UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2008

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

For the transition period from                      to                     

UNITED COMMUNITY FINANCIAL CORP.

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

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

275 West Federal Street, Youngstown, Ohio 44503-1203
(Address of principal executive offices) (Zip Code)

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

Not Applicable

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

Yes þ No o

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

Yes o No þ

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

 

 

TABLE OF CONTENTS

		PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of March 31, 2008 (Unaudited) and December 31, 2007			1
Consolidated Statements of Income for the Three Months Ended March 31, 2008 and 2007 (Unaudited)			2
Consolidated Statement of Shareholders’ Equity for the Three Months ended March 31, 2008 (Unaudited)			3
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007 (Unaudited)			4
Notes to Consolidated Financial Statements			5 - 13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			14-21
Item 3. Quantitative and Qualitative Disclosures about Market Risk			22
Item 4. Controls and Procedures			23
Part II. OTHER INFORMATION
Item 1. Legal Proceedings			24
Item 1A. Risk Factors			24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			24
Item 3. Defaults Upon Senior Securities (None)
Item 4. Submission of Matters to a Vote of Security Holders			24
Item 5. Other Information (None)
Item 6. Exhibits			24
Signatures			25
Exhibits			26-29
EX-31.1
EX-31.2
EX-32

PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

		March 31,				December 31,
		2008				2007
		(Dollars in thousands)
Assets:
Cash and deposits with banks		$	32,102			$	33,266
Federal funds sold and other			4,033				4,097
Total cash and cash equivalents			36,135				37,363
Securities:
Trading, at fair value			5,930				5,064
Available for sale, at fair value			307,597				244,753
Loans, net of allowance for loan losses of $33,202 and $32,006, respectively			2,215,917				2,236,988
Loans held for sale			13,268				87,236
Federal Home Loan Bank stock, at cost			25,764				25,432
Premises and equipment, net			27,140				27,521
Accrued interest receivable			11,691				13,077
Real estate owned and other repossessed assets			9,989				10,510
Goodwill			33,713				33,713
Core deposit intangible			1,091				1,169
Cash surrender value of life insurance			24,287				24,053
Other assets			14,196				13,160
Total assets		$	2,726,718			$	2,760,039
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Interest bearing		$	1,766,280			$	1,768,757
Non-interest bearing			109,690				106,449
Total deposits			1,875,970				1,875,206
Federal Home Loan Bank advances			381,381				437,253
Repurchase agreements and other borrowings			168,857				149,533
Advance payments by borrowers for taxes and insurance			12,891				17,853
Accrued interest payable			8,002				7,837
Accrued expenses and other liabilities			5,681				2,643
Total liabilities			2,452,782				2,490,325
Shareholders’ Equity
Preferred stock-no par value; 1,000,000 shares authorized and unissued			—				—
Common stock-no par value; 499,000,000 shares authorized; 37,804,457 shares issued			146,962				146,683
Retained earnings			215,079				213,727
Accumulated other comprehensive income			2,796				661
Unearned employee stock ownership plan shares			(9,009	)			(9,465	)
Treasury stock, at cost, 7,752,684 shares			(81,892	)			(81,892	)
Total shareholders’ equity			273,936				269,714
Total liabilities and shareholders’ equity		$	2,726,718			$	2,760,039

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

		For the Three Months Ended
		March 31,
		2008				2007
		(Dollars in thousands, except per share data)
Interest income
Loans		$	35,808			$	39,003
Loans held for sale			188				256
Securities:
Trading			62				62
Available for sale			3,298				2,934
Federal Home Loan Bank stock dividends			332				400
Other interest earning assets			168				170
Total interest income			39,856				42,825
Interest expense
Deposits			17,036				16,722
Federal Home Loan Bank advances			3,692				5,347
Repurchase agreements and other			2,026				1,355
Total interest expense			22,754				23,424
Net interest income			17,102				19,401
Provision for loan losses			2,466				2,325
Net interest income after provision for loan losses			14,636				17,076
Non-interest income
Brokerage commissions			6,578				6,240
Service fees and other charges			3,455				3,573
Underwriting and investment banking			29				33
Net gains (losses):
Securities available for sale			931				—
Trading securities			(27	)			5
Loans sold			2,184				663
Other			(140	)			(24	)
Other income			1,107				927
Total non-interest income			14,117				11,417
Non-interest expense
Salaries and employee benefits			14,729				14,282
Occupancy			1,336				1,148
Equipment and data processing			2,339				2,315
Franchise tax			591				564
Advertising			379				317
Amortization of core deposit intangible			78				100
Other expenses			3,063				2,516
Total non-interest expenses			22,515				21,242
Income before income taxes			6,238				7,251
Income taxes			2,195				2,581
Net income		$	4,043			$	4,670
Comprehensive income		$	6,178			$	5,108
Earnings per share
Basic		$	0.14			$	0.16
Diluted		$	0.14			$	0.16

