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, 2008

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

For the transition period from                      to                     

UNITED COMMUNITY FINANCIAL CORP.

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

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

275 West Federal Street, Youngstown, Ohio 44503-1203

(Address of principal executive offices) (Zip Code)

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

Not Applicable

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

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

Yes  þ                              No  o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

Yes  o                                   No  þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
30,051,773 common shares as of July 31, 2008.

 

 

TABLE OF CONTENTS

						PAGE
Part I.    FINANCIAL INFORMATION
		Item 1.		Financial Statements
				Consolidated Statements of Financial Condition as of June 30, 2008 (Unaudited) and December 31, 2007		1
				Consolidated Statements of Income for the Three and Six Months Ended June 30, 2008 and 2007 (Unaudited)		2
				Consolidated Statement of Shareholders’ Equity for the Six Months ended June 30, 2008 (Unaudited)		3
				Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007 (Unaudited)		4
				Notes to Consolidated Financial Statements		5 - 15
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		16-26
		Item 3.		Quantitative and Qualitative Disclosures about Market Risk		27
		Item 4.		Controls and Procedures		28
Part II.    OTHER INFORMATION
		Item 1.		Legal Proceedings		29
		Item 1A.		Risk Factors		29
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		29
		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		29
Signatures						30
Exhibits						31-34
EX-31.1
EXX-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,
		2008				2007
		(Dollars in thousands)
Assets:
Cash and deposits with banks		$	38,660			$	33,266
Federal funds sold and other			5,260				4,097
Total cash and cash equivalents			43,920				37,363
Securities:
Trading, at fair value			8,691				5,064
Available for sale, at fair value			309,413				244,753
Loans, net of allowance for loan losses of $28,900 and $32,006, respectively			2,209,924				2,236,988
Loans held for sale			11,237				87,236
Federal Home Loan Bank stock, at cost			26,112				25,432
Premises and equipment, net			26,777				27,521
Accrued interest receivable			11,444				13,077
Real estate owned and other repossessed assets			21,517				10,510
Goodwill			33,593				33,593
Core deposit intangible			1,018				1,169
Cash surrender value of life insurance			24,524				24,053
Other assets			18,991				13,280
Total assets		$	2,747,161			$	2,760,039
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Interest bearing		$	1,739,503			$	1,768,757
Non-interest bearing			114,889				106,449
Total deposits			1,854,392				1,875,206
Federal Home Loan Bank advances			444,209				437,253
Repurchase agreements and other borrowings			154,544				149,533
Advance payments by borrowers for taxes and insurance			12,789				17,853
Accrued interest payable			4,852				7,837
Accrued expenses and other liabilities			7,195				2,643
Total liabilities			2,477,981				2,490,325
Shareholders’ Equity
Preferred stock-no par value; 1,000,000 shares authorized and unissued			—				—
Common stock-no par value; 499,000,000 shares authorized; 37,804,457 shares issued and 30,051,773 shares outstanding			146,855				146,683
Retained earnings			216,435				213,727
Accumulated other comprehensive income (loss)			(3,664	)			661
Unearned employee stock ownership plan shares			(8,554	)			(9,465	)
Treasury stock, at cost, 7,752,684 shares			(81,892	)			(81,892	)
Total shareholders’ equity			269,180				269,714
Total liabilities and shareholders’ equity		$	2,747,161			$	2,760,039

See Notes to Consolidated Financial Statements.

