTS

		PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of June 30, 2009 (Unaudited) and December 31, 2008			1
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2009 and 2008 (Unaudited)			2
Consolidated Statement of Shareholders’ Equity for the Six Months ended June 30, 2009 (Unaudited)			4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008 (Unaudited)			5
Notes to Consolidated Financial Statements			6-24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25-36
Item 3. Quantitative and Qualitative Disclosures about Market Risk			37
Item 4. Controls and Procedures			38
Part II. OTHER INFORMATION
Item 1. Legal Proceedings			39
Item 1A. Risk Factors			39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			39
Item 3. Defaults Upon Senior Securities (None)
Item 4. Submission of Matters to a Vote of Security Holders			39
Item 5. Other Information (None)
Item 6. Exhibits			39
Signatures			40
Exhibits			41
Exhibit 10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I. FINANCIAL INFORMATION

ITEM 1.		Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

		June 30,				December 31,
		2009				2008
		(Dollars in thousands)
Assets:
Cash and deposits with banks		$	22,006			$	21,745
Federal funds sold and other			22,654				21,672
Total cash and cash equivalents			44,660				43,417
Securities:
Available for sale, at fair value			255,845				215,731
Loans held for sale			14,057				16,032
Loans, net of allowance for loan losses of $39,832 and $35,962, respectively			2,032,404				2,203,453
Federal Home Loan Bank stock, at cost			26,464				26,464
Premises and equipment, net			24,258				25,015
Accrued interest receivable			9,042				10,082
Real estate owned and other repossessed assets			33,077				29,258
Core deposit intangible			766				884
Cash surrender value of life insurance			25,611				25,090
Assets of discontinued operations—Butler Wick Corp.			—				5,562
Other assets			20,871				17,085
Total assets		$	2,487,055			$	2,618,073
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Interest bearing		$	1,711,315			$	1,779,676
Non-interest bearing			116,899				106,255
Total deposits			1,828,214				1,885,931
Borrowed funds:
Federal Home Loan Bank advances			294,152				337,603
Repurchase agreements and other borrowings			97,252				125,269
Total borrowings			391,404				462,872
Advance payments by borrowers for taxes and insurance			14,051				19,806
Accrued interest payable			2,698				3,077
Liabilities of discontinued operations—Butler Wick Corp.			—				2,388
Accrued expenses and other liabilities			16,075				9,076
Total liabilities			2,252,442				2,383,150
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 30,897,825 shares outstanding			145,873				146,439
Retained earnings			165,803				165,447
Accumulated other comprehensive income			2,624				3,635
Unearned employee stock ownership plan shares			(6,732	)			(7,643	)
Treasury stock, at cost, 6,906,632 shares			(72,955	)			(72,955	)
Total shareholders’ equity			234,613				234,923
Total liabilities and shareholders’ equity		$	2,487,055			$	2,618,073

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
		(Dollars in thousands, except per share data)
Interest income
Loans		$	30,076			$	33,935			$	61,143			$	69,743
Loans held for sale			216				88				479				276
Securities:
Trading			—				2				—				1
Available for sale			2,796				3,803				5,566				7,044
Federal Home Loan Bank stock dividends			294				348				593				680
Other interest earning assets			9				28				38				85
Total interest income			33,391				38,204				67,819				77,829
Interest expense
Deposits			12,074				14,510				24,725				31,546
Federal Home Loan Bank advances			1,569				3,191				3,427				6,883
Repurchase agreements and other			1,061				1,587				2,251				3,543
Total interest expense			14,704				19,288				30,403				41,972
Net interest income			18,687				18,916				37,416				35,857
Provision for loan losses			12,311				3,248				20,755				5,714
Net interest income after provision for loan losses			6,376				15,668				16,661				30,143
Non-interest income
Non-deposit investment income			404				432				708				910
Service fees and other charges			2,721				2,523				4,233				4,288
Net gains (losses):
Securities available for sale			1,382				57				1,382				988
Other than temporary impairment charges on securities available for sale			—				—				(150	)			—
Trading securities			—				(23	)			—				(23	)
Loans sold			1,788				395				2,928				2,579
Real estate owned and other repossessed assets sold			(1,182	)			(1,533	)			(2,320	)			(1,673	)
Other income			1,092				1,057				2,167				2,110
Total non-interest income			6,205				2,908				8,948				9,179
Non-interest expense
Salaries and employee benefits			7,764				9,011				15,787				18,061
Occupancy			899				900				1,883				1,847
Equipment and data processing			1,660				1,547				3,390				3,268
Franchise tax			555				544				1,147				1,124
Advertising			187				217				416				482
Amortization of core deposit intangible			58				74				118				151
Deposit insurance premiums			2,940				219				4,723				270
Professional fees			907				716				1,623				1,250
Real estate owned and other repossessed asset expenses			804				700				1,755				1,088
Other expenses			1,428				1,233				2,759				2,583
Total non-interest expenses			17,202				15,161				33,601				30,124
Income (loss) before income taxes and discontinued operations			(4,621	)			3,415				(7,992	)			9,198
Income taxes expense (benefit)			(1,707	)			1,111				(3,399	)			3,129
Net income (loss) before discontinued operations			(2,914	)			2,304				(4,593	)			6,069
Discontinued operations
Net income of Butler Wick Corp., net of tax			—				425				4,949				703
Net income (loss)		$	(2,914	)		$	2,729			$	356			$	6,772