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

																		Unearned
														Accumulated				Employee
														Other				Stock
		Shares				Common				Retained				Comprehensive				Ownership				Treasury
		Outstanding				Stock				Earnings				Income (Loss)				Plan Shares				Stock				Total
		(Dollars in thousands, except share data)
Balance December 31, 2007			30,052			$	146,683			$	213,727			$	661			$	(9,465	)		$	(81,892	)		$	269,714
Comprehensive income:
Net income											4,043																4,043
Change in net unrealized gain/(loss) on securities, net of taxes of $1,150															2,135												2,135
Comprehensive income																											6,178
Shares allocated to ESOP participants							(27	)											456								429
Stock based compensation							306																				306
Dividends paid, $0.095 per share											(2,691	)															(2,691	)
Balance March 31, 2008			30,052			$	146,962			$	215,079			$	2,796			$	(9,009	)		$	(81,892	)		$	273,936

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

		Three Months Ended March 31,
		2008				2007
		(Dollars in thousands)
Cash Flows from Operating Activities
Net income		$	4,043			$	4,670
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			2,466				2,325
Net gains			(2,948	)			(639	)
Amortization of premiums and accretion of discounts			578				739
Depreciation and amortization			729				765
ESOP compensation			429				854
Stock based compensation			306				—
FHLB stock dividends			(332	)			—
Decrease in trading securities			(893	)			6,335
Decrease (increase) in interest receivable			1,386				138
Increase in prepaid and other assets			(1,792	)			(2,046	)
Increase in interest payable			165				1,977
Net principal disbursed on loans held for sale			(64,006	)			(48,596	)
Proceeds from sale of loans held for sale			140,158				62,168
Decrease in other liabilities			1,890				7,126
Net cash from operating activities			82,179				35,816
Cash Flows from Investing Activities
Proceeds from principal repayments and maturities of:
Available for sale securities			18,773				16,852
Proceeds from sale of:
Available for sale securities			38,299				—
Real estate owned and other repossessed assets			3,654				636
Purchases of securities available for sale			(115,672	)			(38,238	)
Net principal repaid (disbursed) on loans			39,381				33,172
Loans purchased			(24,066	)			(41,003	)
Purchases of premises and equipment			(339	)			(1,766	)
Net cash from investing activities			(39,970	)			(30,347	)
Cash Flows from Financing Activities
Net increase in NOW, savings and money market accounts			47,846				23,927
Net decrease in certificates of deposit			(47,082	)			(15,543	)
Net decrease in advance payments by borrowers for taxes and insurance			(4,962	)			(6,239	)
Proceeds from FHLB advances			217,100				196,553
Repayment of FHLB advances			(272,972	)			(237,768	)
Net change in other borrowed funds			19,324				39,738
Dividends paid			(2,691	)			(2,766	)
Proceeds from the exercise of stock options			—				46
Purchase of treasury stock			—				(3,780	)
Net cash from financing activities			(43,437	)			(5,832	)
Decrease in cash and cash equivalents			(1,228	)			(363	)
Cash and cash equivalents, beginning of period			37,363				35,637
Cash and cash equivalents, end of period		$	36,135			$	35,274

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

     1. BASIS OF PRESENTATION

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

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

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

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

     2. RECENT ACCOUNTING DEVELOPMENTS

In July 2006, the Emerging Issues Task Force (EITF) of FASB issued a draft abstract for EITF Issue No. 06-04, Accounting for Deferred Compensation and Postretirement Benefits Aspects of Endorsement Split-Dollar Life Insurance Arrangement. This draft abstract from EITF reached a consensus that for an endorsement split-dollar life insurance arrangement within the scope of this Issue, an employer should recognize a liability for future benefits in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”. The Task Force concluded that a liability for the benefit obligation under SFAS No. 106 has not been settled through the endorsement type life insurance policy. In September 2006, FASB agreed to ratify the consensus reached in EITF Issue No. 06-04. This new accounting standard became effective for fiscal years beginning after December 15, 2007. At March 31, 2008, United Community and its subsidiaries owned $24.3 million of bank owned life insurance. The adoption of this standard had an immaterial impact on UCFC’s consolidated financial statements.