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

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
		(Dollars in thousands)								(Dollars in thousands)
Interest income
Loans		$	33,935			$	37,915			$	69,743			$	76,918
Loans held for sale			88				289				276				545
Securities
Trading			68				63				130				125
Available for sale			3,857				3,099				7,155				6,033
Federal Home Loan Bank stock dividend			348				412				680				812
Other interest earning assets			93				226				261				396
Total interest income			38,389				42,004				78,245				84,829
Interest expense
Deposits			14,510				16,828				31,546				33,550
Federal Home Loan Bank advances			3,191				5,280				6,883				10,627
Repurchase agreements and other			1,638				1,744				3,664				3,099
Total Interest Expense			19,339				23,852				42,093				47,276
Net interest income			19,050				18,152				36,152				37,553
Provision for loan losses			3,248				2,744				5,714				5,069
Net interest income after provision for loan losses			15,802				15,408				30,438				32,484
Noninterest income
Brokerage commissions			7,062				7,049				13,640				13,289
Service fees and other charges			4,005				3,770				7,460				7,343
Underwriting and investment banking			206				212				235				245
Net gains (losses):
Securities available for sale			57				—				988				—
Trading securities			(22	)			43				(49	)			48
Loans sold			395				524				2,579				1,187
Other			(1,533	)			(379	)			(1,673	)			(403	)
Other income			1,194				998				2,301				1,925
Total noninterest income			11,364				12,217				25,481				23,634
Noninterest expenses
Salaries and employee benefits			14,902				14,359				29,631				28,641
Occupancy			1,285				1,208				2,621				2,356
Equipment and data processing			2,135				2,306				4,474				4,621
Franchise tax			556				550				1,147				1,114
Advertising			360				390				739				707
Amortization of core deposit intangible			73				93				151				193
Other expenses			3,787				2,594				6,850				5,110
Total noninterest expenses			23,098				21,500				45,613				42,742
Income before income taxes			4,068				6,125				10,306				13,376
Income taxes			1,339				2,195				3,534				4,776
Net income		$	2,729			$	3,930			$	6,772			$	8,600
Comprehensive income (loss)		$	(3,731	)		$	1,119			$	2,447			$	6,227
Earnings per share:
Basic		$	0.10			$	0.14			$	0.24			$	0.30
Diluted		$	0.10			$	0.13			$	0.24			$	0.29

See Notes to Consolidated Financial Statements.

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

														Accumulated				Unearned
														Other				Employee
		Shares				Common				Retained				Comprehensive				Stock Ownership				Treasury
		Outstanding				Stock				Earnings				Income (Loss)				Plan Shares				Stock				Total
		(Dollars in thousands, except share data)
Balance December 31, 2007			30,052			$	146,683			$	213,727			$	661			$	(9,465	)		$	(81,892	)		$	269,714
Comprehensive income:
Net income											6,772																6,772
Change in net unrealized gain/(loss) on securities, net of taxes of $2,329															(4,325	)											(4,325	)
Comprehensive income																											2,447
Shares allocated to ESOP participants							11												911								922
Stock based compensation							161																				161
Dividends paid, $0.1425 per share											(4,064	)															(4,064	)
Balance June 30, 2008			30,052			$	146,855			$	216,435			$	(3,664	)		$	(8,554	)		$	(81,892	)		$	269,180

See Notes to Consolidated Financial Statements.

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

		Six Months Ended June 30,
		2008				2007
		(Dollars in thousands)
Cash Flows from Operating Activities
Net income		$	6,772			$	8,600
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			5,714				5,069
Net gains on loans held for sale and other assets			(1,845	)			(784	)
Amortization of premiums and accretion of discounts			608				995
Depreciation and amortization			1,461				1,559
ESOP compensation			922				1,632
Stock based compensation			161				—
FHLB stock dividends			(680	)			—
(Increase) decrease in trading securities			(3,676	)			3,155
Decrease in interest receivable			1,633				535
Increase in prepaid and other assets			(6,656	)			(4,321	)
(Decrease) increase in interest payable			(2,985	)			3,375
Net principal disbursed on loans held for sale			(106,334	)			(109,845	)
Proceeds from sale of loans held for sale			184,912				121,455
Decrease in other liabilities			6,880				115
Net cash from operating activities			86,887				31,540
Cash Flows from Investing Activities
Proceeds from principal repayments and maturities of:
Available for sale securities			38,947				29,990
Proceeds from sale of:
Available for sale securities			49,399				—
Real estate owned and other repossessed assets			5,863				1,693
Purchases of securities available for sale			(158,665	)			(45,717	)
Net principal repaid (disbursed) on loans			57,006				81,854
Loans purchased			(54,207	)			(90,897	)
Purchases of premises and equipment			(698	)			(2,328	)
Net cash from investing activities			(62,355	)			(25,405	)
Cash Flows from Financing Activities
Net increase in NOW, savings and money market accounts			68,463				27,235
Net decrease in certificates of deposit			(89,277	)			(48,919	)
Net decrease in advance payments by borrowers for taxes and insurance			(5,064	)			(3,113	)
Proceeds from FHLB advances			405,700				404,453
Repayment of FHLB advances			(398,744	)			(416,892	)
Net change in other borrowed funds			5,011				43,628
Dividends paid			(4,064	)			(5,481	)
Proceeds from the exercise of stock options			—				153
Purchase of treasury stock			—				(8,518	)
Net cash from financing activities			(17,975	)			(7,454	)
Increase (decrease) in cash and cash equivalents			6,557				(1,319	)
Cash and cash equivalents, beginning of period			37,363				35,637
Cash and cash equivalents, end of period		$	43,920			$	34,318

