UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2007

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

For the transition period from                      to                     

UNITED COMMUNITY FINANCIAL CORP.

 

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

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

275 West Federal Street, Youngstown, Ohio 44503-1203

(Address of principal executive offices) (Zip Code)

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

Not Applicable

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

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

Yes þ      No o

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

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

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

Yes o     No þ     

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

 

 

TABLE OF CONTENTS

				PAGE
Part I. FINANCIAL INFORMATION
Item 1.		Financial Statements
		Consolidated Statements of Financial Condition as of June 30, 2007 (Unaudited) and December 31, 2006			1
		Consolidated Statements of Income for the Three and Six Months Ended June 30, 2007 and 2006 (Unaudited)			2
		Consolidated Statement of Shareholders’ Equity for the Six Months ended June 30, 2007 (Unaudited)			3
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006 (Unaudited)			4
		Notes to Consolidated Financial Statements			5 - 13
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			14-24
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			25
Item 4.		Controls and Procedures			26
Part II. OTHER INFORMATION
Item 1.		Legal Proceedings			27
Item 1A.		Risk Factors			27
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			27
Item 3.		Defaults Upon Senior Securities (None)
Item 4.		Submission of Matters to a Vote of Security Holders (None)
Item 5.		Other Information (None)
Item 6.		Exhibits			27
Signatures					28
Exhibits					29-32
EX-31.1
EX-31.2
EX-32

PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)

		June 30,				December 31,
		2007				2006
		(Dollars in thousands)
Assets:
Cash and deposits with banks		$	32,093			$	34,129
Federal funds sold and other			2,225				1,508
Total cash and cash equivalents			34,318				35,637
Securities:
Trading, at fair value			7,631				10,786
Available for sale, at fair value			249,636				237,531
Loans, net of allowance for loan losses of $19,395 and $16,955, respectively			2,248,462				2,253,559
Loans held for sale			16,509				26,960
Federal Home Loan Bank stock, at cost			25,432				25,432
Premises and equipment, net			25,970				25,192
Accrued interest receivable			13,168				13,703
Real estate owned and other repossessed assets			9,841				3,242
Goodwill			33,593				33,593
Core deposit intangible			1,341				1,534
Cash surrender value of life insurance			23,587				23,137
Other assets			16,672				13,239
Total assets		$	2,706,160			$	2,703,545
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Interest bearing		$	1,696,819			$	1,720,426
Non-interest bearing			104,430				102,509
Total deposits			1,801,249				1,822,935
Federal Home Loan Bank advances			452,814				465,253
Repurchase agreements and other borrowings			142,139				98,511
Advance payments by borrowers for taxes and insurance			14,358				17,471
Accrued interest payable			6,217				2,842
Accrued expenses and other liabilities			14,037				15,200
Total liabilities			2,430,814				2,422,212
Shareholders’ Equity
Preferred stock-no par value; 1,000,000 shares authorized and unissued			—				—
Common stock-no par value; 499,000,000 shares authorized; 37,804,457 shares issued			146,555				145,834
Retained earnings			223,571				220,527
Accumulated other comprehensive loss			(3,669	)			(1,296	)
Unearned employee stock ownership plan shares			(10,376	)			(11,287	)
Treasury stock, at cost, 7,591,488 and 6,827,143 shares, respectively			(80,735	)			(72,445	)
Total shareholders’ equity			275,346				281,333
Total liabilities and shareholders’ equity		$	2,706,160			$	2,703,545

See Notes to Consolidated Financial Statements.

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

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
						(Dollars in thousands, except per share data)
Interest income
Loans		$	37,915			$	37,961			$	76,918			$	73,071
Loans held for sale			289				480				545				988
Securities:
Trading			63				80				125				162
Available for sale			3,099				2,366				6,033				4,580
Held to maturity
Margin accounts			—				367				—				707
Federal Home Loan Bank stock dividends			412				349				812				690
Other interest earning assets			226				44				396				75
Total interest income			42,004				41,647				84,829				80,273
Interest expense
Deposits			16,828				14,153				33,550				26,573
Federal Home Loan Bank advances			5,280				5,251				10,627				9,881
Repurchase agreements and other			1,744				1,207				3,099				2,094
Total interest expense			23,852				20,611				47,276				38,548
Net interest income			18,152				21,036				37,553				41,725
Provision for loan losses			2,744				812				5,069				1,551
Net interest income after provision for loan losses			15,408				20,224				32,484				40,174
Non-interest income
Brokerage commissions			7,049				4,814				13,289				9,814
Service fees and other charges			3,770				3,209				7,343				6,407
Underwriting and investment banking			212				(4	)			245				26
Net gains (losses):
Trading securities			43				(12	)			48				32
Loans sold			524				466				1,187				1,029
Other			(379	)			(32	)			(403	)			(27	)
Other income			998				1,092				1,925				2,064
Total non-interest income			12,217				9,533				23,634				19,345
Non-interest expense
Salaries and employee benefits			14,359				13,005				28,641				26,528
Occupancy			1,208				1,106				2,356				2,214
Equipment and data processing			2,306				2,386				4,621				4,645
Franchise tax			550				530				1,114				1,071
Advertising			390				447				707				792
Amortization of core deposit intangible			93				127				193				260
Other expenses			2,594				2,525				5,110				4,973
Total non-interest expenses			21,500				20,126				42,742				40,483
Income before income taxes			6,125				9,631				13,376				19,036
Income taxes			2,195				3,381				4,776				6,654
Net income		$	3,930			$	6,250			$	8,600			$	12,382
Comprehensive income		$	1,119			$	4,695			$	6,227			$	10,339
Earnings per share
Basic		$	0.14			$	0.22			$	0.30			$	0.43
Diluted		$	0.13			$	0.21			$	0.29			$	0.42

See Notes to Consolidated Financial Statements.