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

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

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

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

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

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

     3. STOCK COMPENSATION

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

The 1999 Plan provides for the grant of options, which may qualify as either incentive or nonqualified stock options. The incentive plan provides that option prices will not be less than the fair market value of the stock at the grant date. The maximum number of common shares that may be issued under the plan is 3,471,562, all of which were granted prior to December 31, 2004. All of the options awarded became exercisable on the date of grant. The option period expires 10 years from the date of grant.

On April 26, 2007, shareholders approved the United Community Financial Corp. 2007 Long-Term Incentive Plan (2007 Plan). The purpose of the 2007 Plan is the same as that of the 1999 Plan. The 2007 Plan provides for the issuance of up to 2,000,000 shares that are to be used for awards of restricted stock shares, stock options, performance awards, stock appreciation rights (SARs), or other forms of stock-based incentive awards. There were 237,072 stock options granted in the first quarter of 2008 under the 2007 Plan. All of the options awarded became exercisable on the date of grant. The option period expires 10 years from the date of grant. The Company recognized $306,000 in expenses related to this grant.

A summary of activity in the plan is as follows:

		For the three months ended March 31, 2008
						Weighted				Aggregate
						average				intrinsic value
		Shares				exercise price				(in thousands)
Outstanding at beginning of year			2,043,856			$	9.66
Granted			237,072				6.05
Exercised			—				—
Forfeited			—				—
Outstanding at end of period			2,280,928			$	9.28			$	35
Options exercisable at end of period			2,280,928			$	9.28			$	35

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

		March 31,
		2008
Intrinsic value of options exercised		$	—
Cash received from option exercises			—
Tax benefit realized from option exercises			—
Weighted average fair value of options granted			1.29

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

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

Risk-free interest rate			3.03	%
Expected term (years)			5
Expected stock volatility			40.1
Dividend yield			6.28	%

Outstanding stock options have a weighted average remaining life of 5.31 years and may be exercised in the range of $6.05 to $12.73.

     4. SECURITIES

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

		March 31, 2008												December 31, 2007
										(Dollars in thousands)
						Gross				Gross								Gross				Gross
		Fair				Unrealized				Unrealized				Fair				Unrealized				Unrealized
		Value				Gains				Losses				Value				Gains				Losses
U.S. Treasury and government sponsored entities’ securities		$	47,657			$	893			$	—			$	84,388			$	337			$	(126	)
Equity securities			7,006				138				(469	)			7,064				221				(494	)
Mortgage-related securities			252,934				3,259				(64	)			153,301				977				(443	)
Total		$	307,597			$	4,290			$	(533	)		$	244,753			$	1,535			$	(1,063	)

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

		March 31,				December 31,
		2008				2007
		(Dollars in thousands)
US Treasury and government sponsored entities		$	1,547			$	1,054
State and municipal obligations			3,805				3,636
Corporate bonds, debentures and notes			266				62
Mutual funds			312				312
Total trading securities		$	5,930			$	5,064

     5. LOANS

Portfolio loans consist of the following:

		March 31,				December 31,
		2008				2007
		(Dollars in thousands)
Real Estate:
One- to four-family residential		$	865,576			$	871,019
Multifamily residential			177,994				179,535
Nonresidential			358,518				359,070
Land			23,307				22,818
Construction:
One- to four-family residential			349,610				357,153
Multifamily and non-residential			29,344				25,191
Total real estate			1,804,349				1,814,786
Consumer			345,805				349,447
Commercial			97,359				103,208
Total loans			2,247,513				2,267,441
Less:
Allowance for loan losses			33,202				32,006
Deferred loan fees, net			(1,606	)			(1,553	)
Total			31,596				30,453
Loans, net		$	2,215,917			$	2,236,988

     Changes in the allowance for loan loss are as follows:

		As of or For the
		Three Months				As of or For the
		Ended				Year Ended
		March 31,				December 31,
		2008				2007
		(Dollars in thousands)
Balance, beginning of year		$	32,006			$	16,955
Provision for loan losses			2,466				28,750
Amounts charged off			(1,597	)			(14,220	)
Recoveries			327				521
Balance, end of period		$	33,202			$	32,006

Non-accrual loans were $99.8 million and $97.5 million at March 31, 2008, and December 31, 2007, respectively. Restructured loans were $2.9 million at March 31, 2008 and $2.3 million at December 31, 2007. Loans greater than 90 days past due and still accruing interest were $1.7 million and $1.2 million at March 31, 2008 and December 31, 2007, respectively.

