General

United Community Financial Corp. (United Community) was incorporated in the State of Ohio in February 1998 for the purpose of owning all of the outstanding capital stock of The Home Savings and Loan Company of Youngstown, Ohio (Home Savings) issued upon the conversion of Home Savings from a mutual savings association to a permanent capital stock savings association (Conversion). The Conversion was completed on July 8, 1998.

The following discussion and analysis of the financial condition and results of operations of United Community and its subsidiaries should be read in conjunction with the consolidated financial statements, and the notes thereto, included in this Annual Report.

Forward-Looking Statements

Certain statements contained in this report that are not historical facts are forward-looking statements that are subject to certain risks and uncertainties. When used herein, the terms "anticipate," "plan," "expect," "believe," and similar expressions as they relate to United Community or its management are intended to identify such forward-looking statements. United Community's actual results, performance or achievements may differ materially from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, the interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations and rapidly changing technology affecting financial services.

Changes in Financial Condition

Total assets decreased $153.0 million, or 5.5%, from $2.8 billion at December 31, 2007 to $2.6 billion at December 31, 2008. The net change in assets consisted primarily of decreases of $71.2 million in net loans held for sale, $33.6 million in goodwill, $33.5 million in net loans, $24.3 million in available for sale securities, and assets of discontinued operations of $14.8 million. These decreases were offset partially by increases of $18.7 million in real estate owned and other repossessed assets, and $9.9 million in cash and cash equivalents. Total liabilities decreased $118.3 million, or 4.7%, primarily as a result of decreases of $99.7 million in Federal Home Loan Bank advances, $24.3 million in repurchase agreements and other borrowings, $4.8 million in accrued interest payable and

$2.0 million in liabilities of discontinued operations, partially offset by a $10.9 million increase in interest-bearing deposits.

Funds not currently utilized for general corporate purposes are invested in overnight funds and securities. Cash and cash equivalents increased $9.9 million, or 29.6%, to $43.4 million at December 31, 2008, compared to $33.5 million at December 31, 2007.

Available for sale securities decreased $24.3 million during 2008 primarily as a result of the sales of securities of $138.0 million in addition to paydowns and maturities of $56.7 million, offset partially by purchases of $167.1 million. The majority of United Community's available for sale portfolio is held by Home Savings.

Net loans decreased $33.5 million, or 1.5%, to $2.2 billion at December 31, 2008, compared to December 31, 2007. The change is largely attributable to a decline in Home Savings' construction loan portfolio of $91.2 million, as Home Savings reduced its origination efforts in this portfolio and shifted its focus to permanent real estate lending to reduce the concentration of construction loans, land loans, land development loans and nonowner-occupied commercial real estate, in accordance with the Bank Order. Home Savings also had decreases of $1.7 million in commercial loans and $613,000 in consumer loans. All of these decreases were offset by increases in permanent real estate loans of $63.8 million. The change in permanent real estate loans was primarily attributable to increases in one- to four-family residential real estate lending and non-residential real estate lending. Non-residential real estate lending generally is considered to involve a higher degree of risk than residential real estate lending due to the relatively larger loan amounts and the effects of general economic conditions on the successful operation of income-producing properties. Consumer lending also can involve a higher degree of risk than residential real estate lending as collateral for consumer loans can decline in value more quickly than real estate collateral. See Note 6 to the consolidated financial statements for additional information regarding the composition of net loans.

Loans held for sale were $16.0 million at December 31, 2008, compared to $87.2 million at December 31, 2007. Contributing to the decrease was the designation of $76.5 million of one-to four-family residential mortgage loans as held for sale in 2007, which Home Savings sold in February 2008 with a gain of $1.5 million. Home Savings sells other loans as part of its risk management strategy and anticipates doing so in the future. Home Savings purchases other loans, both for its portfolio and to be sold in the secondary market.

For residential real estate lending, customers may borrow up to 80% of the home's appraised value and obtain a second loan or line of credit for up to 15% of the appraised value without having to purchase mortgage insurance. In addition, Home Savings offers a first-time homebuyers product that permits a 95% loan-to-value and has no mortgage insurance requirement. At December 31, 2008, loans to first-time homebuyers with an original loan-to-value of 95% aggregated $21.9 million. Home Savings does not offer products where customers may pay a monthly amount that is less than the interest expense incurred on the loan. Further, Home Savings does not offer loan products where customers may qualify for the loan based on their ability to pay a minimum payment, even though the customers will be required to pay a significantly higher monthly payment in future periods unless the mortgage is prepaid. Interest-only loans are originated for sale only.

The allowance for loan losses increased to $36.0 million at December 31, 2008, from $32.0 million at December 31, 2007. 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, non-performing 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 1.61% at December 31, 2008, compared to 1.41% at

December 31, 2007. See Note 6 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 2008.