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

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

See Notes to Consolidated Financial Statements.

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

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

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     1. BASIS OF PRESENTATION

United Community Financial Corp. (United Community) was incorporated under Ohio law in February 1998 by The Home Savings and Loan Company of Youngstown, Ohio (Home Savings) in connection with the conversion of Home Savings from an Ohio mutual savings and loan association to an Ohio capital stock savings bank (Conversion). Upon consummation of the Conversion on July 8, 1998, United Community became the unitary thrift holding company for Home Savings. During 2003, Home Savings changed its charter to a state savings bank. Home Savings has 38 full service offices and five loan production offices throughout Ohio and Western Pennsylvania. Butler Wick Corp. (Butler Wick) became a wholly owned subsidiary of United Community on August 12, 1999. Butler Wick is the parent company for two wholly owned subsidiaries: Butler, Wick & Co., Inc. and Butler Wick Trust Company. Butler Wick has 21 office locations providing a full range of investment alternatives for individuals, businesses and not-for-profit organizations throughout Ohio and Western Pennsylvania.

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

The results of operations for the six months ended June 30, 2007, are not necessarily indicative of the results to be expected for the year ending December 31, 2007. The consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2006, contained in United Community’s Form 10-K for the year ended December 31, 2006.

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

     2. RECENT ACCOUNTING DEVELOPMENTS

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

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

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

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

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

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

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

     3. STOCK COMPENSATION

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

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

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

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

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

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

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

     4. SECURITIES

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

		June 30, 2007												December 31, 2006
										(Dollars in thousands)
						Gross				Gross								Gross				Gross
		Fair				Unrealized				Unrealized				Fair				Unrealized				Unrealized
		Value				Gains				Losses				Value				Gains				Losses
U.S. Treasury and agency securities		$	94,613			$	—			$	(1,436	)		$	96,847			$	63			$	(722	)
Equity securities			7,802				599				(135	)			7,866				641				(112	)
Mortgage-related securities			147,221				11				(4,560	)			132,818				131				(1,870	)
Total		$	249,636			$	610			$	(6,131	)		$	237,531			$	835			$	(2,704	)

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

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

     5. LOANS

Portfolio loans consist of the following:

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

Changes in the allowance for loan loss are as follows:

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

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

Impaired loans consist of the following:

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

     6. MORTGAGE BANKING ACTIVITIES

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

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

		As of or for the
		Six Months				As of or for the
		Ended				Year Ended
		June 30,				December 31,
		2007				2006
		(Dollars in thousands)
Balance, beginning of year		$	6,820			$	6,923
Originations			585				1,917
Sale of servicing			—				(323	)
Amortized to expense			(873	)			(1,697	)
Balance, end of period		$	6,532			$	6,820

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

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

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

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

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

      7. OTHER POSTRETIREMENT BENEFIT PLANS

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

Components of net periodic benefit cost are as follows:

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

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

      8. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURE

Supplemental disclosures of cash flow information are summarized below.

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

      9. SEGMENT INFORMATION

United Community has two principal segments, banking and investment services. Banking provides consumer and commercial banking services. Investment services provide investment brokerage and a network of integrated financial services. Condensed statements of income by operating segment for the three and six months ended June 30, 2007 and 2006 are as follows:

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

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

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

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

     10. EARNINGS PER SHARE

Earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of shares determined for the basic computation plus the dilutive effect of potential common shares that could be issued under outstanding stock options. There were stock options for 717,247 shares that were antidilutive for the period ending June 30, 2007 and 746,097 shares that were antidilutive for the period ending June 30, 2006.

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

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

      11. SUBSEQUENT EVENT

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

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

Selected financial ratios and other data: (1)

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

Forward Looking Statements

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

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

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

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

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

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

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

The allowance for loan losses increased to $19.4 million at June 30, 2007, from $17.0 million at December 31, 2006 as a result of a loan loss provision of $5.1 million which was partially offset by net chargeoffs, primarily in the commercial and consumer portfolios. The allowance for loan losses is monitored closely and may increase or decrease depending on a variety of factors such as levels and trends of delinquencies, chargeoffs and recoveries, nonperforming loans, and potential risk in the portfolios. Management has developed and maintains an appropriate, systematic and consistently applied process to determine the amount of allowance and provision for loan losses. The allowance for loan losses as a percentage of net loans (coverage ratio) was 0.86% at June 30, 2007, compared to 0.75% at December 31, 2006. See Note 5 to the financial statements for a summary of the allowance for loan losses. The following table summarizes the trend in the allowance for loan losses for the first six months of 2007.

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