Impaired loans consist of the following:

		As of or For the				As of or For
		Three				the Year
		Months Ended				Ended
		March 31,				December 31,
		2008				2007
		(Dollars in thousands)
Impaired loans on which no specific valuation allowance was provided		$	33,466			$	30,475
Impaired loans on which a specific valuation allowance was provided			51,785				53,902
Total impaired loans at period-end		$	85,251			$	84,377
Specific valuation allowances on impaired loans at period-end		$	12,902			$	13,165
Average impaired loans during the period			84,814				63,468
Interest income recognized on impaired loans during the period			83				348
Interest income received on impaired loans during the period			83				348

     6. MORTGAGE BANKING ACTIVITIES

Mortgage loans serviced for others, which are not reported in United Community’s assets, totaled $945.9 million at March 31, 2008, and $876.1 million at December 31, 2007.

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

		As of or for the
		Three Months				As of or for the
		Ended				Year Ended
		March 31,				December 31,
		2008				2007
		(Dollars in thousands)
Balance, beginning of year		$	6,184			$	6,820
Originations			852				1,268
Sale of servicing			—				—
Amortized to expense			(541	)			(1,904	)
Balance, end of period		$	6,495			$	6,184

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

		March 31,				December 31,
		2008				2007
		(Dollars in thousands)
Balance, beginning of year		$	(562	)		$	(435	)
Impairment charges			—				(562	)
Recoveries			19				435
Balance, end of period		$	(543	)		$	(562	)

Fair value of mortgage servicing rights as of March 31, 2008 was approximately $9.7 million and at December 31, 2007 was $8.7 million.

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

		March 31,				December 31,
		2008				2007
Weighted average prepayment rate		267 PSA				272 PSA
Weighted average life (in years)			4.57				3.87
Weighted average discount rate			8%				8%

     7. OTHER POSTRETIREMENT BENEFIT PLANS

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

Components of net periodic benefit cost are as follows:

		Three Months Ended March 31,
		2008				2007
		(Dollars in thousands)
Service cost		$	—			$	—
Interest cost			48				56
Expected return on plan assets			—				—
Net amortization of prior service cost			—				—
Net amortization of actuarial gain			(3	)			—
Net periodic benefit cost		$	45			$	56
Assumptions used in the valuations were as follows:
Weighted average discount rate			6.00	%			5.75	%

     8. FAIR VALUE MEASUREMENT

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

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

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

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

The fair values of trading securities and securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique widely used to in the industry to value debt

securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.

The fair value of loans held for sale is determined, when possible, using quoted secondary-market prices. If no such quoted price exists, the fair value of a loan is determined using quoted prices for a similar asset or assets, adjusted for the specific attributes of that loan.

The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. The Company is able to compare the valuation model inputs and results to widely available published industry data for reasonableness.

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

						Fair Value Measurements at March 31, 2008 Using:
						Quoted Prices in
						Active Markets								Significant
						for Identical				Significant Other				Unobservable
						Assets				Observable				Inputs
		March 31, 2008				(Level 1)				Inputs (Level 2)				(Level 3)
Assets:
Trading securities		$	5,930			$	5,930			$	—			$	—
Available for sale securities			307,597				2,006				305,591				—
Loans held for sale			13,268				13,268				—				—
Mortgage servicing rights			6,495				—				9,697				—
Impaired loans			85,251				—				—				72,349

The Company did not recognize any impairment charges for assets listed above for the period ending March 31, 2008.

     9. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURE

Supplemental disclosures of cash flow information are summarized below.

