Summary of UNITED COMMUNITY FINANCIAL CORP

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

                        UNITED COMMUNITY FINANCIAL CORP.

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

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

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

(3) Net income
(loss) divided by average total equity.

(4) Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities.

(5) Net interest income as a percentage of average interest-earning assets.

(6) Noninterest expense, excluding the amortization of core deposit intangible and goodwill impairment charge, divided by the sum of net interest income and noninterest income, excluding securities write-downs and gains and losses on securities and other.

(7) Nonperforming loans consist of loans ninety days past due, loans less than ninety days past due and not accruing interest and restructured loans.

(8) Nonperforming assets consist of nonperforming loans and real estate owned and other repossessed assets.

(9) Earnings per share are computed by dividing net income ( loss) by the weighted average number of shares outstanding during the period. Diluted earnings per share are computed using the weighted average number of common shares determined for the basic computation plus the dilutive effect of potential common shares that could be issued under outstanding stock options.

(10) Equity divided by number of shares outstanding.

(11) Equity minus goodwill and core deposit intangible divided by number of shares outstanding.

(12) Market value divided by book value. UCFC shares closed at $5.00 per share on September 30, 2008, as quoted on the NASDAQ stock market.

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Forward Looking Statements When used in this Form 10-Q the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in United Community's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in Home Savings' market area, demand for investments in Butler Wick's market area and competition, that could cause actual results to differ materially from results presently anticipated or projected. United Community cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. United Community advises readers that the factors listed above could affect United Community's financial performance and could cause United Community's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.
Comparison of Financial Condition at September 30, 2008 and December 31, 2007 Total assets decreased $33.3 million to $2.7 billion at September 30, 2008, compared to December 31, 2007. The change was attributable to decreases in loans held for sale of $79.7 million, goodwill of $33.6 million, cash and cash equivalents of $4.2 million, accrued interest receivable of $2.0 million and premises and equipment of $1.2 million. These decreases were offset partially by increases in securities available for sale of $56.0 million, net loans of $11.4 million, real estate owned and other repossessed assets of $10.0 million and other assets of $3.2 million.
Cash and cash equivalents decreased $4.2 million to $33.1 million at September 30, 2008, compared to $37.4 million at December 31, 2007. This change is primarily the result of a decrease in checks awaiting deposit at the Federal Reserve and cash maintained at Home Savings' branch locations. These decreases were partially offset by an increase in cash maintained in Home Savings' account at the Federal Reserve.
The trading securities portfolio increased $5.3 million to $10.4 million at September 30, 2008, from $5.1 million at December 31, 2007. This change resulted primarily from an increase in Butler Wick's portfolio of $5.0 million in state and municipal securities and an increase of $149,000 in US Treasury and government sponsored securities, offset by decreases of $312,000 in mutual fund investments. Butler Wick's increase in trading securities is due to normal trading activity and securities Butler Wick holds in inventory. Available for sale securities increased $56.0 million, or 22.9%, from December 31, 2007, to September 30, 2008. Home Savings purchased $157.1 million in securities during the first nine months of 2008 and Butler Wick purchased $1.9 million. These purchases were partially offset by sales of $48.4 million at Home Savings and paydowns and maturities of $50.1 million at Home Savings and $2.6 million at Butler Wick. The remaining difference is primarily a result of changes in the market valuation of the portfolio, including the $4.7 million write-down of the Fannie Mae security, net of any amortization or accretion. Net loans increased $11.4 million from December 31, 2007, to September 30, 2008. Real estate loans increased $13.1 million and consumer loans increased $9.0 million. The overall increase in loans is attributable primarily to higher originations and purchases of loans offset partially by paydowns during the period.
The allowance for loan losses increased to $33.2 million, or 1.45% of portfolio loans and 31.2% of nonperforming loans as of September 30, 2008, from $32.0 million or 1.41% of portfolio loans as of December 31, 2007. Provisions totaling $14.9 million during the nine months ended September 30, 2008 were substantially offset by charge-offs totaling $14.1 million. .Management establishes the allowance for loan losses at a level it believes adequate to absorb probable losses incurred in the loan portfolio. Management bases its determination of the adequacy of the allowance upon estimates derived from an analysis of individual credits, prior and current loss experience, loan portfolio delinquency levels, overall growth in the loan portfolio, current economic conditions, and results of regulatory examinations. Furthermore, in determining the level of the allowance for loan loss, management reviews and evaluates on a monthly basis the necessity of a reserve for individual loans classified by management. The specifically allocated reserve for a classified loan is determined based on management's estimate of the borrower's ability to repay the loan given the availability of collateral, other sources of cash flow and legal remedies available to Home Savings. Once a review is completed, the need for a specific reserve is determined by the Home Savings Asset Review Committee and allocated to the loan. Other loans not reviewed specifically by management are evaluated as a homogeneous group of loans (e.g., performing single-family residential mortgage loans and all consumer credit except marine loans) using the historical charge-off experience ratio specific to each type of loan. The historical charge-off experience ratio considers the homogeneous nature of the loans, the geographical lending areas involved, regulatory examination findings, specific grading systems applied, and any other known factors that may impact the ratios used. Specific reserves on individual loans and historical ratios are reviewed periodically and adjusted as necessary based on subsequent collections, loan upgrades or downgrades, nonperforming trends, or actual principal charge-offs. These factors are