(Continued)

(Continued)

UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
		(Dollars in thousands, except per share data)
Comprehensive income (loss)		$	(4,835	)		$	(3,731	)		$	(655	)		$	2,448
Earnings (loss) per share
Basic—continuing operations		$	(0.10	)		$	0.08			$	(0.16	)		$	0.21
Basic—discontinued operations			—				0.02				0.17				0.03
Basic			(0.10	)			0.10				0.01				0.24
Diluted—continuing operations			(0.10	)			0.08				(0.16	)			0.21
Diluted—discontinued operations			—				0.02				0.17				0.03
Diluted			(0.10	)			0.10				0.01				0.24

See notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

																		Unearned
														Accumulated				Employee
														Other				Stock
		Shares				Common				Retained				Comprehensive				Ownership				Treasury
		Outstanding				Stock				Earnings				Income (Loss)				Plan Shares				Stock				Total
		(Dollars in thousands, except share data)
Balance December 31, 2008			30,898			$	146,439			$	165,447			$	3,635			$	(7,643	)		$	(72,955	)		$	234,923
Comprehensive income:
Net income											356																356
Change in net unrealized gain/(loss) on securities, net of tax benefit of $544															(1,011	)											(1,011	)
Comprehensive income (loss)																											(655	)
Shares allocated to ESOP participants							(595	)											911								316
Stock based compensation							29																				29
Balance June 30, 2009			30,898			$	145,873			$	165,803			$	2,624			$	(6,732	)		$	(72,955	)		$	234,613

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

		Six Months Ended June 30,
		2009				2008
		(Dollars in thousands)
Cash Flows from Operating Activities
Net income		$	356			$	6,772
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses			20,755				5,714
Net gains on loans sold			(2,928	)			(2,579	)
Net losses on real estate owned and other repossessed assets sold			2,337				1,674
Net losses on other assets sold			(17	)			(1	)
Other than temporary impairment of securities available for sale			150				—
Amortization of premiums and accretion of discounts			1,156				612
Depreciation and amortization			1,124				1,299
Federal Home Loan Bank stock dividends			—				(680	)
Decrease in interest receivable			1,040				1,581
Decrease in interest payable			(379	)			(2,986	)
Increase in prepaid and other assets			(4,042	)			(5,392	)
Increase in other liabilities			3,104				5,366
Decrease in trading securities			—				22
Stock based compensation			29				161
Net principal disbursed on loans originated for sale			(262,788	)			(106,334	)
Proceeds from sale of loans originated for sale			267,691				184,912
ESOP Compensation			316				922
Operating cash flows from discontinued operations			(4,949	)			(315	)
Net cash from operating activities			22,955				90,748
Cash Flows from Investing Activities
Proceeds from principal repayments and maturities of:
Securities available for sale			25,923				36,942
Proceeds from sale of:
Securities available for sale			46,051				48,411
Real estate owned and other repossessed assets			6,797				5,863
Purchases of:
Securities available for sale			(114,047	)			(157,065	)
Net change in loans			138,926				57,006
Loans purchased			(2,009	)			(54,207	)
Purchases of premises and equipment			(334	)			(522	)
Investing cash flows from discontinued operations			11,921				—
Net cash from investing activities			113,228				(63,572	)
Cash Flows from Financing Activities
Net increase in checking, savings and money market accounts			30,279				68,463
Net decrease in certificates of deposit			(87,996	)			(89,277	)
Net decrease in advance payments by borrowers for taxes and insurance			(5,755	)			(5,063	)
Proceeds from Federal Home Loan Bank advances			423,400				405,700
Repayment of Federal Home Loan Bank advances			(466,851	)			(398,744	)
Net change in repurchase agreements and other borrowed funds			(28,017	)			2,677
Cash dividends paid			—				(4,064	)
Financing cash flows from discontinued operations			—				2,334
Net cash from financing activities			(134,940	)			(17,974	)
Change in cash and cash equivalents			1,243				9,202
Cash and cash equivalents, beginning of period			43,417				33,502
Cash and cash equivalents, end of period		$	44,660			$	42,704