		March 31, 2008				March 31, 2007
		(Dollars in thousands)
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest on deposits and borrowings, net of amounts capitalized		$	22,589			$	21,447
Interest capitalized on borrowings			—				10
Income taxes			—				—
Supplemental schedule of noncash activities:
Transfers from loans to real estate owned and other repossessed assets			3,274				3,787

10. SEGMENT INFORMATION

United Community has two principal segments, banking and investment services. Banking provides consumer and commercial banking services. Investment services provide investment brokerage and a network of integrated financial services. Condensed statements of income by operating segment for the three months ended March 31, 2008 and 2007 are as follows:

		For the Three Months Ended March 31, 2008
		Banking				Investment
		Services				Services				Total
		(Dollars in thousands)
Interest income		$	39,627			$	229			$	39,856
Interest expense			22,685				69				22,754
Provision for loan loss			2,466				—				2,466
Net interest income after provision for loan loss			14,476				160				14,636
Non-interest income			6,270				7,847				14,117
Non-interest expense			14,964				7,551				22,515
Income before tax			5,782				456				6,238
Income tax expense			2,018				177				2,195
Net income		$	3,764			$	279			$	4,043

		For the Three Months Ended March 31, 2007
		Banking				Investment
		Services				Services				Total
		(Dollars in thousands)
Interest income		$	42,570			$	255			$	42,825
Interest expense			23,331				93				23,424
Provision for loan loss			2,325				—				2,325
Net interest income after provision for loan loss			16,914				162				17,076
Non-interest income			3,617				7,800				11,417
Non-interest expense			14,089				7,153				21,242
Income before tax			6,442				809				7,251
Income tax expense			2,298				283				2,581
Net income		$	4,144			$	526			$	4,670

     11. EARNINGS PER SHARE

Earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of shares determined for the basic computation plus the dilutive effect of potential common shares that could be issued under outstanding stock options. There were no stock options that were antidilutive for the period ending March 31, 2008. There were stock options for 717,247 shares that were antidilutive for the period ending March 31, 2007.

		For the Three Months
		Ended March 31,
		2008				2007
		(Dollars in thousands,
		except per share data)
Net income applicable to common stock		$	4,043			$	4,670
Weighted average common shares outstanding			28,545				29,126
Dilutive effect of stock options			—				331
Weighted average common shares outstanding for dilutive computation			28,545				29,457
Basic earnings per share as reported		$	0.14			$	0.16
Diluted earnings per share as reported		$	0.14			$	0.16

     12. BUSINESS COMBINATION

On July 24, 2007 United Community executed a definitive agreement for United Community to acquire PVF Capital Corp., the holding company for Park View Federal Savings Bank located in Solon, Ohio. On April 1, 2008, United Community announced that the acquisition agreement had been terminated by PVF Capital and Park View.

     13. OTHER BORROWINGS

Included in other borrowings is $32.3 million outstanding at March 31, 2008 under a Credit Agreement between JP Morgan Chase Bank, N.A., and United Community, dated September 12, 2005, as amended on July 18, 2007, and March 28, 2008, (the “Credit Agreement”). The Credit Agreement provided United Community with a line of credit of up to $40.0 million.

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

On March 28, 2008, United Community and JP Morgan Chase amended the Credit Agreement to provide, among other things, (1) a waiver of all existing defaults under the credit agreement, (2) that no new funds would be advanced to United Community on the line of credit, and (3) an increase in the allowable non-performing asset ratio to 6.50% of total loans and REO. As of March 31, 2008, that ratio was 5.07%. Furthermore, on March 28, 2008, United Community paid $4.0 million in principal to bring the balance to $32.3 million at quarter end.

On April 9, 2008, United Community paid an additional $16.0 million in principal to bring the balance to $16.3 million at April 30, 2008. All borrowings under the Credit Agreement are due on August 31, 2008.

ITEM 2. Management’s discussion and analysis of financial condition and results of operations

