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                    At or For the
                                                                         Three Months Ended               Nine Months Ended
                                                                           September 30,                    September 30,
                                                                        2009            2008             2009            2008
Selected financial ratios and other data: (1)
Performance ratios:
Return on average assets (2)                                               -0.14 %         -5.57 %          -0.03 %         -1.54 %
Return on average equity (3)                                               -1.45 %        -54.84 %          -0.28 %        -14.96 %
Interest rate spread (4)                                                    3.04 %          2.62 %           2.86 %          2.49 %
Net interest margin (5)                                                     3.32 %          2.92 %           3.16 %          2.83 %
Non-interest expense to average assets                                      2.49 %          7.16 %           2.58 %          3.86 %
Efficiency ratio (6)                                                       65.02 %         70.06 %          68.72 %         67.02 %
Average interest-earning assets to average interest-bearing
liabilities                                                               112.39 %        109.98 %         112.18 %        110.66 %
Capital ratios:
Average equity to average assets                                            9.70 %         10.17 %           9.62 %         10.29 %
Equity to assets, end of period                                             9.58 %          8.59 %           9.58 %          8.59 %
Tier 1 leverage ratio                                                       8.68 %          7.43 %           8.68 %          7.43 %
Tier 1 risk-based capital ratio                                            11.77 %          9.86 %          11.77 %          9.86 %
Total risk-based capital ratio                                             13.03 %         11.78 %          13.03 %         11.78 %
Asset quality ratios:
Non-performing loans to total loans at end of period (7)                    5.92 %          4.73 %           5.92 %          4.73 %
Non-performing assets to average assets (8)                                 5.73 %          4.58 %           5.58 %          4.61 %
Non-performing assets to total assets at end of period                      5.74 %          4.65 %           5.74 %          4.65 %
Allowance for loan losses as a percent of loans                             1.98 %          1.45 %           1.98 %          1.45 %
Allowance for loan losses as a percent of nonperforming loans (7)          34.15 %         31.23 %          34.15 %         31.23 %
Texas ratio (9)                                                            51.44 %         47.39 %          51.44 %         47.39 %
Total classified assets as a percent of Tier 1 capital                     77.59 %         61.03 %          77.59 %         61.03 %
Net charge-offs as a percent of average loans                               1.31 %          0.84 %           1.50 %          0.80 %
Total 90+ days past due as a percent of total loans                         5.11 %          4.28 %           5.11 %          4.28 %
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 (10)               $      (0.03 )   $     (1.32 )   $      (0.19 )   $     (1.12 )
Basic earnings from discontinued operations (10)                               -            0.01             0.17            0.04
Basic earnings (loss) (10)                                                 (0.03 )         (1.31 )          (0.02 )         (1.08 )
Diluted earnings (loss) from continuing operations (9)                     (0.03 )         (1.32 )          (0.19 )         (1.12 )
Diluted earnings from discontinued operations (10)                             -            0.01             0.17            0.04
Diluted earnings (loss) (10)                                               (0.03 )         (1.31 )          (0.02 )         (1.08 )
Book value (11)                                                             7.64            8.97             7.64            7.80
Tangible book value (12)                                                    7.61            7.81             7.61            7.77

(1) Ratios for the three and nine month periods are annualized where appropriate. Ratios for the period ending September 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) Nonperforming assets divided by the sum of shareholders equity and the allowance for loan losses.

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

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

(12) Shareholders' equity minus goodwill and core deposit intangible divided by the number of shares outstanding.

