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 Six
                                                  Months Ended                  Months Ended
                                                    June 30,                      June 30,
                                               2009           2008           2009          2008
Selected financial ratios and other data:
(1)
Performance ratios:
Return on average assets (2)                      -0.46 %        0.40 %         0.03 %        0.49 %
Return on average equity (3)                      -4.74 %        3.82 %         0.29 %        4.77 %
Interest rate spread (4)                           2.81 %        2.60 %         2.78 %        2.40 %
Net interest margin (5)                            3.12 %        2.94 %         3.08 %        2.77 %
Non-interest expense to average assets             2.72 %        2.20 %         2.62 %        2.19 %
Efficiency ratio (6)                              69.38 %       64.69 %        70.56 %       65.52 %
Average interest-earning assets to
average interest-bearing liabilities             112.66 %      111.38 %       112.08 %      111.47 %
Capital ratios:
Average equity to average assets                   9.74 %       10.38 %         9.58 %       10.31 %
Equity to assets, end of period                    9.43 %        9.76 %         9.43 %        9.76 %
Tier 1 leverage ratio                              8.50 %        7.77 %         8.50 %        7.77 %
Tier 1 risk-based capital ratio                   11.50 %        9.86 %        11.50 %        9.86 %
Total risk-based capital ratio                    12.76 %       11.77 %        12.76 %       11.77 %
Asset quality ratios:
Non-performing loans to total loans at
end of period (7)                                  5.02 %        4.44 %         5.02 %        4.44 %
Non-performing assets to average assets
(8)                                                5.35 %        4.35 %         5.26 %        4.34 %
Non-performing assets to total assets at
end of period                                      5.43 %        4.34 %         5.43 %        4.34 %
Allowance for loan losses as a percent of
loans                                              1.92 %        1.29 %         1.92 %        1.29 %
Allowance for loan losses as a percent of
nonperforming loans (7)                           39.05 %       29.45 %        39.05 %       29.45 %
Office data:
Number of full service banking offices               39            39             39            39
Number of loan production offices                     6             6              6             6
Per share data:
Basic earnings (loss) from continuing
operations (9)                              $     (0.10 )   $    0.08     $    (0.16 )   $    0.21
Basic earnings from discontinued
operations (9)                                        -          0.02           0.17          0.03
Basic earnings (loss) (9)                         (0.10 )        0.10           0.01          0.24
Diluted earnings (loss) from continuing
operations (9)                                    (0.10 )        0.08          (0.16 )        0.21
Diluted earnings from discontinued
operations (9)                                        -          0.02           0.17          0.03
Diluted earnings (loss) (9)                       (0.10 )        0.10           0.01          0.24
Book value (10)                                    7.59          8.96           7.59          8.96
Tangible book value (11)                           7.57          7.81           7.57          7.81

(1) Ratios for the three and six month periods are annualized where appropriate. Ratios for the period ending June 30, 2008 have been revised to reflect the impact of discontinued operations.

(2) Net income divided by average total assets.

(3) Net income 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, divided by the sum of net interest income and noninterest income, excluding gains and losses on securities, other than temporary impairment charges and other.

(7) Nonperforming loans consist of nonaccrual loans, loans past due ninety days and still accruing, and restructured loans.

(8) Nonperforming assets consist of nonperforming loans, real estate acquired in the settlement of loans and other repossessed assets.

(9) Net income divided by average number of basic or diluted shares outstanding.

(10) Shareholders' equity divided by number of shares outstanding.

(11) Historical per share dividends declared and paid for the period divided by the diluted earnings per share for the period.