UNITED COMMUNITY FINANCIAL CORP.

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.

The accompanying consolidated financial statements of United Community have been prepared in accordance with instructions relating to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair statement of results for the interim periods.

The results of operations for the six months ended June 30, 2009, are not necessarily indicative of the results to be expected for the year ending December 31, 2009. 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, 2008, contained in United Community’s Form 10-K for the year ended December 31, 2008.

Management has evaluated events occurring subsequent to the balance sheet date through August 7, 2009, determining no events require adjustment to or additional disclosure in the consolidated financial statements.

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

2. 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. Because of the consent to the Bank Order, Home Savings is deemed ‘adequately capitalized’ for regulatory capital purposes, as previously disclosed.

United Community and Home Savings are moving toward compliance with the OTS Order and Bank Order.

3. DISCONTINUED OPERATIONS

On August 12, 1999, United Community acquired Butler Wick Corp. (Butler Wick), the parent company for two wholly owned subsidiaries: Butler Wick & Co., Inc. and Butler Wick Trust Company. On December 31, 2008, the Company completed the sale of Butler Wick & Co., Inc., to Stifel Financial Corp. for $12.0 million. On March 31, 2009, the Company completed the sale of Butler Wick Trust to Farmers National Banc Corp. for $12.1 million. As a result, Butler Wick has been reported as a discontinued operation and consolidated financial statement information for all periods presented has been reclassified to reflect this presentation. Butler Wick’s results of operations summarized are as follows:

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
		(Dollars in thousands)								(Dollars in thousands)
Income
Interest income		$	—			$	187			$	32			$	416
Brokerage commissions			—				6,629				—				12,730
Service fees and other charges			—				1,483				1,287				3,172
Underwriting and investment banking			—				206				—				235
Gain on the sale of Butler Wick Trust			—				—				7,904				—
Other income			—				138				—				164
Total income			—				8,643				9,223				16,717
Expenses
Interest expense on borrowings			—				52				—				121
Salaries and employee benefits			—				5,891				1,198				11,570
Occupancy expenses			—				385				68				773
Equipment and data processing			—				588				84				1,206
Other expenses			—				1,073				258				1,939
Total expenses			—				7,989				1,608				15,609
Income before taxes			—				654				7,615				1,108
Income tax			—				229				2,666				405
Net income		$	—			$	425			$	4,949			$	703

4. RECENT ACCOUNTING DEVELOPMENTS

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. The adoption of this standard had no impact on United Community’s 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. The adoption of this standard had no impact on United Community’s 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. The adoption of this standard had no impact on United Community’s consolidated financial statements.

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. The adoption of this standard had no impact 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 did not have a material impact to 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 did not materially affect 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 did not materially affect United Community’s consolidated financial statements.

In October 2008, the FASB issued Staff Position 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is not Active. The provisions of FSP 157-3 are effective on issuance, or October 10, 2008. FSP 157-3 clarifies the application of SFAS No. 157, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. Application issues addressed by the FSP include (a) how management’s internal assumptions should be considered when measuring fair value when relevant observable data do not exist, (b) how observable market information in a market that is not active should be considered when measuring fair value and (c) how the use of market quotes should be considered when assessing the relevance of observable and unobservable data available to measure fair value. The adoption of FSP 157-3 did not materially affect United Community’s consolidated financial statements.