See Notes to Consolidated Financial Statements.

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

     1. BASIS OF PRESENTATION

United Community Financial Corp. (United Community) was incorporated under Ohio law in February 1998 by The Home Savings and Loan Company of Youngstown, Ohio (Home Savings) in connection with the conversion of Home Savings from an Ohio mutual savings and loan association to an Ohio capital stock savings association (Conversion). Upon consummation of the Conversion on July 8, 1998, United Community became the unitary thrift holding company for Home Savings. Home Savings, a state-chartered savings bank, conducts business from its main office located in Youngstown, Ohio, 39 full-service branches and six loan production offices located throughout Ohio and western Pennsylvania. Butler Wick Corp. (Butler Wick) became a wholly owned subsidiary of United Community on August 12, 1999. Butler Wick is the parent company for two wholly-owned subsidiaries: Butler Wick & Co., Inc. and Butler Wick Trust Company. Butler Wick conducts business from its main office located in Youngstown, Ohio and 22 offices located in northeastern Ohio, western Pennsylvania, and western New York.

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

The results of operations for the six months ended June 30, 2008, are not necessarily indicative of the results to be expected for the year ending December 31, 2008. The consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2007, contained in United Community’s Form 10-K for the year ended December 31, 2007.

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

     2. RECENT ACCOUNTING DEVELOPMENTS

In July 2006, the Emerging Issues Task Force (EITF) of FASB issued a draft abstract for EITF Issue No. 06-04, Accounting for Deferred Compensation and Postretirement Benefits Aspects of Endorsement Split-Dollar Life Insurance Arrangement. This draft abstract from EITF reached a consensus that for an endorsement split-dollar life insurance arrangement within the scope of this Issue, an employer should recognize a liability for future benefits in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”. The Task Force concluded that a liability for the benefit obligation under SFAS No. 106 has not been settled through the endorsement type life insurance policy. In September 2006, FASB agreed to ratify the consensus reached in EITF Issue No. 06-04. This new accounting standard became effective for fiscal years beginning after December 15, 2007. At June 30, 2008, United Community and its subsidiaries owned $24.5 million of bank owned life insurance. The adoption of this standard had an immaterial impact on UCFC’s consolidated financial statements.

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

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

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

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

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

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

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

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

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

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

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

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

     3. STOCK COMPENSATION

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

The 1999 Plan provides for the grant of options, which may qualify as either incentive or nonqualified stock options. The incentive plan provides that option prices will not be less than the fair market value of the share at the grant date. The maximum number of common shares that may be issued under the plan is 3,471,562, 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.

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

A summary of activity in the plans is as follows:

		For the six months ended June 30, 2008
										Aggregate
						Weighted				intrinsic
						average				value (in
		Shares				exercise price				thousands)
Outstanding at beginning of year			2,043,856			$	9.66
Granted			237,072				6.05
Exercised			—				—
Forfeited			(475	)			12.73
Outstanding at end of period			2,280,453			$	9.28			$	—
Options exercisable at end of period			2,280,453			$	9.28			$	—

Information related to the stock option plan during the quarter follows (dollars in thousands):

		June 30,
		2008
Intrinsic value of options exercised		$	—
Cash received from option exercises			—
Tax benefit realized from option exercises			—
Weighted average fair value of options granted			—

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

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

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

Outstanding stock options have a weighted average remaining life of 5.06 years and may be exercised in the range of $6.05 to $12.73.