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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, 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. United Community undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made.
Comparison of Financial Condition at June 30, 2009 and December 31, 2008 Total assets decreased $131.0 million, or 5.0%, to $2.5 billion at June 30, 2009, compared to December 31, 2008. Contributing to the change were decreases in net loans of $171.0 million, loans held for sale of $2.0 million, accrued interest receivable of $1.0 million and assets of discontinued operations of $5.6 million. These decreases were partially offset by increases in cash and cash equivalents of $1.2 million, securities available for sale of $40.1 million, real estate owned and other repossessed assets of $3.8 million and other assets of $3.8 million.
Cash and cash equivalents increased $1.2 million to $44.7 million at June 30, 2009, compared to $43.4 million at December 31, 2008. This change is primarily the result of an increase in checks awaiting deposit at the Federal Reserve and cash maintained in Home Savings' account at the Federal Reserve. These increases were partially offset by a decrease in cash prepared for delivery to Home Savings' branch locations.
Available for sale securities increased $40.1 million, or 18.6%, from December 31, 2008, to June 30, 2009. Home Savings purchased $114.0 million in mortgage-backed and agency securities during the first six months of 2009 as part of a planned investment strategy to offset partial decreases in loan balances, described below. The investment strategy also included the sale of approximately $46.1 million of mortgage-backed securities, which generated a gain of $1.4 million. Paydowns and maturities of $25.9 million at Home Savings and other than temporary impairment charges of $150,000 at United Community also contributed to the change in available for sale securities. The remaining difference is a result of changes in the market valuation of the portfolio, net of any amortization or accretion.
Net loans decreased $171.0 million from December 31, 2008, to June 30, 2009. Real estate loans decreased $125.7 million, consumer loans decreased $26.0 million, and commercial loans decreased $15.2 million. The overall decrease in loans is attributable primarily to the strategic objective of reducing exposure to commercial and residential construction lending. Furthermore, due to a much lower interest rate environment, refinance activity accelerated, further contributing to the decline in one-to four-family loans. The allowance for loan losses increased to $39.8 million, or 1.92% of the net loan portfolio and 39.1% of nonperforming loans as of June 30, 2009, up from $36.0 million or 1.29% of the net loan portfolio and 33.71% of nonperforming loans as of December 31, 2008. Loan loss provisions totaling $20.8 million during the six months ended June 30, 2009 were partially offset by charge-offs totaling $17.5 million. The allowance for loan losses is a valuation allowance for probable credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses. Management estimates the allowance balance required based on an analysis using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations, estimated collateral values, general economic conditions in the market area and other factors. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers pools of loans and is based on historical loss experience adjusted for current factors, but the entire allowance is available for any loan, or portion thereof that, in management's judgment, should be charged-off.

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The general component of the allowance covers pools of loans not reviewed specifically by management that are evaluated as a homogeneous group of loans (e.g., performing single-family residential mortgage loans) using a historical charge-off experience ratio applied to each pool of loans. The historical charge-off experience ratio considers historical loss rates adjusted for certain environmental factors.

                                                       Allowance For Loan Losses
                                                        (Dollars in thousands)
                             December 31,                                                         June 30,
Real Estate Loans                2008            Provision        Recovery       Chargeoff          2009
Permanent
One-to four-family
residential                 $        4,986      $     2,487      $       10      $   (2,364 )    $    5,119
Multifamily residential              2,344            1,158               3          (2,036 )         1,469
Nonresidential                       4,870            1,548               3          (2,348 )         4,073
Land                                   585               65               -               -             650


Total                               12,785            5,258              16          (6,748 )        11,311


Construction Loans
One-to four-family
residential                         10,620           12,173               9          (6,091 )        16,711
Multifamily and
nonresidential                         722             (435 )             -               -             287


Total                               11,342           11,738               9          (6,091 )        16,998


Consumer Loans
Home Equity                          1,386            1,473               1            (906 )         1,954
Auto                                   242               14              10             (72 )           194
Marine                               1,504              216             331            (806 )         1,245
Recreational vehicle                 1,425              948              82          (1,015 )         1,440
Other                                  313              139             172            (341 )           283


Total                                4,870            2,790             596          (3,140 )         5,116


Commercial Loans
Secured                              3,355              938               -            (946 )         3,347
Unsecured                            3,610               31               -            (581 )         3,060


Total                                6,965              969               -          (1,527 )         6,407


Total                       $       35,962      $    20,755      $      621      $  (17,506 )    $   39,832

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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 $102.0 million, or 5.02% of net loans, at June 30, 2009, compared to $106.7 million, or 4.84% of net loans, at December 31, 2008. The schedule below summarizes the change in nonperforming loans for the first six months of 2009.

                                                    Nonperforming Loans
                                                  (Dollars in thousands)
                                         June 30,       December 31,
        Real Estate Loans                  2009             2008           Change
        Permanent
        One-to four-family residential   $  23,081     $       21,669     $  1,412
        Multifamily residential              5,349              8,724       (3,375 )
        Nonresidential                      15,046             15,246         (200 )
        Land                                 5,169              4,840          329


        Total                               48,645             50,479       (1,834 )


        Construction Loans
        One-to four-family residential      36,806             43,167       (6,361 )
        Multifamily and nonresidential         555                816         (261 )


        Total                               37,361             43,983       (6,622 )


        Consumer Loans
        Home Equity                          2,931              2,312          619
        Auto                                   119                154          (35 )
        Marine                               1,736              2,614         (878 )
        Recreational vehicle                 1,068                756          312
        Other                                   35                 33            2