                                                                     Allowance for Loan Losses
                                          December 31,                                                        December 31,
                                              2007            Provision       Recovery       Chargeoff            2008
                                                                           (In thousands)

Real Estate Loans
Permanent
One-to four-family                       $        2,803      $     5,530      $      23      $   (3,370 )    $        4,986
Multifamily residential                           2,365            2,803              3          (2,827 )             2,344
Nonresidential                                    4,488            1,009              3            (630 )             4,870
Land                                                629              (44 )            -               -                 585

Total                                            10,285            9,298             29          (6,827 )            12,785

Construction Loans
One-to four-family residential                   11,892            7,869             10          (9,151 )            10,620
Multifamily and nonresidential                      607              115              -               -                 722

Total                                            12,499            7,984             10          (9,151 )            11,342

Consumer Loans
Home Equity                                       1,260            1,717              -          (1,591 )             1,386
Auto                                                447             (118 )           36            (123 )               242
Marine                                            1,468              288             64            (316 )             1,504
Recreational vehicle                              2,050              543            133          (1,301 )             1,425
Other                                               260              358            342            (647 )               313

Total                                             5,485            2,788            575          (3,978 )             4,870

Commercial Loans
Secured                                           2,375            2,779              -          (1,799 )             3,355
Unsecured                                         1,362            2,480            101            (333 )             3,610

Total                                             3,737            5,259            101          (2,132 )             6,965

Total Allowance                          $       32,006      $    25,329      $     715      $  (22,088 )    $       35,962

Home Savings has made changes to its methodology for determining the adeqvacy of the allowance for loan losses as a result of compliance with the Bank Order. Stricter underwriting standards, better collection efforts and the overall efforts to reduce delinquencies will affect the allowance for loan losses in the future.

A loan is impaired when, based on current information and events, it is probable that Home Savings will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement. An insignificant delay or insignificant shortfall in amount of payments does not require application of this definition. A loan is not impaired during a period of delay in payment if Home Savings expects to collect all amounts due including interest accrued at the contractual interest rate for the period of delay.

The total outstanding balance of all impaired loans was $87.2 million at December 31, 2008 as compared to $84.4 million at December 31, 2007. The amount of allowance for loan losses specifically allocated to impaired loans at December 31, 2008 and 2007 was $11.0 million and $13.2 million, respectively. The schedule below summarizes impaired loans for 2008.

                                                      Impaired Loans
                                       December 31,       December 31,
                                           2008               2007           Change
                                                      (In thousands)

     Real Estate Loans
     Permanent
     One-to four-family               $       12,675     $        2,681     $  9,994
     Multifamily residential                   8,724             13,604       (4,880 )
     Nonresidential                           14,855             13,597        1,258
     Land                                      4,757              3,700        1,057

     Total                                    41,011             33,582        7,429

     Construction Loans
     One-to four-family residential           36,903             43,518       (6,615 )
     Multifamily and nonresidential              816                825           (9 )

     Total                                    37,719             44,343       (6,624 )

     Consumer Loans
     Home Equity                               1,657                  -        1,657
     Auto                                          -                  -            -
     Marine                                    2,614              1,714          900
     Recreational vehicle                          -                  -            -
     Other                                         -                  -            -

     Total                                     4,271              1,714        2,557

     Commercial Loans
     Secured                                   3,496              4,554       (1,058 )
     Unsecured                                   751                184          567

     Total                                     4,247              4,738         (491 )

     Total Impaired Loans             $       87,248     $       84,377     $  2,871

Non-performing loans consist of loans past due 90 days or more and on a non-accrual status, past due 90 days or more and still accruing, past due less than 90 days and on a non-accrual status and restructured loans. Non-performing loans increased $5.6 million from $101.1 million at December 31, 2007 to $106.7 million at December 31, 2008. The change occurred primarily in the permanent real estate segments of the portfolio. The schedule below summarizes the change in nonperforming loans for 2008.

                                                                       Nonperforming Loans
                                               December 31,        December 31,                      2008 Interest
                                                   2008                2007            Change          Foregone
                                                                         (In thousands)

Real Estate Loans
Permanent
One-to four-family                            $       21,669      $       12,752      $  8,917      $           803
Multifamily residential                                8,724              13,604        (4,880 )                288
Nonresidential                                        15,246              13,597         1,649                  154
Land                                                   4,840               3,700         1,140                  447

Total                                                 50,479              43,653         6,826                1,692

Construction Loans
One-to four-family residential                        43,167              44,680        (1,513 )                554
Multifamily and nonresidential                           816                 825            (9 )                 97

Total                                                 43,983              45,505        (1,522 )                651