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

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

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


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

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


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

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


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

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

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

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Nonperforming loans consist of loans past due 90 days or more, loans past due less than 90 days that are on nonaccrual status, and restructured loans. Nonperforming loans were $106.3 million, or 4.73% of net loans, at September 30, 2008, compared to $101.1 million, or 4.52% of net loans, at December 31, 2007. The schedule below summarizes the change in nonperforming loans for the first nine months of 2008.

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

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


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

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


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

Total                                                   5,748                 4,819             929                    153


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

Restructured Loans                                      3,199                 2,341             858                      -

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

The $4.2 million increase in nonperforming loans secured by one-to four-family properties was primarily a result of the overall increase in the number of loans becoming 90 or more days past due. The decrease in nonperforming construction loans was primarily the result of Home Savings taking into possession property collateralizing three lending relationships totaling $12.5 million in the first quarter of 2008.
A loan is impaired when, based on current information and events, it is probable that Home Savings will be unable to collect both the contractual interest payments and the contractual principal payments, as scheduled in the loan agreement. The net decrease in impaired loans, as shown in the following table, of $2.5 million during the period relates primarily to Home Savings taking possession of property collateralizing $12.5 of one-to four-family residential loans and property collateralizing $3.7 million of nonresidential real estate loans.

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

     Total                                     35,539             33,582        1,957


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

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


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

     Total                                      2,617              1,714          903


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

     Total                                      4,315              4,738         (423 )

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

Other nonperforming assets, consisting of real estate and other consumer property acquired in the settlement of loans, totaled $20.5 million at September 30, 2008, compared to $10.5 million at December 31, 2007. The $10.0 million increase is primarily attributable to the acquisition of properties having an estimated market value of $13.3 million that collateralized commercial construction loans primarily in the central Ohio market area and three properties with a combined estimated market value of $1.2 million that secured three commercial real estate loans located in northeast Ohio. Home Savings disposed of land with a value of $3.1 million in the first quarter of 2008, partially offsetting the increase. Other consumer property, such as boats, recreational vehicles, and automobiles that were received by Home Savings in the satisfaction of loans, makes up the remainder of the change.
Loans held for sale decreased $79.7 million, or 91.4%, to $7.5 million at September 30, 2008, compared to $87.2 million at December 31, 2007. The change in loans held for sale was due largely to loans that were designated for sale in the fourth quarter of 2007 and were sold in February 2008, with a gain of $1.5 million. Home Savings sells newly originated loans as part of its risk management strategy and anticipates doing so in the future.
Federal Home Loan Bank stock grew to $26.5 million at September 30, 2008, compared to $25.4 million at December 31, 2007. During the first nine months of 2008, the Federal Home Loan Bank paid a stock dividend in lieu of a cash dividend to its member banks.
Home Savings maintains a contra account for uncollected interest for loans on non-accrual status that represents the reduction in interest income from the time the borrower stopped making payments until the loan is repaid, charged off or the default is cured and performance resumes. The increases in these reserves, from $12.2 million at December 31, 2007, to $14.6 million at September 30, 2008, and the impact of the loan sale mentioned above, were the primary reasons that accrued interest receivable decreased $2.0 million to $11.0 million at September 30, 2008, compared to $13.1 million at December 31, 2007.