        Total                                5,889              5,869           20


        Commercial Loans
        Secured                              6,488              3,496        2,992
        Unsecured                            1,126              1,057           69


        Total                                7,614              4,553        3,061


        Restructured Loans                   2,494              1,797          697


        Total Nonperforming Loans        $ 102,003     $      106,681     $ (4,678 )

The $1.4 million increase in nonperforming loans secured by one-to four-family properties was primarily a result of an increase in the number of loans that have become 90 days or more past due. During the first half of the year, Home Savings has experienced an increase in the number of one-to four-family mortgage loans that became delinquent and subsequently went into nonaccrual status. The $6.4 million decrease in nonperforming construction loans was substantially the result of Home Savings taking into possession two properties located in western Pennsylvania in the second quarter of 2009. A large portion of the decrease in nonperforming multifamily residential loans can also be attributable to Home Savings taking into possession one property located in Michigan. The increase in nonperforming commercial secured loans was primarily a result of the Company placing a loan on nonaccrual status that was not yet ninety or more days past due.
In the fourth quarter of 2008, Home Savings adopted the 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. In the second quarter of 2009, this practice was changed back to the number of calendar months, which is more consistent with industry practice.

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A loan is considered impaired when, based on current information and events, it is probable that Home Savings will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement and the loan is non-homogeneous in nature. Factors considered by management in determining impairment include payment status, collateral value, the strength of guarantors (if any), and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the facts and circumstances surrounding the loans and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the fair value of the collateral if the loan is collateral dependent, the present value of expected future cash flows discounted at the loan's effective interest rate, or the market value of the loan. As shown in the following table, impaired loans increased to $89.6 million, or 2.7% at the end of June 2009, from December 2008. The largest increase was $6.0 million in one-to four-family mortgage loans.

                                                      Impaired Loans
                                                  (Dollars in thousands)
                                         June 30,       December 31,
        Real Estate Loans                  2009             2008           Change
        Permanent
        One-to four-family residential   $  18,709     $       12,675     $  6,034
        Multifamily residential              5,349              8,724       (3,375 )
        Nonresidential                      14,903             14,855           48
        Land                                 5,168              4,757          411


        Total                               44,129             41,011        3,118


        Construction Loans
        One-to four-family residential      34,570             36,903       (2,333 )
        Multifamily and nonresidential         555                816         (261 )


        Total                               35,125             37,719       (2,594 )


        Consumer Loans
        Home Equity                          1,895              1,657          238
        Auto                                     -                  -            -
        Boat                                 1,736              2,614         (878 )
        Recreational vehicle                   327                  -          327
        Other                                    8                  -            8


        Total                                3,966              4,271         (305 )


        Commercial Loans
        Secured                              5,330              3,496        1,834
        Unsecured                            1,040                751          289


        Total                                6,370              4,247        2,123


        Total Impaired Loans             $  89,590     $       87,248     $  2,342

Other nonperforming assets, consisting of real estate and other consumer property acquired in the settlement of loans, totaled $33.1 million at June 30, 2009, compared to $29.3 million at December 31, 2008. The $3.8 million increase is primarily attributable to the acquisition of two properties having an estimated market value of $4.0 million that collateralized commercial construction loans primarily in southwestern Pennsylvania, ten properties having an estimated market value of $2.5 million in northern Ohio, one property with an estimated market value of $1.7 million that secured a commercial real estate loan in Michigan and four properties with an estimated value of $1.5 million that secured ten commercial real estate loans in northern Ohio. Home Savings disposed of property with a value of $6.3 million in the first six months of 2009, 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.