Consumer Loans
Home Equity                                            2,312               2,454          (142 )                145
Auto                                                     154                 211           (57 )                 (5 )
Marine                                                 2,614               1,714           900                   87
Recreational vehicle                                     756                 376           380                   27
Other                                                     33                  64           (31 )                  -

Total                                                  5,869               4,819         1,050                  254

Commercial Loans
Secured                                                3,496               4,554        (1,058 )                438
Unsecured                                              1,057                 184           873                   72

Total                                                  4,553               4,738          (185 )                510

Restructured Loans                                     1,797               2,341          (544 )                  -

Total Nonperforming Loans                     $      106,681      $      101,056      $  5,625      $         3,107

The $8.9 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 reported as 90 or more days past due. The increase in reported nonperforming loans was due in part to the adoption by Home Savings in the fourth quarter of 2008 of the more conservative practice of determining the past due status of loans based on the number of days the loan is past due, rather than the number of calendar months the loan is 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.

The Company continues to monitor changes in nonperforming loans due to rapidly changing conditions in the current economic environment. Nonperforming loans at February 28, 2009 were $102.8 million, compared to $106.7 million at December 31, 2008. Real estate owned and other repossessed assets at February 28, 2009 were $30.9 million, compared to $29.3 million at December 31, 2008. These changes were expected as a result of the implementation of Home Saving's plan to reduce loan concentrations, loan delinquencies, and classified assets. These areas are being monitored on an ongoing basis in compliance with the Bank Order and Home Savings expects these concentrations, delinquencies and classified assets to be reduced as a result of that plan.

Federal Home Loan Bank stock increased $1.0 million to $26.5 million at December 31, 2008, compared to December 31, 2007. The quarterly dividend payments received by Home Savings were paid in stock. In the prior year, these dividends were paid in cash to Home Savings.

Premises and equipment decreased $1.6 million from $26.6 million at December 31, 2007 to $25.0 million at December 31, 2008. The primary cause of this change was a full year's depreciation expenses recognized during the year on projects completed in 2007. Those projects included the completion of two new Home Savings branches and the remodeling of the lobby in United Community's headquarters. Similar projects were not undertaken in 2008.

Accrued interest receivable decreased $2.9 million, or 22.4%, to $10.1 million at December 31, 2008, compared to $13.0 million at December 31, 2007. Home Savings had overall decreases in accrued interest on all loan portfolio segments. Interest accrued on mortgage loans decreased $715,000 due primarily to an increase of $1.2 million in reserves for uncollected interest on mortgage loans. Interest accrued on installment loans decreased $402,000, due primarily to an increase in reserves for uncollected interest on consumer loans of $259,000. Interest accrued on commercial loans decreased $1.3 million, due primarily to an increase in reserves for uncollected interest on commercial loans of $2.3 million. The increase in the reserves for uncollected interest is affected directly by the increase in loans on non-accrual status. Interest accrued on securities available for sale decreased $510,000 due primarily to a decrease in the average balance of securities held in Home Savings' portfolio over the year. As the Bank's plan to reduce loan concentrations, loan delinquencies, and classified assets is carried out in compliance with the Bank Order, the Company expects these reserves for uncollected interest to decrease.

Home Savings has an investment in bank-owned life insurance, which is insurance on the lives of certain employees where Home Savings is the beneficiary. Bank-owned life insurance provides a long-term asset to offset long-term benefit obligations, while generating competitive investment yields. Home Savings recognized $943,000 as other non-interest income based on the cash value of the policies in 2008 and $917,000 in 2007. The increase in the cash value of the policies is tax exempt as long as the policies are not cashed in, and any death benefit proceeds received by Home Savings are tax-free.

Assets of discontinued operations of Butler Wick decreased as a result of the completion of the sale of Butler Wick & Co., Inc. on December 31, 2008, to Stifel Financial Corp. for $12.0 million. Refer to Note 4 for further discussion on discontinued operations.

Other assets decreased $1.3 million during 2008. The decrease is a result primarily of a decrease in deferred tax assets at Home Savings of $1.6 million and a decrease in mortgage servicing rights of $2.3 million, offset by an increase in payments due from securities of $1.4 million.

Total deposits increased $10.7 million to $1.9 billion at December 31, 2008, compared to December 31, 2007. The change is primarily as a result of an increase in certificates of deposit of $54.7 million and an increase in savings accounts of $6.2 million. This increase was offset by a decrease of $55.0 million in money market demand accounts. The change in certificates of deposit is attributable to a decline in retail certificates of deposit of $50.6 million, offset by an increase in brokered certificates of deposit of $105.3 million. In the third quarter of 2008 Home Savings utilized the services of an investment broker to attract brokered certificates of deposit. These deposits were utilized to enhance the Company's liquidity. Pursuant to the Bank Order, Home Savings cannot obtain additional brokered certificates of deposit without prior consent of the FDIC and Ohio Division. Management continually evaluates many variables when pricing deposits, including cash requirements, liquidity targets, asset growth rates, the liability mix and interest rate risk.