     4. SECURITIES

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

		June 30, 2008												December 31, 2007
		(Dollars in thousands)
						Gross				Gross								Gross				Gross
		Fair				Unrealized				Unrealized				Fair				Unrealized				Unrealized
		Value				Gains				Losses				Value				Gains				Losses
U.S. Treasury and government sponsored entities’ securities		$	49,835			$	209			$	(324	)		$	84,388			$	337			$	(126	)
Equity securities			6,242				64				(1,160	)			7,064				221				(494	)
Mortgage-related securities			253,336				163				(5,132	)			153,301				977				(443	)
Total		$	309,413			$	436			$	(6,616	)		$	244,753			$	1,535			$	(1,063	)

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

		June 30,				December 31,
		2008				2007
		(Dollars in thousands)
US Treasury and government sponsored entities		$	1,136			$	1,054
State and municipal obligations			7,171				3,636
Corporate bonds, debentures and notes			94				62
Mutual funds			290				312
Total trading securities		$	8,691			$	5,064

     5. LOANS

Portfolio loans consist of the following:

		June 30,				December 31,
		2008				2007
		(Dollars in thousands)
Real Estate:
One- to four-family residential		$	875,115			$	871,019
Multifamily residential			188,000				179,535
Nonresidential			373,201				359,070
Land			23,541				22,818
Construction:
One- to four-family residential			305,335				357,153
Multifamily and non-residential			27,771				25,191
Total real estate			1,792,963				1,814,786
Consumer			349,706				349,447
Commercial			94,447				103,208
Total loans			2,237,116				2,267,441
Less:
Allowance for loan losses			28,900				32,006
Deferred loan fees, net			(1,708	)			(1,553	)
Total			27,192				30,453
Loans, net		$	2,209,924			$	2,236,988

Changes in the allowance for loan loss are as follows:

		As of or For the				As of or For the
		Six Months Ended				Year Ended
		June 30,				December 31,
		2008				2007
		(Dollars in thousands)
Balance, beginning of year		$	32,006			$	16,955
Provision for loan losses			5,714				28,750
Amounts charged off			(9,277	)			(14,220	)
Recoveries			457				521
Balance, end of period		$	28,900			$	32,006

Non-accrual loans were $94.6 million and $97.5 million at June 30, 2008, and December 31, 2007, respectively. Restructured loans were $3.1 million at June 30, 2008 and $2.3 million at December 31, 2007. Loans greater than 90 days past due and still accruing interest were $421,000 and $1.2 million at June 30, 2008 and December 31, 2007, respectively.

Impaired loans consist of the following:

		As of or for the				As of or for the
		Six Months Ended				Year Ended
		June 30,				December 31,
		2008				2007
		(Dollars in thousands)
Impaired loans on which no specific valuation allowance was provided		$	34,735			$	30,475
Impaired loans on which a specific valuation allowance was provided			43,094				53,902
Total impaired loans at period-end		$	77,829			$	84,377
Specific valuation allowances on impaired loans at period-end		$	8,140			$	13,165
Average impaired loans during the period			82,486				63,468
Interest income recognized on impaired loans during the period			376				348
Interest income received on impaired loans during the period			376				348

     6. MORTGAGE BANKING ACTIVITIES

Mortgage loans serviced for others, which are not reported in United Community’s assets, totaled $938.5 million at June 30, 2008, and $876.1 million at December 31, 2007.

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

		As of or for the
		Six Months				As of or for the
		Ended				Year Ended
		June 30,				December 31,
		2008				2007
		(Dollars in thousands)
Balance, beginning of year		$	6,184			$	6,820
Originations			1,047				1,268
Sale of servicing			—				—
Amortized to expense			(1,035	)			(1,904	)
Balance, end of period		$	6,196			$	6,184

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

		June 30,				December 31,
		2008				2007
		(Dollars in thousands)
Balance, beginning of year		$	(562	)		$	(435	)
Impairment charges			—				(562	)
Recoveries			562				435
Balance, end of period		$	—			$	(562	)

Fair value of mortgage servicing rights as of June 30, 2008 was approximately $11.7 million and at December 31, 2007 was $8.7 million.