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Loans held for sale decreased $2.0 million, or 12.3%, to $14.1 million at June 30, 2009, compared to $16.0 million at December 31, 2008. The change in loans held for sale was due largely to the increase in volume of loan originations and sales during the period because of the lower interest rate environment. Home Savings sells a portion of newly originated loans into the secondary market as part of its risk management strategy and anticipates continuing to do so in the future.
Federal Home Loan Bank stock remained at $26.5 million for June 30, 2009, and December 31, 2008. During the first six months of 2009, the Federal Home Loan Bank paid a cash dividend in lieu of a stock dividend to its member banks. Home Savings maintains a contra account for uncollected interest for loans on non-accrual status. This account represents the reduction in interest income from the time the borrower stopped making payments until the loan is either repaid, charged off or the default is cured and performance resumes. The increases in these reserves, from $14.8 million at December 31, 2008, to $15.8 million at June 30, 2009, and the impact of the reduction in loan balances mentioned above, were the primary reasons that accrued interest receivable decreased $1.0 million to $9.0 million at June 30, 2009, compared to $10.1 million at December 31, 2008.
Other assets increased $3.8 million to $20.9 million at June 30, 2009, compared to $17.1 million at December 31, 2008. Home Savings had increases in mortgage servicing rights of $1.8 million, prepaid Ohio franchise tax of $1.1 million, and a current federal income tax benefit of $364,000. These increases were offset by cash due on payments of mortgage-backed securities of $1.4 million and $767,000 in other prepaid assets.
Total deposits decreased $57.7 million to $1.8 billion at June 30, 2009, compared to $1.9 billion at December 31, 2008. This change was due primarily to a decrease of $52.9 million in brokered certificates of deposit and a $35.1 million decrease in retail certificates of deposit offset by a $16.8 million increase in savings accounts and a $13.5 million increase in money market accounts and other demand deposit accounts. To supplement its funding needs, United Community obtained brokered certificates of deposit in 2007 and 2008. Such deposits have maturities ranging from six months to two years from the date they were issued. The total balance of brokered certificates of deposit was $92.2 million at June 30, 2009 and $145.0 million at December 31, 2008. At this time, regulatory approval would be required to replace these brokered deposits with additional brokered deposits as they mature. The Company does not anticipate on seeking approval to replace brokered deposits at this time. Federal Home Loan Bank advances decreased $43.5 million during the first six months of 2009, reflecting a decrease in overnight advances of $13.1 million and a decrease in term advances of $30.4 million. Home Savings had approximately $247.2 million in unused borrowing capacity at the FHLB at June 30, 2009. Repurchase agreements and other borrowed funds, including United Community's line of credit with JP Morgan Chase Bank, N.A. (JP Morgan Chase), decreased $28.0 million to $97.3 million at June 30, 2009 from $125.3 million at December 31, 2008. United Community's line of credit with JP Morgan Chase was paid in full with proceeds from the sale of Butler Wick Trust on March 31, 2009. Advance payments by borrowers for taxes and insurance decreased $5.8 million during the first six months of 2009. Remittance of real estate taxes and property insurance made on behalf of customers of Home Savings account for $3.6 million of the decrease. In addition, funds held for payments received on loans sold where servicing was retained by Home Savings decreased $2.2 million. Accrued expenses and other liabilities increased $7.0 million, to $16.1 million at June 30, 2009 from $9.1 million at December 31, 2008. United Community had an increase in accrued liabilities for taxes related to the net income from Butler Wick and sale of Butler Wick Trust in the first quarter of 2009. Home Savings had an increase in liabilities of $2.9 million due to issuing official checks for customers and accounts payable remittances. Home Savings also experienced increases in deferred income taxes related to the valuation of the securities available for sale portfolio of $575,000, along with accrued payroll and related expenses of $514,000.
Shareholders' equity decreased $310,000 to $234.6 million at June 30, 2009, from $234.9 million at December 31, 2008. An after-tax gain of $4.7 million from the sale of Butler Wick Trust and net operating income of $238,000 from Butler Wick for the first six months of 2009 were partially offset by a $4.0 million net loss recognized by Home Savings in the period. A decrease in other comprehensive income resulting from changes in available for sale securities, net of tax, of $1.0 million also contributed to the decrease.

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Comparison of Operating Results for the Three Months Ended June 30, 2009 and June 30, 2008 Net Income. United Community recognized a net loss for the three months ended June 30, 2009, of $2.9 million, or $(0.10) per diluted share, compared to net income of $2.7 million, or $0.10 per share, for the three months ended June 30, 2008. Compared with the second quarter of 2008, net interest income decreased $229,000, the provision for loan losses increased $9.1 million, non-interest income increased $3.3 million, and non-interest expense increased $2.0 million. United Community's annualized return on average assets and return on average equity were (0.46)% and (4.74)%, respectively, for the three months ended June 30, 2009. The annualized return on average assets and return on average equity for the comparable period in 2008 were 0.40% and 3.82%, respectively. Net Interest Income. Net interest income for the three months ended June 30, 2009, was $18.7 million, compared to $18.9 million for the same period last year. Both interest income and interest expense decreased, with a smaller decline in interest expense. Interest income decreased $4.8 million in the second quarter of 2009 compared to the second quarter of 2008. The change in interest income was due primarily to decreases in interest earned on net loans. . . .