In April 2009, the FASB issued Staff Position (FSP) No. 115-2 and No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, which amends existing guidance for determining whether impairment is other-than-temporary (OTTI) for debt securities. The FSP requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized in earnings. For securities that do not meet the aforementioned criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income. Additionally, the FSP expands and increases the frequency of existing disclosures about other-than-temporary impairments for debt and equity securities. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted the FSP effective April 1, 2009. The adoption of FSP FAS 115-2 and FAS 124-2 for the period ended June 30, 2009, did not have a material impact on the Company’s consolidated financial statements as the Company has not experienced other-than-temporary impairment within its debt securities portfolio.

In April 2009, the FASB issued Staff Position (FSP) No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP emphasizes that even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants. The FSP provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity. In addition, when transactions or quoted prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value. The FSP also requires increased disclosures. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. The adoption of this FSP at June 30, 2009 did not have a material impact on the results of operations or financial position.

In April 2009, the FASB issued FSP No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies that were previously only required in annual financial statements. This FSP is effective for interim reporting periods ending after June 15, 2009. The adoption of this FSP at June 30, 2009 did not have a material impact on the results of operations or financial position as it only required disclosures which are included in Note 11.

In May 2009, FASB issued SFAS No. 165, Subsequent Events, with the objective to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 sets forth: (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS No. 165 is effective for interim and annual financial periods ending after June 15, 2009. The adoption of SFAS No. 165 on June 30, 2009, did not have a material impact on the Company’s consolidated financial statements.

Recently Issued but not yet Effective Accounting Pronouncements:

In June 2009, FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140. The objective of SFAS No. 166 is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. SFAS No. 166 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Management is still evaluating the impact of this accounting standard.

In June 2009, FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). The objective of SFAS No. 167 is to amend certain requirements of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. SFAS No. 167 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. Management is still evaluating the impact of this accounting standard.

5. 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, by facilitating their purchase of an ownership interest in United Community. The 1999 Plan terminated on May 20, 2009.

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 3,569,766. There were 336,000 stock options granted in the first six months of 2009 under the 1999 plan. As of June 30, 2009, there were 115,793 shares remaining in the 1999 Plan that could be granted. However, as of July 12, 2009, no additional options may be issued under the 1999 Plan. All of the previous options awarded became exercisable on the date of grant. For the options granted in 2009, one third of the total options granted become exercisable on December 31, 2009, 2010 and 2011. The option period for each grant 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 no stock-based incentive awards granted in the first six months of 2009 and there were 243,721 stock options granted in 2008 under the 2007 Plan. All of the options awarded in 2008 became exercisable on the date of grant. The option period for each grant expires 10 years from the date of grant.

A summary of activity in the plans is as follows:

		For the Six Months Ended June 30, 2009
										Aggregate
						Weighted				intrinsic
						average				value (in
		Shares				exercise price				thousands)
Outstanding at beginning of year			2,092,128			$	9.08
Granted			336,000				1.86
Exercised			—				—
Forfeited			(209,925	)			9.16
Outstanding at end of period			2,218,203			$	7.98			$	—
Options exercisable at end of period			1,882,203			$	9.40			$	—

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

		June 30,
		2009
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			1.07

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.

		May 8, 2009				June 25, 2009
Risk-free interest rate			2.15	%			2.58	%
Expected term (years)			5				5
Expected stock volatility			67.4				67.8
Dividend yield			—	%			—	%

Outstanding stock options have a weighted average remaining life of 5.06 years and may be exercised in the range of $1.30 to $12.38.

6. SECURITIES

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

		June 30, 2009
		(Dollars in thousands)
						Gross				Gross
		Fair				Unrealized				Unrealized				Amortized
		Value				Gains				Losses				Cost
U.S. Treasury and government sponsored entities’ securities		$	43,974			$	698			$	(41	)		$	43,317
Equity securities			976				334				(459	)			1,101
Mortgage-related securities			210,895				3,151				(167	)			207,911
Total		$	255,845			$	4,183			$	(667	)		$	252,329

		December 31, 2008
		(Dollars in thousands)
						Gross				Gross
		Fair				Unrealized				Unrealized
		Value				Gains				Losses
U.S. Treasury and government sponsored entities’ securities		$	27,170			$	865			$	—
Equity securities			910				70				(411	)
Mortgage-related securities			187,651				4,527				(107	)
Total		$	215,731			$	5,462			$	(518	)