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

		June 30,				December 31,
		2008				2007
Weighted average prepayment rate		267 PSA				272 PSA
Weighted average life (in years)			3.78				3.87
Weighted average discount rate			8%				8%

     7. OTHER POSTRETIREMENT BENEFIT PLANS

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

Components of net periodic benefit cost are as follows:

		Three Months Ended June 30,
		2008				2007
		(Dollars in thousands)
Service cost		$	—			$	—
Interest cost			48				55
Expected return on plan assets			—				—
Net amortization of prior service cost			—				—
Net amortization of actuarial gain			(3	)			—
Net periodic benefit cost		$	45			$	55
Assumptions used in the valuations were as follows:
Weighted average discount rate			6.00	%			5.50	%

		Six Months Ended June 30,
		2008				2007
		(Dollars in thousands)
Service cost		$	—			$	—
Interest cost			96				111
Expected return on plan assets			—				—
Net amortization of prior service cost			—				—
Net amortization of actuarial gain			(6	)			—
Net periodic benefit cost		$	90			$	111
Assumptions used in the valuations were as follows:
Weighted average discount rate			6.00	%			5.50	%

     8. FAIR VALUE MEASUREMENT

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

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

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

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

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

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

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

						Fair Value Measurements at June 30, 2008 Using:
						Quoted Prices in				Significant Other				Significant
						Active Markets for				Observable				Unobservable
						Identical Assets				Inputs				Inputs
		June 30, 2008				(Level 1)				(Level 2)				(Level 3)
Assets:
Trading securities		$	8,691			$	8,691			$	—			$	—
Available for sale securities			309,413				1,742				307,671				—
Impaired loans			43,094				—				—				34,954

United Community did not recognize any impairment charges for assets listed above for the period ending June 30, 2008.

     9. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURE

Supplemental disclosures of cash flow information are summarized below.

		June 30, 2008				June 30, 2007
		(Dollars in thousands)
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest on deposits and borrowings, net of amounts capitalized		$	45,078			$	43,901
Interest capitalized on borrowings			—				13
Income taxes			3,825				6,881
Supplemental schedule of noncash activities:
Transfers from loans to real estate owned and other repossessed assets			18,545				8,687

     10. SEGMENT INFORMATION

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

		For the Three Months Ended June 30, 2008
		Banking				Investment
		Services				Services				Total
		(Dollars in thousands)
Interest income		$	38,202			$	187			$	38,389
Interest expense			19,287				52				19,339
Provision for loan loss			3,248				—				3,248
Net interest income after provision for loan loss			15,667				135				15,802
Non-interest income			2,908				8,456				11,364
Non-interest expense			15,161				7,937				23,098
Income before tax			3,414				654				4,068
Income tax expense			1,110				229				1,339
Net income		$	2,304			$	425			$	2,729

		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 Six Months Ended June 30, 2008
		Banking				Investment
		Services				Services				Total
		(Dollars in thousands)
Interest income		$	77,829			$	416			$	78,245
Interest expense			41,972				121				42,093
Provision for loan loss			5,714				—				5,714
Net interest income after provision for loan loss			30,143				295				30,438
Non-interest income			9,180				16,301				25,481
Non-interest expense			30,125				15,488				45,613
Income before tax			9,198				1,108				10,306
Income tax expense			3,129				405				3,534
Net income		$	6,069			$	703			$	6,772

		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

     11. EARNINGS PER SHARE

Earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of shares determined for the basic computation plus the dilutive effect of potential common shares that could be issued under outstanding stock options. There were no stock options that were antidilutive for the period ending June 30, 2008. There were stock options for 717,247 shares that were antidilutive for the period ending June 30, 2007.