Funds needed in excess of deposit growth are borrowed in the normal course of business. Home Savings has an established credit relationship with the Federal Home Loan Bank of Cincinnati under which Home Savings can borrow up to $619.1 million. Of the total borrowing capacity at the Federal Home Loan Bank, Home Savings had outstanding advances of $337.6 million at December 31, 2008, which is a decrease of $99.7 million compared to December 31, 2007. These borrowings are collateralized primarily by one- to four-family residential mortgage loans.

Repurchase agreements used for general corporate purposes have decreased $24.3 million to $125.3 million at December 31, 2008, as a result of Home Savings securing brokered deposits as a funding source. Home Savings also offers a sweep product to certain customers that are collateralized by investment securities. This type of borrowing offers customers of Home Savings a higher rate of return than what would be offered within deposit product

offerings. These funds are not deposit accounts and are not insured by the FDIC. United Community continually evaluates funding alternatives and may borrow additional funds in 2009 to satisfy funding requirements.

United Community has a Credit Agreement with JP Morgan Chase Bank, N.A., dated September 12, 2005, as amended on July 18, 2007, March 28, 2008, August 29, 2008, and January 31, 2009, (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.

On March 28, 2008, United Community and JP Morgan amended the Credit Agreement to provide, among other things, (1) a waiver of all existing defaults under the credit agreement, (2) that no new funds would be advanced to United Community on the line of credit, and (3) an increase in the allowable non-performing asset ratio to 6.50% of total loans and other real estate owned. As of December 31, 2008, that ratio was 5.97%.

On August 29, 2008, United Community and JP Morgan amended the Credit Agreement in response to the event of default that occurred when United Community entered into the OTS Order and Home Savings entered into the Bank Order. The Amendment waived the events of default and extended the maturity date of the borrowings until January 31, 2009. Over the course of 2008, the Company paid down approximately $29.4 million on this line of credit, under which $36.3 million had been outstanding at December 31, 2007. In January 2009, the Company paid down an additional $1.8 million on this line of credit, further reducing the balance to $5.1 million.

On January 31, 2009, United Community and JP Morgan amended the Credit Agreement in response to the proposed sale of Butler Wick Trust to Farmers National Banc Corp. The amendment includes provisions to use a portion of the cash proceeds of the sale to repay the entire principal balance outstanding and any unpaid interest that has accrued no later than April 30, 2009.

Accrued interest payable decreased during 2008 as a result of a net decrease in the borrowings mentioned above.

Total shareholders' equity decreased $34.8 million, or 12.9%, from December 31, 2007 to December 31, 2008. The decrease was primarily due to net loss of $35.3 million, and cash dividends paid to shareholders totaling $4.1 million. Accumulated other comprehensive income changed as a result of the change in market value of available for sale securities at December 31, 2008 compared to December 31, 2007 and the effect of the recognition of SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and 132(R) . Refer to Note 18 for a further discussion of the effect this pronouncement had on the Company's financial statements. Book value per share and tangible book value per share were $7.60 and $7.57, respectively, as of December 31, 2008. Book value per share and tangible book value per share were $8.73 and $7.60, respectively, as of December 31, 2007.

Comparison of Operating Results for the Years Ended December 31, 2008 and December 31, 2007

Net Income - Net loss for the year ended December 31, 2008 was $35.3 million, compared to net income of $4.1 million for the year ended December 31, 2007. This change was due primarily to impairment charges recognized on goodwill of $33.6 million and other-than-temporary impairment charges recognized on securities available for sale of $6.1 million. Similar impairment charges were not required in 2007.

Net Interest Income - Net interest income for the year ended December 31, 2008, was $73.3 million compared to $72.7 million for 2007. The decline in interest expenses more than offset the decline in interest income during 2008, compared to 2007. Interest expenses decreased in 2008 compared to 2007, due mainly to declines in interest paid on FHLB advances of $9.1 million and interest paid on deposits of $7.8 million. In keeping with the reduction in total assets in 2008, the Company was able to reduce its debt and utilize lower cost funds.

Interest income decreased $16.6 million in 2008 primarily due to decreases in interest earned on net loans of $17.7 million, loans held for sale of $448,000, and dividends received on shares of FHLB stock of $317,000. The change in interest earned on loans was a result of a decrease of $37.2 million in the average balance of outstanding loans, due in part to the sale of $76.5 million of mortgage loans in February 2008, as well as a decrease of 68 basis points in the yield earned on these assets. Interest earned on available for sale securities increased and offset . . .