Selected financial ratios and other data: (1)		At or For the Three Months Ended
		March 31,
		2008				2007
Performance ratios:
Return on average assets (2)			0.59	%			0.69	%
Return on average equity (3)			5.72	%			6.49	%
Interest rate spread (4)			2.23	%			2.56	%
Net interest margin (5)			2.63	%			3.03	%
Non-interest expense to average assets			3.28	%			3.14	%
Efficiency ratio (6)			73.67	%			68.56	%
Average interest-earning assets to average interest-bearing liabilities			111.70	%			112.72	%
Capital ratios:
Average equity to average assets			10.28	%			10.65	%
Equity to assets, end of period			10.05	%			10.35	%
Tier 1 leverage ratio			7.67	%			7.80	%
Tier 1 risk-based capital ratio			9.83	%			9.67	%
Total risk-based capital ratio			12.51	%			11.95	%
Asset quality ratios:
Non-performing loans to total loans at end of period (7)			4.71	%			2.51	%
Non-performing assets to average assets (8)			4.16	%			2.33	%
Non-performing assets to total assets at end of period			4.20	%			2.32	%
Allowance for loan losses as a percent of loans			1.48	%			0.82	%
Allowance for loan losses as a percent of non-performing loans (7)			31.79	%			32.83	%
Office data:
Number of full service banking offices			39				38
Number of loan production offices			6				5
Number of brokerage offices			21				20
Number of trust offices			2				2
Per share data:
Basic earnings per share (9)		$	0.14			$	0.16
Diluted earnings per share (9)		$	0.14			$	0.16
Book value (10)		$	9.12			$	9.16
Tangible book value (11)		$	7.96			$	8.02
Market value as a percent of book value (12)			68	%			121	%

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 March 31, 2008 and December 31, 2007

Total assets decreased by $33.3 million to $2.7 billion at March 31, 2008, compared to December 31, 2007. The net change in assets consisted of decreases of $21.1 million in net loans, $74.0 million in loans held for sale, $1.4 million in accrued interest receivable, $1.2 million in cash and cash equivalents and $521,000 in real estate owned and other repossessed assets. These decreases were offset by increases in available for sale securities of $62.8 million, trading securities of $866,000 and other assets of $1.0 million.

Cash and cash equivalents decreased $1.2 million during the first three months of 2008. The change primarily is attributable to the repayment of advances from the Federal Home Loan Bank and the purchases of available for sale securities during the period.

The trading securities portfolio increased $866,000, or 17.1%, to $5.9 million at March 31, 2008, from $5.1 million at December 31, 2007. This change was a result of increases in Butler Wick’s portfolio of $493,000 in government securities, $204,000 in corporate securities and $169,000 in municipal securities. Butler Wick’s increase in trading securities is due to normal trading activity and what the Company holds in inventory over the end of the period.

Available for sale securities increased $62.8 million, or 25.7%, from December 31, 2007, to March 31, 2008. Home Savings had purchased $115.7 million in securities during the first quarter of 2008, which were offset partially by sales of $37.4 million at Home Savings. Paydowns and maturities of $18.3 million at Home Savings and $505,000 at Butler Wick also contributed to the offset. The remaining difference is primarily a result of changes in the market valuation of the portfolio, net of any amortization or accretion.

Net loans decreased $21.1 million from December 31, 2007, to March 31, 2008. Real estate loans decreased $10.4 million, consumer loans decreased $3.6 million, and commercial loans decreased $5.8 million. The overall decline in loans is attributable primarily to higher paydowns as compared to originations during the period.

The allowance for loan losses increased to $33.2 million, or 1.48% of portfolio loans as of March 31, 2008, from $32.0 million or 1.41% of portfolio loans as of December 31, 2007, management establishes the allowance for loan losses at a level it believes adequate to absorb probable losses incurred in the loan portfolio. Management bases its determination of the adequacy of the allowance upon estimates derived from an analysis of individual credits, prior and current loss experience, loan portfolio delinquency levels, overall growth in the loan portfolio, current economic conditions, and results of regulatory examinations. Furthermore, in determining the level of the allowance for loan loss, management reviews and evaluates on a monthly basis the necessity of a reserve for individual loans classified by management. The specifically allocated reserve for a classified loan is determined based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to Home Savings. Once a review is completed, the need for a specific reserve is determined by the Home Savings Asset Review Committee and allocated to the loan. Other loans not reviewed specifically by management are evaluated as a homogeneous group of loans (single-family residential mortgage loans and all consumer credit except marine loans) using the historical charge-off experience ratio calculated by 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. When evaluating the adequacy of the allowance for loan losses, consideration is given to geographic concentration and the effect changing economic conditions have on Home Savings. These estimates particularly are susceptible to changes that could result in a material adjustment to results of operations. The provision for loan losses represents a charge against current earnings in order to maintain the allowance for loan losses at an appropriate level.