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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 September 30, 2009 and December 31, 2008 Total assets decreased $155.9 million, or 6.0%, to $2.5 billion at September 30, 2009, compared to December 31, 2008. Contributing to the change were decreases in net loans of $283.7 million, cash and cash equivalents of $5.5 million, accrued interest receivable of $1.2 million and assets of discontinued operations of $5.6 million. These decreases were partially offset by increases in loans held for sale of $57.9 million, securities available for sale of $80.7 million, and other assets of $3.5 million.
Cash and cash equivalents decreased $5.5 million to $38.0 million at September 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 Bank and cash maintained in Home Savings' account at the Federal Reserve Bank. These increases were partially offset by a decrease in cash funding official checks written on behalf of customers.
Available for sale securities increased $80.7 million, or 37.4%, from December 31, 2008, to September 30, 2009. Home Savings purchased $196.3 million in mortgage-backed and agency securities during the first nine months of 2009 as part of a planned investment strategy to partially offset decreases in loan balances, as described below. The investment strategy also included the sale of approximately $73.6 million of mortgage-backed securities, which generated a gain of $1.9 million. Paydowns and maturities of $42.2 million at Home Savings and other than temporary impairment charges of $722,000 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 $283.7 million from December 31, 2008, to September 30, 2009. Real estate loans decreased $221.9 million, consumer loans decreased $28.7 million, and commercial loans decreased $29.8 million. The decrease in real estate loans is attributable primarily to the strategic objective of reducing exposure to commercial and residential construction lending. Also affecting the decline was management's decision to prepare for sale certain one-to four-family residential mortgage loans aggregating $69.8 million which were moved to loans held for sale at September 30, 2009. The proposed sale was considered for several reasons. First, the loans identified for sale in this transaction were 30-year fixed rate loans that had a weighted average coupon of 5.95%. United Community's outlook for interest rates is for long term interest rates to begin increasing later in 2010 creating prepayment risk. In addition, the Federal Reserve Bank has stated that its program to purchase mortgage-backed securities will end by the end of March 2010. The removal of this liquidity may result in spreads widening on mortgages with associated pricing decreasing. Due to a 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 $38.8 million, or 1.98% of the net loan portfolio and 34.15% of nonperforming loans as of September 30, 2009, up from $36.0 million or 1.61% of the net loan portfolio and 33.71% of nonperforming loans as of December 31, 2008. Loan loss provisions totaling $26.3 million during the nine months ended September 30, 2009 were partially offset by charge-offs totaling $24.2 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 required allowance balance 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,                                                         September 30,
                                 2008            Provision        Recovery       Chargeoff            2009
Real Estate Loans
Permanent
One-to four-family
residential                 $        4,986      $     4,772      $       55      $   (4,043 )    $         5,770
Multifamily residential              2,344            1,475               3          (2,290 )              1,532
Nonresidential                       4,870            2,786               3          (2,783 )              4,876
Land                                   585               61               -               -                  646

Total                               12,785            9,094              61          (9,116 )             12,824


Construction Loans
One-to four-family
residential                         10,620           13,971               9          (8,815 )             15,785
Multifamily and
nonresidential                         722             (394 )             -               -                  328

Total                               11,342           13,577               9          (8,815 )             16,113


Consumer Loans
Home Equity                          1,386            2,438               1          (1,620 )              2,205
Auto                                   242                4              14             (80 )                180
Marine                               1,504              134             331          (1,052 )                917
Recreational vehicle                 1,425            1,235             113          (1,393 )              1,380
Other                                  313              301             251            (556 )                309

Total                                4,870            4,112             710          (4,701 )              4,991


Commercial Loans
Secured                              3,355             (158 )             -          (1,017 )              2,180
Unsecured                            3,610             (291 )             3            (585 )              2,737

Total                                6,965             (449 )             3          (1,602 )              4,917

Total                       $       35,962      $    26,334      $      783      $  (24,234 )    $        38,845

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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 $113.7 million, or 5.92% of net loans, at September 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 nine months of 2009.

                                                    Nonperforming Loans
                                                  (Dollars in thousands)
                                       September 30,       December 31,
                                           2009                2008           Change
     Real Estate Loans
     Permanent
     One-to four-family residential   $        25,808     $       21,669     $  4,139
     Multifamily residential                    5,612              8,724       (3,112 )
     Nonresidential                            16,623             15,246        1,377
     Land                                       5,168              4,840          328

     Total                                     53,211             50,479        2,732


     Construction Loans
     One-to four-family residential            46,623             43,167        3,456
     Multifamily and nonresidential               531                816         (285 )

     Total                                     47,154             43,983        3,171


     Consumer Loans
     Home Equity                                3,226              2,312          914
     Auto                                         148                154           (6 )
     Marine                                     1,150              2,614       (1,464 )
     Recreational vehicle                         694                756          (62 )
     Other                                         35                 33            2

     Total                                      5,253              5,869         (616 )


     Commercial Loans
     Secured                                    5,153              3,496        1,657
     Unsecured                                  1,021              1,057          (36 )

     Total                                      6,174              4,553        1,621

     Restructured Loans                         1,949              1,797          152

     Total Nonperforming Loans        $       113,741     $      106,681     $  7,060

The $4.1 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 nine months 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 $3.2 million increase in nonperforming construction loans was substantially the result of five loans the Company placed in nonaccrual status that were not yet 90 or more days past due in the third quarter, offset partially by 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 attributed to Home Savings taking into possession one property located in Michigan. The increase in nonperforming commercial secured loans was primarily a result of a loan secured by property in northeast Ohio becoming 90 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, Home Savings reverted to using 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, and the strength of guarantors (if any). 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 $98.2 million, or 12.6% at the end of September 2009, from December 2008. The largest increase was $6.1 million in one-to four-family residential construction loans.