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
		(In thousands, except per share data)
Net income applicable to common stock		$	2,729			$	3,930			$	6,772			$	8,600
Weighted average common shares outstanding			28,618				28,769				28,557				28,946
Dilutive effect of stock options			21				255				5				291
Weighted average common shares outstanding for dilutive computation			28,639				29,024				28,562				29,237
Basic earnings per share as reported		$	0.10			$	0.14			$	0.24			$	0.30
Diluted earnings per share as reported		$	0.10			$	0.13			$	0.24			$	0.29

     12. OTHER BORROWINGS

Included in other borrowings is $16.3 million outstanding at June 30, 2008 under a Credit Agreement between JP Morgan Chase Bank, N.A., and United Community, dated September 12, 2005, as amended on July 18, 2007, and March 28, 2008, (the “Credit Agreement”). The Credit Agreement provided United Community with a line of credit of up to $40.0 million.

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

On March 28, 2008, United Community and JP Morgan Chase amended the Credit Agreement to provide, among other things, (1) a waiver of all existing defaults under the credit agreement, (2) that no new funds would be advanced to United Community on the line of credit, and (3) an increase in the allowable non-performing asset ratio to 6.50% of total loans and REO. As of June 30, 2008, that ratio was 5.30%. All borrowings under the Credit Agreement are due on August 31, 2008.

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,
		2008				2007				2008				2007
Performance ratios:
Return on average assets (2)			0.40	%			0.58	%			0.49	%			0.64	%
Return on average equity (3)			3.82	%			5.49	%			4.77	%			5.99	%
Interest rate spread (4)			2.61	%			2.37	%			2.43	%			2.47	%
Net interest margin (5)			2.96	%			2.83	%			2.79	%			2.93	%
Non-interest expense to average assets			3.37	%			3.18	%			3.32	%			3.16	%
Efficiency ratio (6)			72.15	%			69.72	%			72.89	%			69.14	%
Average interest-earning assets to average interest-bearing liabilities			111.56	%			112.49	%			111.61	%			112.60	%
Capital ratios:
Average equity to average assets			10.42	%			10.58	%			10.35	%			10.61	%
Equity to assets, end of period			9.80	%			10.17	%			9.80	%			10.17	%
Tier 1 leverage ratio			7.77	%			7.95	%			7.77	%			7.95	%
Tier 1 risk-based capital ratio			9.86	%			9.96	%			9.86	%			9.96	%
Total risk-based capital ratio			11.77	%			12.29	%			11.77	%			12.29	%
Asset quality ratios:
Nonperforming loans to net loans at end of period (7)			4.44	%			3.30	%			4.44	%			3.30	%
Nonperforming assets to average assets (8)			4.36	%			3.10	%			4.36	%			3.10	%
Nonperforming assets to total assets at end of period			4.35	%			3.10	%			4.35	%			3.10	%
Allowance for loan losses as a percent of loans			1.29	%			0.86	%			1.29	%			0.86	%
Allowance for loan losses as a percent of non-performing loans (7)			29.45	%			26.17	%			29.45	%			26.17	%
Office data:
Number of full service banking offices			39				38				39				38
Number of loan production offices			6				5				6				5
Number of brokerage offices			21				20				21				20
Number of trust offices			2				2				2				2
Per share data:
Basic earnings per share (9)		$	0.10			$	0.14			$	0.24			$	0.30
Diluted earnings per share (9)		$	0.10			$	0.13			$	0.24			$	0.29
Book value (10)		$	8.96			$	9.11			$	8.96			$	9.11
Tangible book value (11)		$	7.81			$	7.95			$	7.81			$	7.95
Market value as a percent of book value (12)			42	%			110	%			42	%			110	%

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, 2008 and December 31, 2007

Total assets decreased by $12.9 million to $2.7 billion at June 30, 2008, compared to December 31, 2007. The net change in assets consisted of decreases of $27.1 million in net loans, $76.0 million in loans held for sale, and $1.6 million in accrued interest receivable. These decreases were offset by increases in available for sale securities of $64.7 million, real estate owned and other repossessed assets of $11.0 million, cash and cash equivalents of $6.6 million, trading securities of $3.6 million and other assets of $5.7 million.

Cash and cash equivalents increased $6.6 million during the first six months of 2008. The change primarily resulted from an increase in cash maintained by Home Savings on deposit at the Federal Reserve and an increase in checks awaiting deposit to the Federal Reserve.