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At December 31, 2007, United Community has recorded $33.6 million in goodwill in connection with two acquisitions completed in 2001 and 2002. Goodwill is not amortized. Generally Accepted Accounting Principles (GAAP) require the Company to perform an impairment test on goodwill annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired, by comparing the fair value of goodwill to its carrying amount. If the carrying amount exceeds the fair value, an impairment charge must be recognized in an amount equal to that excess. GAAP does not permit an increase to goodwill if, in future valuations, the fair value of the asset exceeds its carrying cost. As a result of impairment testing performed, the Company recorded an impairment charge of $33.6 million. The Company decided it was appropriate to perform the analysis in the third quarter based primarily on the price at which its shares were trading.
Other assets increased $3.2 million to $16.5 million at September 30, 2008, compared to $13.3 million at December 31, 2007. Home Savings had increases in deferred federal income taxes of $437,000 related to the market valuation of available for sale securities, prepaid Ohio franchise tax of $526,000, cash due on payments of mortgage-backed securities of $1.2 million and $242,000 in deferred mortgage servicing rights. Butler Wick had an increase in other assets, such as deferred taxes and prepaid assets, of $967,000.
Total deposits increased $41.9 million to $1.9 billion at September 30, 2008, compared to December 31, 2007. This change was due primarily to an increase of $145.1 million in brokered certificates of deposit offset by a $68.6 million decrease in retail certificates of deposit and a $34.7 million decrease in money market accounts and other demand deposit accounts. To supplement its funding needs, United Community began obtaining brokered certificates of deposit in 2007. Such deposits have maturities ranging from six months to two years. The total balance of brokered certificates of deposit was $185.2 million at September 30, 2008 and $39.9 million at December 31, 2007. Home Savings cannot obtain additional brokered certificates of deposit without prior consent of the FDIC and Ohio Division.
Federal Home Loan Bank advances decreased $18.8 million during the first nine months of 2008, reflecting a decrease in overnight advances of $11.8 million and a decrease in term advances of $7.0 million. Home Savings had approximately $170.5 million in unused borrowing capacity at the FHLB at September 30, 2008. Repurchase agreements and other borrowed funds, including United Community's line of credit with JP Morgan Chase Bank, N.A., decreased $14.4 million to $135.1 million at September 30, 2008 from $149.5 million at December 31, 2007. The maturity date of this line of credit is January 31, 2009.
Advance payments by borrowers for taxes and insurance decreased $6.1 million during the first nine months of 2008. Payments for real estate taxes and property insurance made on behalf of customers of Home Savings account for $3.1 million of the decrease. In addition, funds held for payments received on loans sold where servicing was retained by Home Savings decreased $3.0 million. Accrued interest payable declined from $7.8 million at December 31, 2007, to $5.2 million at September 30, 2008. The decrease was primarily due to a decrease in interest accrued on retail certificates of deposit of $4.6 million, partially offset by increases in interest accrued on brokered certificates of deposit of $1.7 million and money market and other demand accounts of $335,000. Accrued expenses and other liabilities increased $2.2 million, to $4.8 million at September 30, 2008 from $2.6 million at December 31, 2007. Home Savings had an increase in accrued liabilities for official check remittances of $1.3 million. Butler Wick had an increase in accrued expenses and other liabilities due largely to securities sold but not yet settled over the end of the period. These increases were offset by a decrease in accrued federal income tax at Home Savings of $2.4 million.
Shareholders' equity decreased $35.4 million, to $234.4 million at September 30, 2008, from $269.7 million at December 31, 2007. Earnings of $1.1 million from Butler Wick for the first nine months of 2008 were more than offset by a $31.9 million net loss recognized by Home Savings. Dividend payments to shareholders of $4.1 million and changes in available for sale securities, net of tax, of $906,000 also contributed to the decrease. United Community reduced its quarterly dividend to $0.0475 per share in the second quarter of 2008 and paid no dividend in the third quarter of 2008. Continuing credit quality issues and the cease and desist orders consented to in August 2008 could have an adverse impact on future dividends. If the Company participates in the CPP, it will not be able to increase its dividend with out consent of the OTS. The $33.6 million impairment charge to goodwill will not impact regulatory . . .