		Allowance For Loan Losses
		December 31,																March 31,
		2007				Provision				Recovery				Chargeoff				2008
Real Estate Loans
Permanent
One-to four-family		$	2,803			$	(150	)		$	—			$	(146	)		$	2,507
Multifamily residential			2,365				1,044				3				(243	)			3,169
Nonresidential			4,488				251				2				—				4,741
Land			629				(100	)			—				—				529
Total			10,285				1,045				5				(389	)			10,946
Construction Loans
One-to four-family residential			11,892				1,278				—				(777	)			12,393
Multifamily and nonresidential			607				41				—				—				648
Total			12,499				1,319				—				(777	)			13,041
Consumer Loans
Home Equity			1,260				(32	)			—				(14	)			1,214
Auto			447				59				8				(30	)			484
Marine			1,468				(160	)			53				(4	)			1,357
Recreational vehicle			2,050				(445	)			60				(194	)			1,471
Other			260				167				100				(156	)			371
Total			5,485				(411	)			221				(398	)			4,897
Commercial Loans
Secured			2,375				422				—				(33	)			2,764
Unsecured			1,362				91				101				—				1,554
Total			3,737				513				101				(33	)			4,318
Total Allowance		$	32,006			$	2,466			$	327			$	(1,597	)		$	33,202

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 $104.4 million, or 4.71% of net loans, at March 31, 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 quarter of 2008.

Nonperforming Loans
		March 31,				December 31,								2008 Interest
		2008				2007				Change				Foregone
Real Estate Loans
Permanent
One-to four-family		$	14,242			$	12,752			$	1,490			$	198
Multifamily residential			15,857				13,604				2,253				246
Nonresidential			13,762				13,597				165				476
Land			3,700				3,700				—				114
Total			47,561				43,653				3,908				1,034
Construction Loans
One-to four-family residential			43,349				44,680				(1,331	)			1,036
Multifamily and nonresidential			825				825				—				27
Total			44,174				45,505				(1,331	)			1,063
Consumer Loans
Home Equity			2,747				2,454				293				49
Auto			212				211				1				(2	)
Marine			1,752				1,714				38				27
Recreational vehicle			519				376				143				3
Other			72				64				8				—
Total			5,302				4,819				483				77
Commercial Loans
Secured			4,344				4,554				(210	)			77
Unsecured			184				184				—				3
Total			4,528				4,738				(210	)			80
Restructured Loans			2,869				2,341				528				—
Total Nonperforming Loans		$	104,434			$	101,056			$	3,378			$	2,254

The $2.3 million change in nonperforming loans secured by multifamily properties was primarily a result of a loan secured by multifamily rental properties in the Flint, Michigan area that became past-due 90 days during the first quarter of 2008. The $1.5 million increase in nonperforming one-to four-family permanent loans was the result of an overall change in the homogeneous portfolio. The decrease in nonperforming construction loans was primarily the result of Home Savings taking into possession property collateralizing three lending relationships in the first quarter of 2008. Although the rate of new delinquencies, charge-offs and foreclosures returned to more normalized levels in the first quarter of 2008, compared to the changes experienced in 2007, no assurance can be given that these levels will prevail throughout the remainder of 2008.

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect both the contractual interest payments and the contractual principal payments, as scheduled in the loan agreement. The net increase in impaired loans, as shown in the following table, of $874,000 during the period relates primarily to the previously mentioned loan secured by multifamily rental properties in the Flint, Michigan area.

Impaired Loans
		March 31,				December 31,
		2008				2007				Change
Real Estate Loans
Permanent
One-to four-family		$	2,679			$	2,681			$	(2	)
Multifamily residential			16,138				13,604				2,534
Nonresidential			13,901				13,597				304
Land			3,700				3,700				—
Total			36,418				33,582				2,836
Construction Loans
One-to four-family residential			41,729				43,518				(1,789	)
Multifamily and nonresidential			825				825				—
Total			42,554				44,343				(1,789	)
Consumer Loans
Home Equity			—				—				—
Auto			—				—				—
Boat			1,751				1,714				37
Recreational vehicle			—				—				—
Other			—				—				—
Total			1,751				1,714				37
Commercial Loans
Secured			4,344				4,554				(210	)
Unsecured			184				184				—
Total			4,528				4,738				(210	)
Total Impaired Loans		$	85,251			$	84,377			$	874