The amortized cost and fair value of the investment securities portfolio are shown by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

		June 30, 2009
		(Dollars in thousands)
		Fair				Amortized
		Value				Cost
Due in one year or less		$	—			$	—
Due after one year through five years			28,397				28,062
Due after five years through ten years			15,577				15,255
Mortgage-related securities			210,895				207,911
Total		$	254,869			$	251,228

Home Savings holds in its available-for-sale securities portfolio a Fannie Mae auction rate pass through trust security with an original 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 $4.9 million in 2008 and an additional write-down of $26,000 in the first quarter of 2009. Also, a write-down of the Company’s equity investment in the common shares of three financial institutions of $1.2 million was recognized in 2008. The Company determined that in the first quarter of 2009, further deterioration of the investment in one of those financial institutions caused the need to recognize an additional loss of $124,000. The cause of the deterioration was a result of recent regulatory enforcement actions imposed on that institution by its regulatory authorities.

Securities pledged for public funds deposits were approximately $1.0 million at June 30, 2009, and $2.1 million at December 31, 2008. Securities sold under an agreement to repurchase are secured primarily by mortgage-backed securities with a fair value of approximately $120.4 million at June 30, 2009, and $131.5 million at December 31, 2008.

United Community had no securities classified as trading as of June 30, 2009 and December 31, 2008.

The following table summarizes the investment securities with unrealized losses at June 30, 2009 by aggregated major security type and length of time in a continuous unrealized loss position:

		June 30, 2009
		(Dollars in thousands)
		Less Than 12 Months								12 Months or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Loss				Value				Loss				Value				Loss
U.S. Treasury and government sponsored entities’ securities		$	7,157			$	(41	)		$	—			$	—			$	7,157			$	(41	)
Equity securities			213				(311	)			87				(148	)			300				(459	)
Mortgage-related securities			17,558				(151	)			856				(16	)			18,414				(167	)
Total		$	24,928			$	(503	)		$	943			$	(164	)		$	25,871			$	(667	)

Proceeds from sales and calls of securities available for sale were $46.1 and $10.1 million for the three months ended June 30, 2009 and 2008, respectively. Gross gains of $1.4 million and $100,000 and gross losses of $0 and $0 were realized on these sales during 2009 and 2008, respectively.

Proceeds from sales and calls of securities available for sale were $46.1 million and $48.4 million for the six months ended June 30, 2009 and 2008, respectively. Gross gains of $1.4 million and $1.0 million and gross losses of $0 and $0 were realized on these sales during 2009 and 2008, respectively.

Other-Than-Temporary-Impairment

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities classified as available for sale or held-to-maturity are generally evaluated for OTTI under Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities.

In determining OTTI under the SFAS No. 115 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

The second segment of the portfolio uses the OTTI guidance provided by EITF 99-20 that is specific to purchased beneficial interests that, on the purchase date, were rated below AA. Under the EITF 99-20 model, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

As of June 30, 2009, the Company’s security portfolio consisted of 56 securities, 13 of which were in an unrealized loss position. The majority of unrealized losses are related to the Company’s mortgage-related and equity securities, as discussed below:

Mortgage-related Securities

At June 30, 2009, 100% of the mortgage-related securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-related securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2009.

Equity Securities

The issuers of the equity securities that are temporarily impaired at June 30, 2009, are all well capitalized financial institutions and each exhibit a low to moderate level of nonperforming assets.

7. LOANS

Portfolio loans consist of the following:

		June 30,				December 31,
		2009				2008
		(Dollars in thousands)
Real Estate:
One- to four-family residential		$	852,833			$	909,567
Multifamily residential			164,376				187,711
Nonresidential			396,688				375,463
Land			23,221				23,517
Construction:
One- to four-family residential			209,610				255,355
Multifamily and non-residential			15,007				35,797
Total real estate			1,661,735				1,787,410
Consumer			322,874				348,834
Commercial			86,286				101,489
Total loans			2,070,895				2,237,733
Less:
Allowance for loan losses			39,832				35,962
Deferred loan fees, net			(1,341	)			(1,682	)
Total			38,491				34,280
Loans, net		$	2,032,404			$	2,203,453

Changes in the allowance for loan loss are as follows:

		Six Months
		Ended				Year Ended
		June 30,				December 31,
		2009				2008
		(Dollars in thousands)
Balance, beginning of year		$	35,962			$	32,006
Provision for loan losses			20,755				25,329
Amounts charged off			(17,506	)			(22,088	)
Recoveries			621				715
Balance, end of period		$	39,832			$	35,962

Non-accrual loans were $96.5 million and $98.3 million at June 30, 2009, and December 31, 2008, respectively. Restructured loans were $2.5 million at June 30, 2009 and $1.8 million at December 31, 2008. Loans greater than 90 days past due and still accruing interest were $3.0 million and $6.6 million at June 30, 2009 and December 31, 2008, respectively.