The trading securities portfolio increased $3.6 million, or 71.6%, to $8.7 million at June 30, 2008, from $5.1 million at December 31, 2007. This change resulted primarily from an increase in Butler Wick’s portfolio of $3.6 million in state and municipal securities and an increase of $82,000 in US Treasury and government sponsored securities offset by decreases of $32,000 in corporate securities. Butler Wick’s increase in trading securities is due to normal trading activity and what Butler Wick holds in inventory.

Available for sale securities increased $64.7 million, or 26.4%, from December 31, 2007, to June 30, 2008. Home Savings purchased $157.1 million in securities during the first six months of 2008 and Butler Wick purchased $1.6 million. These purchases were offset partially by sales of $48.4 million at Home Savings. Paydowns and maturities of $36.9 million at Home Savings and $2.0 million at Butler Wick also contributed to the offset. The remaining difference is primarily a result of changes in the market valuation of the portfolio, net of any amortization or accretion.

Net loans decreased $27.1 million from December 31, 2007, to June 30, 2008. Real estate loans decreased $21.8 million and commercial loans decreased $8.8 million. The overall decline in loans is attributable primarily to higher paydowns as compared to originations during the period.

The allowance for loan losses decreased to $28.9 million, or 1.29% of portfolio loans as of June 30, 2008, from $32.0 million or 1.41% of portfolio loans as of December 31, 2007. Management establishes the allowance for loan losses at a level it believes adequate to absorb probable losses incurred in the loan portfolio. Management bases its determination of the adequacy of the allowance upon estimates derived from an analysis of individual credits, prior and current loss experience, loan portfolio delinquency levels, overall growth in the loan portfolio, current economic conditions, and results of regulatory examinations. Furthermore, in determining the level of the allowance for loan loss, management reviews and evaluates on a monthly basis the necessity of a reserve for individual loans classified by management. The specifically allocated reserve for a classified loan is determined based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal remedies available to Home Savings. Once a review is completed, the need for a specific reserve is determined by the Home Savings Asset Review Committee and allocated to the loan. Other loans not reviewed specifically by management are evaluated as a homogeneous group of loans (single-family residential mortgage loans and all consumer credit except marine loans) using the historical charge-off experience ratio specific to each type of loan. The historical charge-off experience ratio considers the homogeneous nature of the loans, the geographical lending areas involved, regulatory examination findings, specific grading systems applied, and any other known factors that may impact the ratios used. Specific reserves on individual loans and historical ratios are reviewed periodically and adjusted as necessary based on subsequent collections, loan upgrades or downgrades, nonperforming trends, or actual principal charge-offs. These factors are susceptible to changes that could result in a material adjustment to results of operations. The provision for loan losses represents a charge against current earnings in order to maintain the allowance for loan losses at an appropriate level.

		Allowance For Loan Losses
		December 31,																June 30,
		2007				Provision				Recovery				Chargeoff				2008
Real Estate Loans
Permanent
One-to four-family		$	2,803			$	1,064			$	5			$	(764	)		$	3,108
Multifamily residential			2,365				946				3				(243	)			3,071
Nonresidential			4,488				3				3				(575	)			3,919
Land			629				(92	)			—				—				537
Total			10,285				1,921				11				(1,582	)			10,635
Construction Loans
One-to four-family residential			11,892				1,269				—				(5.195	)			7,966
Multifamily and nonresidential			607				26				—				—				633
Total			12,499				1,295				—				(5,195	)			8,599
Consumer Loans
Home Equity			1,260				830				—				(146	)			1,944
Auto			447				(13	)			29				(55	)			408
Marine			1,468				(124	)			59				(316	)			1,087
Recreational vehicle			2,050				(214	)			78				(243	)			1,671
Other			260				208				179				(289	)			358
Total			5,485				687				345				(1,049	)			5,468
Commercial Loans
Secured			2,375				988				—				(1,401	)			1,962
Unsecured			1,362				823				101				(50	)			2,236
Total			3,737				1,811				101				(1,451	)			4,198
Total Allowance		$	32,006			$	5,714			$	457			$	(9,277	)		$	28,900