                                                      Impaired Loans
                                                  (Dollars in thousands)
                                       September 30,       December 31,
                                           2009                2008           Change
     Real Estate Loans
     Permanent
     One-to four-family residential   $        17,778     $       12,675     $  5,103
     Multifamily residential                    5,612              8,724       (3,112 )
     Nonresidential                            16,623             14,855        1,768
     Land                                       5,169              4,757          412

     Total                                     45,182             41,011        4,171


     Construction Loans
     One-to four-family residential            43,050             36,903        6,147
     Multifamily and nonresidential               531                816         (285 )

     Total                                     43,581             37,719        5,862


     Consumer Loans
     Home Equity                                1,881              1,657          224
     Auto                                           -                  -            -
     Boat                                       1,150              2,614       (1,464 )
     Recreational vehicle                         265                  -          265
     Other                                          -                  -            -

     Total                                      3,296              4,271         (975 )


     Commercial Loans
     Secured                                    5,242              3,496        1,746
     Unsecured                                    932                751          181

     Total                                      6,174              4,247        1,927

     Total Impaired Loans             $        98,233     $       87,248     $ 10,985

Other nonperforming assets, consisting of real estate and other consumer property acquired in the settlement of loans, decreased $1.7 million to $27.6 million at September 30, 2009, compared to $29.3 million at December 31, 2008. Home Savings disposed of property with a value of $8.5 million in the first nine months of 2009. In addition, the fair market values of several properties held by Home Savings were re-evaluated during the first nine months of 2009, and current market conditions caused a $4.5 million decline in value of the properties. These decreases were partially offset by the acquisition through foreclosure of $12.4 million in real estate properties in the first nine months of 2009, including two commercial construction properties in southwestern Pennsylvania with an estimated fair market value of $3.0 million, one commercial property in Michigan with an estimated fair market value of $1.7 million, one commercial property in northern Ohio with an estimated fair market value of $540,000 and a construction property in northern Ohio with an estimated fair market value of $306,000. 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 increased $57.9 million, or 361.1%, to $73.9 million at September 30, 2009, compared to $16.0 million at December 31, 2008. The change in loans held for sale was due to the designation of $69.8 million of one-to four-family mortgage loans as held for sale, as mentioned above, offset partially by an 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 September 30, 2009, and December 31, 2008. During the first nine 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 $16.8 million at September 30, 2009, and the impact of the reduction in loan balances mentioned above, were the primary reasons that accrued interest receivable decreased $1.2 million to $8.9 million at September 30, 2009, compared to $10.1 million at December 31, 2008.
Other assets increased $3.5 million to $20.6 million at September 30, 2009, compared to $17.1 million at December 31, 2008. Home Savings experienced increases in mortgage servicing rights of $1.7 million, prepaid Ohio franchise tax of $537,000, and a current federal income tax benefit of $637,000. These increases were offset by cash due on payments of mortgage-backed securities of $1.4 million and $230,000 in other prepaid assets.
Total deposits decreased $130.4 million to $1.8 billion at September 30, 2009, compared to $1.9 billion at December 31, 2008. This change was due primarily to a decrease of $130.0 million in brokered certificates of deposit and a $39.0 million decrease in retail certificates of deposit, offset by a $21.2 million increase in savings accounts and a $21.1 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 which had maturities ranging from six months to two years. The total balance of brokered certificates of deposit was $145.0 million at December 31, 2008 and $15.0 million at September 30, 2009. At this time, regulatory approval would be required to replace these brokered deposits with additional brokered deposits. Home Savings does not anticipate seeking approval to replace brokered deposits at this time.
Federal Home Loan Bank advances increased $10.2 million during the first nine months of 2009, reflecting an increase in overnight advances of $65.5 million offset by a decrease in term advances of $75.7 million. Home Savings had approximately $213.4 million in unused borrowing capacity at the FHLB at September 30, 2009. Repurchase agreements and other borrowed funds, including United Community's line of credit with JP Morgan Chase Bank, N.A., which was paid in full with proceeds from the sale of Butler Wick Trust on March 31, 2009, decreased $29.3 million to $95.9 million at September 30, 2009 from $125.3 million at December 31, 2008.
Advance payments by borrowers for taxes and insurance decreased $6.9 million during the first nine 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 $3.2 million. Accrued expenses and other liabilities increased $2.9 million to $12.0 million at September 30, 2009, from $9.1 million at December 31, 2008. United Community . . .