Impaired loans consist of the following:

		As of or for the				As of or for
		Six Months				the Year
		Ended				Ended
		June 30,				December 31,
		2009				2008
		(Dollars in thousands)
Impaired loans on which no specific valuation allowance was provided		$	46,252			$	43,256
Impaired loans on which a specific valuation allowance was provided			43,338				43,992
Total impaired loans at period-end		$	89,590			$	87,248
Specific valuation allowances on impaired loans at period-end		$	6,591			$	10,968
Average impaired loans during the period			88,419				85,812
Interest income recognized on impaired loans during the period			269				513
Interest income received on impaired loans during the period			269				513

8. MORTGAGE BANKING ACTIVITIES

Mortgage loans serviced for others, which are not reported in United Community’s assets, totaled $992.2 million at June 30, 2009, and $921.0 million at December 31, 2008.

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

		Six Months
		Ended				Year Ended
		June 30,				December 31,
		2009				2008
		(Dollars in thousands)
Balance, beginning of year		$	5,562			$	6,184
Originations			2,028				1,337
Amortized to expense			(1,463	)			(1,959	)
Balance, end of period			6,127				5,562
Less valuation allowance			(1,020	)			(2,233	)
Net balance		$	5,107			$	3,329

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

		Six Months
		Ended				Year Ended
		June 30,				December 31,
		2009				2008
		(Dollars in thousands)
Balance, beginning of year		$	(2,233	)		$	(562	)
Impairment charges			—				(2,233	)
Recoveries			1,213				562
Balance, end of period		$	(1,020	)		$	(2,233	)

Fair value of mortgage servicing rights as of June 30, 2009 was approximately $6.5 million and at December 31, 2008 was $3.9 million.

Key economic assumptions in measuring the value of mortgage servicing rights at June 30, 2009 and December 31, 2008 were as follows:

		June 30,		December 31,
		2009		2008
Weighted average prepayment rate		415 PSA		644 PSA
Weighted average life (in years)		3.59		3.34
Weighted average discount rate		8%		8%

9. OTHER REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS

Real estate owned and other repossessed assets at June 30, 2009 and December 31, 2008 were as follows:

		June 30,				December 31,
		2009				2008
		(Dollars in thousands)
Real estate owned and other repossessed assets		$	36,145			$	32,012
Valuation allowance			(3,068	)			(2,754	)
End of period		$	33,077			$	29,258

Activity in the valuation allowance was as follows:

		June 30,				December 31,
		2009				2008
		(Dollars in thousands)
Beginning of year		$	2,754			$	—
Additions charged to expense			1,398				3,753
Direct write-downs			(1,084	)			(999	)
End of period		$	3,068			$	2,754

Expenses related to foreclosed and repossessed assets include:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
		(Dollars in thousands)								(Dollars in thousands)
Net loss on sales		$	497			$	143			$	922			$	238
Provision for unrealized losses			685				1,390				1,398				1,435
Operating expenses, net of rental income			804				700				1,755				1,088
Total expenses		$	1,986			$	2,233			$	4,075			$	2,761

10. OTHER POSTRETIREMENT BENEFIT PLANS

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

Components of net periodic benefit cost are as follows:

		Three Months Ended June 30,
		2009				2008
		(Dollars in thousands)
Service cost		$	—			$	—
Interest cost			47				48
Expected return on plan assets			—				—
Net amortization of prior service cost			—				—
Net amortization of actuarial gain			(4	)			(3	)
Net periodic benefit cost		$	43			$	45

		Six Months Ended June 30,
		2009				2008
		(Dollars in thousands)
Service cost		$	—			$	—
Interest cost			94				96
Expected return on plan assets			—				—
Net amortization of prior service cost			—				—
Net amortization of actuarial gain			(8	)			(6	)
Net periodic benefit cost		$	86			$	90

11. FAIR VALUE MEASUREMENT

SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS No. 157 also establishes a fair value hierarchy which 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 values:

Level 1: Quoted prices (unadjusted) for 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 securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which 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 (Level 2 inputs).

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

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

						Fair Value Measurements at June 30, 2009 Using:
						Quoted Prices in
						Active Markets								Significant
						for Identical				Significant Other				Unobservable
		June 30,				Assets				Observable				Inputs
		2009				(Level 1)				Inputs (Level 2)				(Level 3)
		(Dollars in thousands)
Assets:
Available for sale securities
US Treasury and government sponsored entities’ securities		$	43,974			$	—			$	43,974			$	—
Equity securities			976				976				—				—
Mortgage-related securities			210,895				—				210,895				—

Fair Value Measurements at December 31, 2008 Using:

Quoted Prices in

Active Markets

Significant

for Identical

Significant Other

Unobservable

December 31,

Assets

Observable

Inputs

2008

(Level 1)

Inputs (Level 2)

(Level 3)

(Dollars in thousands)

Assets:

Available for sale securities

$

215,731

$

809

$

214,922

$

—

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

						Fair Value Measurements at June 30, 2009 Using:
						Quoted Prices in
						Active Markets								Significant
						for Identical				Significant Other				Unobservable
		June 30,				Assets				Observable				Inputs
		2009				(Level 1)				Inputs (Level 2)				(Level 3)
		(Dollars in thousands)
Assets:
Impaired loans		$	36,747				—				—			$	36,747
Mortgage servicing assets			2,220				—				2,220				—
Foreclosed assets			10,562				—				—				10,562

Fair Value Measurements at December 31, 2008 Using:

Quoted Prices in

Active Markets

Significant

for Identical

Significant Other

Unobservable

December 31,

Assets

Observable

Inputs

2008

(Level 1)

Inputs (Level 2)

(Level 3)

(Dollars in thousands)

Assets:

Impaired loans

$

33,024

—

—

$

33,024

Mortgage servicing rights

2,421

—

2,421

—

Impaired loans, carried at fair value, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $43.3 million at June 30, 2009, with a valuation allowance of $6.6 million, resulting in additional provision for loan losses of $1.6 million during the period.

Mortgage servicing rights had a carrying amount of $6.1 million with a valuation allowance of $1.0 million, and are valued by an independent third party that is active in purchasing and selling these instruments. The value reflects the characteristics of the underlying loans discounted at a market multiple.

Foreclosed assets, carried at fair value, which is measured for impairment using the fair value of the property less estimated selling costs, had a carrying amount of $13.7 million, with a valuation allowance of $3.1 million.

In accordance with FSP FAS 107-1, the carrying amounts and estimated fair values of financial instruments, at June 30, 2009 and December 31, 2008 are as follows:

		June 30, 2009								December 31, 2008
		Carrying				Fair				Carrying				Fair
		Value				Value				Value				Value
		(Dollars in thousands)
Assets:
Cash and cash equivalents		$	44,660			$	44,660			$	43,417			$	43,417
Securities:
Available for sale			255,845				255,845				215,731				215,731
Loans held for sale			14,057				14,096				16,032				16,358
Loans, net			2,032,404				2,028,432				2,203,453				2,203,606
Federal Home Loan Bank stock			26,464				n/a				26,464				n/a
Accrued interest receivable			9,042				9,042				10,082				10,082
Liabilities:
Deposits:
Checking, savings and money market accounts			(690,954	)			(690,955	)			(660,675	)			(660,675	)
Certificates of deposit			(1,137,260	)			(1,150,774	)			(1,225,256	)			(1,237,262	)
Federal Home Loan Bank advances			(294,152	)			(348,185	)			(337,603	)			(348,185	)
Repurchase agreements and other			(97,252	)			(106,934	)			(125,269	)			(138,862	)
Advance payments by borrowers for taxes and insurance			(14,051	)			(14,051	)			(19,806	)			(19,806	)
Accrued interest payable			(2,698	)			(2,698	)			(3,077	)			(3,077	)

Fair value of financial instruments:

The estimated fair values of financial instruments have been determined by United Community using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that United Community could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material affect on the estimated fair value amounts.